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.

Graph: Econoday

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

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

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.

Graph: Econoday

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

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

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.

Graph: Econoday

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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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

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

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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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.

Graph: Econoday

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

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

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

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

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.

Graph: 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. 

Harlan Green © 2017

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

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.

 

Graph: Econoday

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.

Harlan Green © 2017

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

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.

Graph: Marketwatch/BLS

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

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

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.

Graph: Econoday

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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