Saturday, September 16, 2017

Investment, Factory Orders Rising After Hurricanes

Popular Economics Weekly

The US Dollar’s decline against foreign currencies, mostly due to geopolitical worries such as N. Korea’s nuclear intentions, is already helping the manufacturing sector with a sharp rise in factory orders. This will be aided by Hurricanes Harvey and Irma’s boost in capital expenditures as major infrastructure upgrades will be necessary.

Any infrastructure improvements—such as roads, bridges, the power grid, water and sewer plants—enhances efficiency and job formation. It seems force majeure, or unavoidable catastrophes, are the only way our political parties seem to be able to agree on doing anything that boosts growth!

The factory sector has been slowly moving higher this year. Strength in aircraft has been a big plus but there are huge swings in monthly data. So the above graph excludes civilian aircraft and tracks both orders and shipments for all other manufactured goods. The story is one of recovery with growth moving to the solid 5 to 6 percent range after a long run of contraction tied to the 2014 collapse in oil.

The best factory news has been coming from the most critical area: core capital goods where strength reflects rising investment in future production. Orders have been strong two of the last three reports, up 1.0 percent in July and 0.8 percent in May. This will boost shipments over the next few months which are already on the rise, up 1.2 percent after June's 0.6 percent gain. An upswing in capital goods is auspicious for the factory sector which itself is considered a leading indicator for the economy as a whole.

Graph: Econoday

For all the damage they cause, these hurricanes will spur a gigantic rebuilding effort—maybe upwards of $200 billion in overall spending just to replace what was destroyed. That is 1/5 of President Trump’s original infrastructure proposal.

We have to start somewhere when our government can’t otherwise agree to rebuild our badly aging plants and equipment. The latest Job Openings and Labor Turnover Survey (JOLTS) report out today said there are 6.173 million job openings, and 5.5 million hires in August.

It is possible small business hires will pick up, as the National Federation of Independent Businesses Optimism Index rose 0.1 points in August to 105.3, matching the highest level since the 12-year high set in January. August's optimism reflected increases in the proportion of small business owners planning capital expenditures and anticipating higher sales. Capital expenditures plans in the next 3 to 6 months reached their highest level since 2006, the NFIB said.

Now is the best time for these businesses (80 percent of hires are by small businesses) will try a little harder to hire more of those 6 million that are actually available and want to return to work.

Harlan Green © 2017

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Sunday, September 10, 2017


Popular Economics Weekly

Did you have that queasy feeling; the ‘sick to your stomach’ feeling, when it was announced that Donald Trump was elected President of the United States?  I did. How could someone so obviously unqualified to be president of anything have done it?

It’s becoming more obvious by the day why that happened; why such a man could be elected our President; someone with a sordid business history who blatantly ignores facts, breaks the laws of the land, and ignores our constitution.

That’s because more has just been revealed about the automated Russian cyberattacks that detail how it was done.   These revelations conclude that Donald Trump’s election was a giant scam propagated by the Trump campaign with the aid of Russian intelligence and their propaganda machine.
The latest evidence points to son-in-law Jared Kushner as the main colluder, due to his supervision of the Trump campaign’s digital voter operation. McClatchy News first revealed the link between Kushner and Russia’s cyberwar.
“Congressional and Justice Department investigators are focusing on whether Trump’s campaign pointed Russian cyber operatives to certain voting jurisdictions in key states – areas where Trump’s digital team and Republican operatives were spotting unexpected weakness in voter support for Hillary Clinton,” according to McClatchy.
“By Election Day,” reported McClatchy in July, “an automated Kremlin cyberattack of unprecedented scale and sophistication had delivered critical and phony news about the Democratic presidential nominee to the Twitter and Facebook accounts of millions of voters. Some investigators suspect the Russians targeted voters in swing states, even in key precincts.”
Without Russian aid, Trump could never have vanquished his Republican opponents, as well. These cyberattacks were in play during the primary campaign against Republicans. Throughout the Republican primary elections in early 2016, Russia sent armies of bots carrying pro-Trump messages and deployed human “trolls” to comment in his favor on Internet stories and in social media, former FBI special agent Clint Watts told Congress weeks ago, according to McClatchy.

Perhaps this is why Facebook has finally admitted it sold at least $100,000 in paid advertising to Russian operatives in 2015-16 so that they could gain access to millions of Facebook subscribers.
Donald Trump perfected the Art of the Scam when building his business empire. Perhaps the best example was the Trump University scam—a university in name only—which he was forced to settle for $25 million last November shortly after winning the election. Presiding Judge Gonzalo Curiel had deemed it a criminal organization under RICO, and Trump was scheduled to testify at his trial when he settled with the thousands that  had been scammed, while raking in a reputed $5 million profit from unsuspecting students.

The best evidence that Trump knew he could not become President without Russia’s collusion, are his consequent actions in voicing support for every one of Putin’s policy initiatives—from lifting the Ukraine sanctions, repealing the Sergei Magnitsky Act, and even the breakup of NATO.

He has to be deathly afraid of what Putin could reveal of Trump’s sordid past and details of their collusion. Putin is blackmailing Trump, in a word. McClatchy News has provided the latest evidence of that collusion from confidential sources that the congressional intelligence committees and Special Investigator Robert Mueller are investigating.

So why does the Republican Party continue to support him?

Harlan Green © 2017

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Thursday, September 7, 2017

A Decent Employment Report

Financial FAQs

The Bureau of Labor Statistics reported that 156,000 additional nonfarm payroll jobs were created in August, which was less than expected, but will be enough to keep markets happy. And the unemployment rate edged up to 4.4 percent from July’s 4.3 percent as more workers began looking for work (77,000), but weren’t yet absorbed into the workforce. Almost all the job gains occurred in manufacturing, construction, professional and technical services, health care, and mining.

A major positive in the report is a 36,000 surge in manufacturing payrolls that includes a 10,000 upward revision to July to a 26,000 increase and a 9,000 upgrade to June to a gain of 21,000. It’s a positive sign because manufacturing jobs pay higher wages.

Construction payrolls are also solid, up 28,000 in August following a 3,000 decline in July, which mirrors the surging housing market. The new-home construction rate is now above 1 million annual units, which helps replenish depleted housing stocks (and helps to slow price growth).

But retail hiring has declined for six straight months as retail stores continue to close. This is while Amazon has announced plans to hire an additional 50,000 employees to work in its distribution centers.

This was a good jobs report, in other words, and suggests the ongoing recovery, now in its eighth year, shows no signs of weakening. Wages aren’t rising any faster than 2.5 percent; which is a mystery because manufacturing and construction jobs pay higher wages. Is that because there are still 5.6 million part time workers that would rather work fulltime? They earn less, so that may be what is holding down wage growth.

But real (inflation adjusted) Disposable Income is rising again after going negative in 2016.  Disposable income measures income from rents and the self-employed, as well as wages, which may give a boost to employees’ wages. It is the major reason consumer spending rose 3.3 percent in second quarter’s GDP report, and probably will boost third quarter growth as well. Wages and salaries have now risen 0.5 percent for two consecutive months.

The combination of good unemployment and rising incomes are boosting consumer confidence. The Conference Board reported on Tuesday that its consumer confidence index is now at 122.9, which is its highest value since December 2000.
“Consumer confidence increased in August following a moderate improvement in July,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ more buoyant assessment of present-day conditions was the primary driver of the boost in confidence, with the Present Situation Index continuing to hover at a 16-year high (July 2001, 151.3). Consumers’ short-term expectations were relatively flat, though still optimistic, suggesting that they do not anticipate an acceleration in the pace of economic activity in the months ahead.”
Manufacturing payrolls are surging in part because factory orders are rising again. Factory orders fell in July 3.3 percent because of a drop in aircraft orders, but there was a 6 tenths upward revision to core capital goods orders (nondefense ex-air) to a 1.0 percent gain and a 2 tenths upward revision to core shipments, now at 1.2 percent. These numbers point to accelerating strength for third-quarter business investment, which along with consumer spending are the main drivers of GDP growth.

Another boost to Q3 growth will be the recovery efforts for Hurricane Harvey. Damage estimates range up to $100 billion, and governments (as well as insurance) companies will be spending most of that money.  This is what governments need to do, even if the U.S. congress can’t pass a substantial infrastructure bill this year.

And what about the estimated 6 million damaged autos that will be replaced? That give’s another boost to the manufacturing sector, and Q3 economic growth!

Harlan Green © 2017

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Thursday, August 31, 2017

Corporate Taxes Are Too Low

Financial FAQs

As congress now pivots to the debate on tax reform—when and if they can agree on raising the debt ceiling—why is a lower corporate tax rate part of the proposal? The federal budget deficit can’t decline unless congress raises tax rates to 1970's level, when budget deficits were comparatively minuscule.

The total budget deficit in 1970 was $12.7 billion, or just 0.3 percent of GDP, vs. $580 billion and 3 percent today. The 1970 effective corporate tax rate on capital income was 42.0 percent, vs. 35 percent today. So any corporate tax cut will only grow the deficit, without benefiting consumers and job seekers.

This is while corporate profits rose $73 billion in the revised Q2 GDP growth rate; which has risen to 3 percent from Q1’s 2.1 percent rate. It was a good GDP number, as consumer spending increased 3.3 percent and business investment increased almost 9 percent with almost no inflation.

The proposed House bill wants to reduce the maximum corporate tax rate from 35 to 20 percent. But why, when as I said in a prior column, corporations already pay much less than the actual tax rate? Maybe this will change, but corporations have been using their record profits to buy back stock and enhance executive pay, rather than hire more workers, so that there are now 6 million job vacancies, according to the Commerce Department’s JOLTS report.

They have re-purchased so much stock that a Credit Suisse report released in March titled “The Incredible Shrinking Universe of U.S. Stocks,” says between 1996 and 2016, the number of publicly-listed stocks in the U.S. fell by roughly 50 percent — from more than 7,300 to fewer than 3,600 — while rising about 50 percent in other developed nations.

Not all of it is from stock buybacks, as there have been a large number of corporations either merging, or taken private in buyouts so that the number of listed companies has also declined almost 50 percent since 1996.

Why do corporations and their Republican lobbyists keep pushing for lower taxes? They say it will create more jobs. But, alas, that isn’t shown by the record. An excellent New York Times Op-ed by Sarah Anderson at the Institute for Policy Studies points out that many corporations create very few jobs with those profits.

She reports on 92 public-held American corporations between 2008-15 that pay less than 20 percent in taxes. They had a median job growth rate of 1 percent vs. 6 percent for all private sector corporations during that time.

And 48 of those companies actually cut 438,000 jobs, while their chief executives’ pay last year averaged nearly $15 million, compared with the $13 million average for all S&P 500 companies.

Then why not have congress push corporations to fill more of the 6 million job openings, which could expand their markets, increase profits and help to pay down our enormous public debt, rather than continue to fill their own pockets?

Harlan Green © 2017

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Wednesday, August 30, 2017

Cheaper Dollar Will Help GDP Growth

Popular Economics Weekly

The U.S. Dollar foreign exchange value is falling due to a number of factors. And it's already showing benefits, as Q2 GDP growth was just revised upward to 3 percent, and economists predict third quarter growth will also approach 3 percent.

That's because a cheaper dollar boosts  the export of manufactured goods, as our goods will now be less expensive overseas, which adds to GDP growth. It will hurt imports, which become more expensive (even imported oil), but that’s a good thing because domestically produced consumer goods become cheaper, boosting domestic jobs.

The euro now costs $1.20, when it was almost 1:1 to the Dollar last fall. Is the Dollar decline due to the latest North Korean missile launch, or Hurricane Harvey? Time will tell, but the U.S. factory sector is now doing very well because of the cheaper dollar.

Durable goods orders of goods that last more than 3 years, such as autos and appliances, are booming since the Dollar’s decline and this will help GDP growth. The boost to exports is a plus for our balance of payments problem and the budget deficit.

Graph: Econoday

Consumer confidence to date isn’t being hurt by either North Korean saber rattling or the Charlotte riots, according to the Conference Board. The Conference Board Consumer Confidence Index®, which had increased in July, improved further in August. The Index now stands at 122.9 (1985=100), up from 120.0 in July, said their press release. The Present Situation Index increased from 145.4 to 151.2, while the Expectations Index rose marginally from 103.0 last month to 104.0.
“Consumer confidence increased in August following a moderate improvement in July,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ more buoyant assessment of present-day conditions was the primary driver of the boost in confidence, with the Present Situation Index continuing to hover at a 16-year high (July 2001, 151.3). Consumers’ short-term expectations were relatively flat, though still optimistic, suggesting that they do not anticipate acceleration in the pace of economic activity in the months ahead.”
All in all, a continuation in the dollar’s decline will also be beneficial to manufacturing jobs, which tend to pay higher wages. And higher wages are needed to boost worker productivity and get us out of the slow growth syndrome the U.S. has been living through since the end of the Great Recession.

Harlan Green © 2017

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Thursday, August 24, 2017

Where Are the New Homes?

There just aren’t enough home being built to satisfy surging demand.  The drop in new-home sales total for July to 571,000 units is misleading; mainly because May and June totals were revised upward. That’s because the Census Bureau estimate comes from a very small survey sample with plus or minus 11 percent possible deviation, hence the sometimes large revisions. For instance, this is 9.4 percent (±12.9 percent) below the revised June rate of 630,000 and is 8.9 percent (±15.4 percent) below the July 2016 estimate of 627,000.

And the available supply of new homes for sale rose sharply, up 4,000 to 276,000 new homes on the market. Relative to sales, supply moved from 5.2 months to 5.8 months, which is nearly at the 6-month mark, widely considered to be balanced for new homes, says Econoday.
So with more new homes coming on line, sales could jump again.

This is while existing-home sales ran at a seasonally adjusted annual rate of 5.44 million, the National Association of Realtors said today. That was down 1.3 percent from a downwardly-revised June pace but 2.1 percent higher than a year ago. That’s because there aren’t enough home for sale, folks, with available supply down to 4.2 month. It was the lowest since last August.

“Homes are selling fast,” NAR Chief Economist Lawrence Yun said. In July, that strong demand meant listings went into contract in under 30 days. It also pushed prices higher. The median sales price in July was $258,300, a 6.2 percent increase compared to a year ago.

All will depend on more homes being built, and housing starts are trending higher. Although nationwide housing starts fell 4.8 percent in July to a seasonally adjusted annual rate of 1.16 million units, according to data from the U.S. Department of Housing and Urban Development and the Commerce Department, year-to-date, single-family starts are 8.6 percent above their level over the same period last year.

Homebuilder’s optimism is also holding up. Builder confidence in the market for newly-built single-family homes rose four points in August to a level of 68 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), said the NAHB.
 “The fact that builder confidence has returned to the healthy levels we saw this spring is consistent with our forecast for a gradual strengthening in the housing market,” said NAHB Chief Economist Robert Dietz. “GDP growth improved in the second quarter, which helped sustain housing demand. However, builders continue to face supply-side challenges, such as lot and labor shortages and rising building material costs.”
Graph: Econoday

The number of housing permits for future construction is the main factor determining future new-home inventories. And housing permits have been a thorn in the economy's side all year, bouncing up occasionally but diving more times than not, reports Econoday. Permits were a negative in the week, falling to a 1.223 million annualized rate for a 4.1 percent monthly decline.

Permits are a leading indicator for construction and the results are pointing to further flattening for residential spending. Yet there are more pluses than minuses in housing, evident in the yearly rate for permits, which, is up 4.1 percent, as much as July was down.

So, the overall housing market remains strong. And guess what, interest rates plunged again, so that the 30-year conforming fixed rate is again at 3.50 percent for a 1 point origination fee. With rates this low, and the Fed now saying it may hold off on another rate hike, we could see these rates hold for the rest of this year.

Where are the new homes? Regionally, new home sales increased 6.2 percent in the Midwest. Sales fell 4.1 percent in the South, 21.3 percent in the West and 23.8 percent in the Northeast.  The number of permits issued rose 19.2 percent in the Northeast, fell 1.4 percent in the South, 7.9 percent in the West, and 17.4 percent in the Midwest.

Harlan Green © 2017

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Tuesday, August 22, 2017

Where Are Badly Needed Infrastructure Improvements?

Financial FAQs

It’s really incredible that Republican leaders of both the House and Senate can’t see that Trump’s $1 trillion infrastructure proposal would boost growth. It's the one item that would stir us out of the 2 percent growth doldrums.

The all-Republican congress and White House are making a serious mistake in letting politics and ideology get in the way of economic growth. Does anyone seriously believe their attempts to repeal Obamacare would work with so many of their red state constituents dependent on Medicare?

And now they want to tackle a regressive tax reform plan in which, according to the Tax Policy Center, 76.1 percent of the net tax cuts would flow to the richest 1 percent of households in 2017.  And by 2025, essentially all of the net tax cuts — 99.6 percent — would go to the top 1 percent. That doesn’t even pass the smell test.

However, we have to remember Republicans have always hated the idea of another New Deal, because it would bust their bubble that government investment can’t work; because it did work to build our highways, Internet, shots to the Moon, educational system, a cleaner (and more productive) environment, and so forth.

President Trump’s infrastructure proposal would work, even if partially funded with $40 billion from Saudi Arabia and its allies. But Trump is now toxic with the business community after his Charlottesville racist fiasco. His 34 percent voter base, (or maybe now 24 percent in more recent polling) that continue to support him, even if he shoots someone on Fifth Avenue, won’t keep him in power, as he believes.
But higher economic growth would make him more popular. Marketwatch’s Jeff Bartash has highlighted what it would take to take US out of the doldrums. “Lackluster business investment is one of the chief reasons the U.S. continues to bob along at about 2 percent annual growth, less than two-thirds the historic average. Investment is what spurs new inventions, makes it easier for workers to do their jobs and allows the economy to expand at a faster rate.”
A souped-up economy in turn generates higher profits, fatter dividend payments and bigger paychecks for workers, says Bartash. “Whatever hope businesses may have had earlier in the year, however, has been clouded by the failure of a flailing Trump White House to push through tax cuts, more spending on public works and other measures to aid big and small companies alike.”
It’s so foolish.  President Trump and Republicans won’t accomplish anything, if Trump can’t renounce his neo-nazis, white nationalist and Ku Klux Klan supports.

Harlan Green © 2017

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Saturday, August 19, 2017

Will There Be Tax Reform?

Popular Economics Weekly

After Republicans’ failure to repeal Obamacare, they will now attempt to pass a budget, and tax reform plan. But the $1 trillion in spending cuts (mainly from Medicare) they hoped with the repeal of Obamacare, which would go into tax cuts for corporate, capital gains and upper income personal tax brackets, probably won’t happen.

And that could be a good thing, if it focuses solely on enriching a few. Corporate taxes aren’t too high with all the loopholes that bring down the effective corporate tax rate to 13 percent, rather than the nominal 23.8 percent rate, while the maximum personal tax rate was 92 percent in the 1950s under President Eisenhower when the U.S. was building our modern productivity- enhancing infrastructure, which badly needs an upgrade. And corporations already have record corporate profits as a percentage of GDP, which most aren’t using to increase capital expenditures and so productivity (and growth).

Any attempt at tax reform will run into the moderates in a split Republican Party that want to maintain Medicare and other social programs that aid those in the poorest overwhelmingly Republican red states. So the moderates will stymie efforts to cut spending in social programs, which means that Repubs can’t cut taxes without creating a very large budget deficit—even larger than it is now.

Tax cuts matched with spending cuts have only increased the budget deficit under the various Republican plans. Whereas the Obama administration drastically reduced annual budget deficits while rescinding most of the Bush tax cuts. The formula worked. This raised most taxes back to Clinton administration levels, while maintaining the various social programs that benefited the poorest and disabled.

Corporations are not investing what they should and could because they prefer using financial engineering to finagle stock prices to enrich investors (and executives) while squeezing employees’ incomes that hurts their producitivity. 

Whereas public sector investment is so important when it gets spent on productivity-enhancing infrastructure upgrades. It becomes revenue neutral because it stimulates higher growth, just as it did in the last 4 years of the Clinton administration, which yielded actual budget surpluses.

Republicans’ sole focus on spending and tax cuts is a mistake. The CBPP reports the House GOP agenda issued in 2016 a tax reform plan, which they haven’t amended, and that a 2016 Tax Policy Center (TPC) analysis shows would overwhelmingly benefit the highest-income households.  Under the plan, 76.1 percent of the net tax cuts would flow to the richest 1 percent of households in 2017.  And by 2025, essentially all of the net tax cuts — 99.6 percent — would go to the top 1 percent.

The figures are similarly striking for households with incomes over $1 million, who would reap 71.2 percent of the tax cuts in 2017 and 96.5 percent of the net tax cuts in 2025.[1]  The plan is actually more regressive and more heavily tilted toward those at the top of the income scale than past GOP tax cut proposals.

On the individual tax side, the new tax rate structure would have three brackets of 12 percent, 25 percent, and a top rate of 33 percent.  High-income people’s pass-through income — business income that’s claimed on individual tax returns — would be taxed at a special lower top rate of 25 percent. 

Evidence of the damage from corporations’ financial engineering (instead of productivity-enhancing investments) is the collapse in the number of listed companies. In a Credit Suisse report released in March titled “The Incredible Shrinking Universe of U.S. Stocks,” there were 7,322 in 1996; today there are 3,671. It is important not to confuse this with a shrinking of the stock market: the value of listed firms has risen from 105 percent of GDP in 1996 to 136 percent now. But a smaller number of older, bigger firms dominate bourses.

Consequently between 1996 and 2016, the number of publicly-listed stocks in the U.S. fell by roughly 50 percent — from more than 7,300 to fewer than 3,600 — while rising by about 50 percent in other developed nations, said Credit Suisse. 

A spike in M&A activity also accounted for the rapid acceleration in delistings (and fewer stocks) as well. Private equity has been a dominant force. In 1980, PE deal volume slightly exceeded $1 billion. By 1996, that number had reached $80 billion. And today, it sits at a staggering $825 billion.

Though it’s an old (but time tested) proverb, when private enterprise won’t step up to save economic growth, government has to fill the void.  The best tax reform is that which invests in the future of American productivity, rather than in Wall Street's financial engineering.

Harlan Green © 2017

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Thursday, August 17, 2017

Retail Sales Back, But Not Consumers

The Mortgage Corner

It turns out consumers decided to shop again in July, as retail sales surged in all categories. This includes online sales these days, as retailers adapt to the new reality that one large store size doesn’t fit all. But it may be a one-time surge, as wages are barely rising above inflation, while major brick and mortar stores are disappearing, and factory discount outlets thrive.

Nonstore retailers, vehicle dealers, building materials stores lead the report -- all major categories. Secondary readings are all strong: up 0.5 percent ex-autos, up 0.5 percent ex-autos ex-gas, and up 0.6 percent for the control group. Annual sales had risen above 5 percent in January, then declined until this month. So it’s hard to know if consumers in fact feel more prosperous.

Target, for instance, is opening more than 100 ‘small-store’ outlets near universities and colleges that was announced at their second quarter earnings call. Target Chief Executive Brian Cornell said the retailer would be nearly doubling the number of small-format stores it has this year, with the ultimate goal of having more than 100 open for business over a three-year period. The plan is to have 30 in 2017, said Chief Operating Officer John Mulligan, with nine opening in July and four opening in the first quarter.
“While we’ve only been open a few weeks, our July openers have been particularly strong out of the gate and as Brian highlighted, the guest response has been phenomenal,” Mulligan said on the Wednesday call, according to a FactSet transcript. “For the seven smallest format stores that have been open for more than a year, we’re continuing to see sales productivity more than double the company average and these stores have been delivering high-single-digit comp increases so far in 2017.”
We reported earlier that most households aren’t earning enough income to do more than pay their bills, such is the record income inequality. The monthly reading for this measure did finally show some life in the prior week's employment report with an unadjusted 0.3 percent gain, but it will take a continued run of strength to level out the 2-year trend line which remains in a deep downslope, said Econoday.

So we remain doubtful this retail surge can continue given all the actual brick and mortar stores closed or about to close. Brokerage firm Credit Suisse said in a research report released earlier this month that it's possible more than 8,600 brick-and-mortar stores will close their doors in 2017.

For comparison, the report says 2,056 stores closed down in 2016 and 5,077 were shuttered in 2015. The worst year on record is 2008, when 6,163 stores shut down, due to onset of the Great Recession.

Why? Is it only Amazon online shopping? No, because consumer incomes are barely rising, as I said, they look for discounts everywhere, and brick and mortar stores with their higher overhead, can’t cut prices as much, and can’t offer the variety that Amazon offers.

Now we hear that Amazon also wants to compete on the ground. What next? It will probably be more like an Apple store that samples its services and directs customers to its online warehouses, also springing up everywhere. Who can match that kind of cost-cutting when workers’ stagnant wages and salaries mean they will continue to discount shop for bargains.

Guess what is missing that would boost economic growth? Infrastructure spending, and now that Big Business has walked away from President Trump’s business councils, and Prez Trump is dissing Senate Republican leaders, good luck on getting anything done!

Harlan Green © 2017

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Wednesday, August 16, 2017

Why the Greater Lawlessness?

We knew as far back as Nixon’s Watergate that the Republican party harbors a lawless tendency when it suits them. Why else would President Reagan engineer the illicit Iran contra arms deal with the Ayatollah Khomeini, or, President GW Bush invade Iraq when UN inspectors already knew Saddam Hussein had destroyed his weapons of mass destruction a decade earlier?

The lawlessness of Republicans’ hunger for power has now reached such a point that they have selected and continue to support a president who has lied and cheated his whole adult life; from Trump Casinos to Trump Towers, from stiffing bankers and his workers to cooking the books. This has been documented in many of the 3,500 plus lawsuits Trump has been involved in, and the reason he settled the Trump University lawsuits, one of which alleged he ran a fraudulent enterprise under RICO, the Racketeer Influenced and Corrupt Organizations Act.

The sins of Hillary and Bill Clinton pale, yet Republicans impeached Bill for lying about a sexual encounter and continue to hound Hillary over lost emails. So why aren’t they impeaching Donald Trump who hasn’t divested himself of his assets to avoid conflicts of interest and continues to profit and even solicit favors from foreign governments in direct violation of the constitution?

President Trump's current 34 percent Gallup popularity rating is testimony that his support is now only restricted to those that would support him, even if, ““I could stand in the middle of Fifth Avenue and shoot somebody, and I wouldn’t lose any voters,” said at a January 2016 Iowa campaign rally.

And now we have President Trump condoning the lawlessness of his neo-nazi and white nationalist supporters holding a torchlight parade in Charlottesville, Virginia, Jefferson’s hometown.

CNN commentator David Gergen, advisor to four presidents, chastised Trump yesterday in commenting on the Charlottesville riot and death of a counter-demonstrator. “He said he wants to bring love, not hatred to the country,” Gergen said. “Good. We need to deal with hatred, but he needs to deal with the hatred in his own heart if he wants to bring more love to the country.”

When will the Republican party stand up to such blatant lawlessness? Only when they can deal with the lawlessness in their own hearts. In selecting an autocrat to further their agenda, they are in effect saying freedom means anarchy, rather than living within a democracy of laws based on the world’s first constitution that guarantees equal rights for all of its citizens.

Harlan Green © 2017

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Tuesday, August 15, 2017

Why Aren't Wages Rising Faster?

Popular Economics Weekly

Everything should point to higher wages and salaries ahead for employees with a 4.3 percent unemployment rate and record corporate profits, but corporate profits go mainly to their executives and owners (and their stockholders) these days. The result is stagnant wages and household incomes.

Graph: Econoday

“Real", or inflation adjusted average hourly earnings slipped 2 tenths in July to a year-on-year 0.7 percent. This reading has been under the 1 percent line since October last year. The monthly reading for this measure did finally show some life in the prior week's employment report with an unadjusted 0.3 percent gain, but it will take a continued run of strength to level out the 2-year trend line which remains in a deep downslope, says Econoday.

It’s as if corporate bosses no longer are interested in maximizing their growth, which is the normal way to maximize profits. They have been successful in boosting profits, but mainly through financial engineering—that is, stock buybacks paid with borrowed money, or mergers and acquisitions that consolidate markets into fewer players.

This increases their monopoly powers to boost profits and resist employee calls for higher wages. It has helped to keep the stock market humming, but not the economic growth that should accompany such profits.

Wages in the United States increased 2.95 percent in May of 2017 over the same month in the previous year. But a better idea of healthy wage growth in the United States is a historical average of 6.26 percent from 1960 until 2017, reaching an all-time high of 13.77 percent in January of 1979 and a record low of -5.77 percent in March of 2009, according to Trading Economics.

This is what normal wage growth should look like, if workers were earning a living wage, and inflation was rising at a normal rate. The inflation rate in the United States averaged 3.28 percent from 1914 until 2017, and was 14 percent in 1980. Wages since then have been suppressed in the name of suppressing inflation, as employees’ bargaining power has been curtailed.

That’s why the national minimum wage is still $7.25 per hour, last raised in 2009, though some cities and states are beginning to raise it to $15 per hour, which is what economists calculate is the minimum living wage for a family of four. And that is just enough to cover what a household has to pay for housing, gas, food, clothing, and other everyday items.

But it’s an uphill battle when business interests rule the markets with little push back or bargaining power held by 80 percent of the workforce that are wage earners, and we wonder why so many refuse to return to work. So we shouldn’t wonder why U.S. labor productivity, which ultimately sets our standard of living, has remained so low of late. It increased at an average annual 2.5 percent from 1948-2007, but just 1.2 percent from 2010-14.

It’s also the reason the U.S. have the highest income inequality in the developed world. 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. 

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Friday, August 11, 2017

More Job Openings, Lower Inflation, Mean What?

Popular Economics Weekly

The job market continues to fluctuate, as job openings rose sharply in June to 6.163 million from 5.702 million in May. Hires, however, fell sharply, to 5.356 million from 5.459 million. This data set can be volatile but the underlying theme is a separation between openings and hiring, says Econoday, which rather than meaning full employment and higher inflation points to workers who refuse to return to work, unless employers will pay enough to entice them to return.

The number of unfilled jobs rose again to 807,000, whereas the unfilled total had fallen to 194,000 in May, and there were1 million openings the month before. See what I mean?

Graph: Econoday

There is really no inflation to speak of, in fact the looming danger is disinflation (meaning falling inflation), which can lead to outright deflation and falling prices. Economists don’t like falling prices because it could lead to a recession.

That hasn’t happened yet, but interest rates plunged again. The Fed’s preferred Personal Consumption index that measures overall prices is too low.

The main determinant of inflation is the cost of labor, which accounts for approximately two-thirds of labor costs. Though wages have risen slightly of late, it still can’t buck the 2.5 percent annual increase it’s been for years.

“At 4.3 percent unemployment, earnings in theory should be much higher, at least above 3 percent where many believe it needs to be before feeding into overall inflation,” said Econoday last week. “And overall inflation, tracked here by core PCE prices, hasn't been moving higher either, dipping to the 1.5 percent line.”

It is the meaning of disinflation, and a reason the Federal Reserve will be hesitant to raise their rate another 0.25 percent in their September FOMC meeting. The Prime Rate that controls revolving debt, and even equity line mortgages has already risen from 3.50 to 4.25 percent.

This is while long term Treasury yields continue to drop. The 10-year Treasury yield is now 2.2 percent, which is why the conforming 30-yr fixed rate is still at 3.50 percent for a 1 pt. origination fee. This is what is called a declining yield curve, which means less profits for banks, since they borrow money at a short-term rate, and lend it at longer term rates.

Consumer prices have risen an unadjusted 1.7 percent over the past 12 months, up slightly from 1.6 percent in June. But on a core basis (without food and energy price changes), which is watched more closely by Fed officials, consumer prices remained at a 1.7 percent annual rate, the same rate as in May and June.

So, we have all these job openings that far outnumber hirings, while consumers can’t or won’t push up prices because their incomes aren’t rising enough to boost product costs and so prices.

That is why there are so many unfilled jobs, and such low inflation. Producers would have to boost wages to attract more workers, and they haven’t done so to date. Why? It could be corporations are choosing to use record profits to overpay their executives and stockholders, in effect rewarding themselves, instead of growing their markets.
It's not what all corporations choose, of course, but we know the 7 million total of unemployed and part time workers that want to work full time hasn’t changed in a long time, according to the Labor Bureau—which is why economic growth is still stuck at 2 percent. Economists have yet to come up with a better answer, whereas many workers have answered such employers with their refusal to return to work.

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Monday, August 7, 2017

Another Great Jobs Report?

Financial FAQs

No economist predicted another 209,000 private payroll jobs would be created in July, or that the last 2 months’ total would be 431,000, or the y-t-d total would be 1,290,000 payroll jobs created this year.

But they should have. The May JOLTS report was an indicator of higher employment numbers, as the unfilled jobs total dropped to 194,000 from 1 million the month before, for a total of 5.472 million hirings in May.

Job gains occurred in food services and drinking places, professional and business services, and health care. Employment growth has averaged 184,000 per month thus far this year, in line with the average monthly gain in 2016 (+187,000), said the Labor Bureau.

The only glitch, if that can be considered a problem, is that wages are still rising at 2.5 percent annually, which means two things. It means consumers won’t buy more than they are already buying, which would in turn increase demand and so increase economic growth, and there’s very little inflation, which means interest rates won’t be rising soon.

Wages aren’t rising faster because there are still many unemployed, or working part time when they would rather be working full time. “Both the unemployment rate, at 4.3 percent, and the number of unemployed persons, at 7.0 million, changed little in July. After declining earlier in the year, the unemployment rate has shown little movement in recent months,” said the BLS.

June’s Real Disposable Income was unchanged and May revised 1 tenth lower to a 0.3 percent gain, as I said in an earlier column. The real problem is weak wage growth, as most jobs being created are in low wage industries, like hospitality and even healthcare. Year-on-year, overall prices are up only 1.4 percent with the core little better at 1.5 percent.

Graph: Econoday

The 3 major employment sectors were Professional and Business Services, Healthcare, and Leisure and Hospitality as usual, all generally lower-paying job sectors.

Employment in food services and drinking places rose by 53,000 in July, said BLS. The industry has added 313,000 jobs over the year. Professional and business services added 49,000 jobs in July, in line with its average monthly job gain over the prior 12 months.

In July, health care employment increased by 39,000, with job gains occurring in ambulatory health care services (+30,000) and hospitals (+7,000). Health care has added 327,000 jobs over the past year.

What are those wages? In July, the BLS says, average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $26.36. Over the year, average hourly earnings have risen by 65 cents, or 2.5 percent. In July, average hourly earnings of private-sector production and nonsupervisory employees increased by 6 cents to $22.10.

So the U.S. economy is in a bit of a bind, if it wants to grow faster. And that is a lack of population growth, one of two main drivers of GDP growth, when conservatives want to limit immigration?

The U.S. native population is barely growing, so where else are those workers coming from? And businesses are investing a bare minimum in capital expenditures, robots and other technologies that would increase productivity, the other driver of growth.

And then we have jumped off the Paris Accord bandwagon, when China is tripling its investments in alternative energy sources, such as wind and solar farms. That will also boost productivity and hence growth—for China and the rest of the world that isn’t ignoring climate change.

But conservative still have their heads stuck in coal mines, for some reason. Go figure. What century do they think we are living in?

Harlan Green © 2017

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Tuesday, August 1, 2017

Great Q2 GDP Growth, But Q3?

Popular Economics Weekly

Second quarter GDP came in at a 2.6 percent annualized growth rate. This is one of the best showings of the last 2 years and keeps overall growth at 2 percent; because first quarter's growth was downwardly revised to 1.2 percent. And Q3 growth isn’t looking good, as June personal income and expenditures (PCE) just took a huge plunge—not a good omen for Q3.

June PCE income was unchanged and May revised 1 tenth lower to a 0.3 percent gain. Consumer spending was up 0.1 percent gain. Price data are flat, unchanged in the month with the core rate (less food and energy) up 0.1 percent for a second weak month in a row. The real problem is weak wage growth, as most jobs being created are in low wage industries, like hospitality and even healthcare. Year-on-year, overall prices are up only 1.4 percent with the core little better at 1.5 percent.

Graph: Econoday

What is wrong with the U.S. economy that it can’t grow faster? Nothing, really, given almost no productivity growth, and an aging population. This is maximum speed without an increase in productivity, in other words, and that won’t happen unless some of the $4.6T in deferred infrastructure spending gets done.

Can you imagine what new highways, bridges, airports, energy infrastructure, city and state water treatment facilities would do to productivity growth? Labor productivity rose at an average annual rate of 3-1/4 percent from 1948 to 1973, says the Federal Reserve, whereas, the average growth rate of productivity was about 1.7 percent in the period 1974 to 2016.
“If labor productivity grows an average of 2 percent per year,” said Fed Vice-Chair Stanley Fischer in a recent speech, “average living standards for our children's generation, will be twice what we experienced. If labor productivity grows an average of 1 percent per year, living standards will take two generations to double.”
“Governments can take sensible actions to promote more rapid productivity growth,” continued Fischer. “Broadly speaking, government policy works best when it can address a need that the private sector neglects, including investment in basic research, infrastructure, early childhood education, schooling, and public health.”
But construction spending also dropped in June—1.3 percent, mainly highways and streets in the government sector. Construction spending in manufacturing was also down. Doesn’t congress realize this is a sign that infrastructure expenditures are going down, rather than rising? This should be the priority, not attempting to repeal Obamacare, or cut taxes.

Our deficit problems would be solved if congress would focus on policies that really matter—like increasing spending on factors that enhance productivity, which would in turn increase GDP growth, which would in turn lower the budget deficit and obviate the need for draconian tax cuts.
“Reasonable people can disagree about the right way forward, but if we as a society are to succeed, we need to follow policies that will support and advance productivity growth. That is easier said than done. But it can be done,” says Fischer.
Economists such a Stanley Fischer know how this is done. In fact, we can only really survive as a viable democracy if we listen to the experts, rather than political ideologues.

Harlan Green © 2017

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Saturday, July 29, 2017

Why are Americans So Unhealthy?

Financial FAQs

Americans have just avoided a health care disaster in voting down the Senate’s ‘skinny’ Obamacare Repeal and Replace bill. Even though maintaining most of the taxes to pay for the Medicaid portion, it would have made insurance coverage prohibitively expensive for those older and sicker users with the removal of the private and employer mandate requirements that would cause younger and healthier people to leave the insurance markets.

This is really the latest precipice that’s been averted. Americans already have the worst health outcomes in the developed world, precisely because America is the only developed country—in fact, of most of the rest of the undeveloped world—that doesn’t have universal coverage.

The result is one of the highest birth death rates, as well as heart, diabetes, and infectious disease rates—which are diseases usually associated with poorer, undeveloped countries and regions.

Why has this happened in the America? Because Americans have the worst income inequality in the developed world, according to the CIA World Factbook. And studies have shown that those countries with the greatest inequality also rank lowest in healthcare benefits.

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. Whereas Finland and the Scandinavian countries are at the top of equality rankings, as I’ve highlighted in past columns. The higher the index in the graph, the greater the gap between wealthy and poorer citizens of a country’s population.

This is while congress has even been attempting to take away Medicaid benefits for the poor, elderly and infirmed? It doesn’t compute. Just 3 Senators—Lisa Murkowski, Susan Collins and John McCain—were courageous enough to stand up to the conservative lobbies that would only worsen healthcare outcomes.

What if conservatives had succeeded in repealing Obamacare? “Republicans' Obamacare repeal bill would leave 17 million more people uninsured next year, and 32 million more in 2026, the Congressional Budget Office said in an estimate Wednesday. It also said premiums would double by 2026. …By 2026, three quarters of the population would live in areas with no insurers participating in the non-group market, due to upward pressure on premiums and downward pressure on enrollment, the report found.”
On the other hand, a 2016 Commonwealth Club study lists Obamacare’s many benefits. “…evidence indicates that the ACA has likely acted as an economic stimulus, in part by freeing up private and public resources for investment in jobs and production capacity. Moreover, the law’s payment and other cost-related reforms appear to have contributed to the marked slowdown in health spending growth seen in recent years.”
Some of those benefits are:

· Health care spending growth per person—both public and private—has slowed for five years.
· A number of ACA reforms, particularly related to Medicare, have likely contributed to the slowdown in health care spending growth by tightening provider payment rates and introducing incentives to reduce excess costs. 

· Faster-than-expected economic growth and slower-than-expected health care spending have led to multiple downward revisions of the federal deficit and projected deficits.

· These trends have also been a boon to state and local government budgets, as job growth has improved state tax revenues while cost growth in health care programs has slowed. At the same time, expanding insurance to millions of people who were previously uninsured has supported local health systems and enhanced families’ ability to pay for necessities, including health care.

· The accrued savings in health care spending relative to their projected growth prior to the ACA are substantial: Medicare alone is now projected to spend $1 trillion less between 2010 and 2020.

We can thank Senators Merkowski, Collins, and McCain that the so-called ‘freedom’ lobbies behind the Obamacare repeal efforts have not succeeded in making more Americans ill. I don’t even want to imagine the increased death totals due to lack of care of the 32 million aged and infirm that could ultimately lose their coverage.

So now is the time, in Senator McCain’s words, for Republicans and Democrats to work together in “regular order” to craft a truly bipartisan healthcare bill that could actually improve the health of Americans.

Harlan Green © 2017

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Thursday, July 27, 2017

The End of Easy Money?

Popular Economics Weekly

The Fed just completed its July FOMC meeting and said the sale of some of its $4.5 trillion in securities would begin this year. CNBC has predicted the first installment of $300B in sales could begin anytime. This is a mere drop in the bucket and shouldn’t affect interest rates immediately.

Why? There is simply too much easy money in circulation, which is why the 10-year Treasury yield is still in the 2.3 percent range, and 30-year conforming fixed mortgage rates are below 4 percent. Money is cheap, in other words, which hurts savers but helps borrowers, such as homebuyers.

This is indeed helping homeowners, as June new-home sales just jumped 0.8 percent and are 11 percent higher this year. Should the Fed begin to sell securities they bought via the various Quantitative Easing securities purchases, it will take some of that excess money out of the economy, but should not slow down home buying.

This is because interest rates only go up if inflation rises, and the Fed’s preferred inflation gauge, the Personal Consumption Expenditures index, has tapered off to 1.4 percent growth over 12 months from a five-year high of 2.1 percent. That is not a good sign for future demand and hence growth, as I’ve been saying. But it’s good for borrowers and homebuyers.

“The month’s (new-home) sales report is consistent with our forecast, and we should see further gains throughout the year as the labor market continues to strengthen,” said NAHB Senior Economist Michael Neal. “While new home inventory rose slightly in June, it remains tight as builders face lot and labor shortages and increases in building material costs.”
The assessment of both current and future business conditions is also strong with more describing them as good. Buying plans for homes is also a positive, up a sharp 7 tenths to 6.7 percent with buying plans for autos also up, 1 tenth higher to 12.7 percent.

Graph: Econoday

So the expected rise in interest rates is just not happening. Inflation is really a gauge of present and future demand and the demand by consumers, even for so-called capital expenditures by businesses that would expand production, isn’t happening. Capex spending jumped slightly earlier this year, but has slowed and manufacturing activity is still in a positive but narrow range.

However, consumer confidence continues to soar. The Conference Board’s index is back to its highest level this year. The index rose nearly 4 points in July to 121.1. Confidence has risen about 20 points following the November election, hitting a 17-year peak of 124.9 in March. Is this due to the Trump election? We haven’t yet seen higher retail sales and other indicators of greater consumer spending that would boost GDP growth to 3 percent as Republicans have promised.

So what are consumers up to? They seem to want to save most of their earnings at present, which is a sign that consumers are not yet convinced higher economic growth is in the cards, in spite of the availability of so much easy money.

Harlan Green © 2017

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Tuesday, July 25, 2017

Home Sales Disappoint

The Mortgage Corner

Existing-home sales were at a 5.52 million seasonally adjusted annual rate in June, the National Association of Realtors said Monday. That was 0.7 percent above the year-ago rate, but 1.8 percent lower than in May and marked the second-lowest monthly total of 2017.

Why? There’s a severe housing shortage with inventories down to a 4.3-month supply at the current sales rate. It is so bad that Zillow Chief Economist Svenja Gudell in a Marketwatch interview said, “There are about as many homes for sale now as there were in 1994 (1.96m), except there are about 63 million more people in this country now than there were then.”

The supply imbalance continues to push prices higher. The median sales price was $263,800 nationally, a 6.5 percent increase compared with the year-earlier period. The median price in California is now $500,000. That sets a fresh record and marks the 64th consecutive month of yearly price gains, with housing prices growing at roughly double the rate of wage gains.

It’s hard to understand why builders aren’t answering the call with demand so high and interest rates still at record lows. Part of the problem is that there are so few entry-level homes being built.
“Closings were down in most of the country last month because interested buyers are being tripped up by supply that remains stuck at a meager level and price growth that's straining their budget," said NAR economist Lawrence Yun. "The demand for buying a home is as strong as it has been since before the Great Recession. Listings in the affordable price range continue to be scooped up rapidly, but the severe housing shortages inflicting many markets are keeping a large segment of would-be buyers on the sidelines."
First-time buyers were 32 percent of sales in June, which is down from 33 percent both in May and a year ago. The longer-term average is 40 percent for first-timers as a percentage of all buyers, which are mainly younger buyers.

Graph: Apartment List

CNBC reports new data from Apartment List  that shows, although 80 percent of millennials would like to purchase real estate, very few are in a good position to buy, largely because they have nothing saved. According to the report, "68 percent of millennials said they have saved less than $1,000 for a down payment. Almost half, or 44 percent, of millennials said they have not saved anything for a down payment."

That is probably why mortgage lenders are now offering more exotic products, such as a 1 percent down payment for the conforming 30-year fixed rate with the lender chipping in another 2 percent, so that it satisfies the minimum 3 percent minimum down payment requirement for conforming loans.

Lenders are also offering high end buyers a 40-year fixed rate program for super jumbo loan amounts with the first 10 years at interest only payments. Payments then become standard 30 year principal and interest payments for the rest of the 30-year term.

Meanwhile the standard 30-year conforming fixed rate is 3.50 percent for 1 origination point in California, as it has been for months. There are still many buyers out there, in other words, but the most important population segment is the millennials, who marry later and have those student debt problems.

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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!

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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.

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