Who Needs Tax Cuts?

Popular Economics Weekly

It turns out very few of us need a tax cut. Marketwatch economist Rex Nutting calculates that those in the 60 percent middle-income brackets—from $32,000 to $140,000 per year—pay just an average 2.5 percent in income taxes. It’s only the richest 0.1 to 1 percent income earners that pay more, and want the huge tax cuts congress and the Trump administration are proposing.
 

Graph: Marketwatch

Their rationale? That it will boost GDP growth to 3 percent from the current 2 percent average since the end of the Great Recession. But guess what? Q2 GDP growth was already 3 percent in Q2 and just revised to 3.1 percent, the highest growth rate in 2 years. Q3 GDP growth was just reported today at 3 percent, due to higher consumer spending and Durable Goods orders on hurricane replacement. 

Businesses are already investing in expansion, in other words—business investment in structures rose a stronger 7 percent instead of 6.2 percent in the revision. So, why not pay down the huge budget deficits accumulated since then, instead of cutting tax revenues?

“A bill that cuts federal income taxes for middle-class families makes absolutely no sense, except as a sad way of camouflaging the real intent of the bill: Giving millions of dollars to the very wealthy, who happen to be the only people who are really benefiting from our uneven economic growth,” said Nutting.

Because the budget deficit cannot be increased more then $1.5 trillion in ten years, due to prior budget agreements, spending has to be cut somewhere, and guess where. The just passed House and Senate budget resolution cuts $1trillion from Medicaid, and $500 billion from Medicare.

Guess who is hurt most by those benefit cuts? Trump's lower-income voters in the red states that depend most heavily on  health benefits. So, once again Repubs are attempting to disguise a tax cut for the wealthiest.

A corporate tax cut also benefit the wealthiest, since the top 10 percent of income earners own 80 percent of stocks, which is where most of the benefits from their increased profits will show up.

Graph: Econoday

Top this off with another record for corporate profits, up 7.4 percent in a year, and there is no reason to be cutting their taxes. They haven’t been using their profits for productive purposes, so what’s needed is for them to pay higher taxes so government can use that money to invest productively in the $2 trillion plus in outmoded infrastructure that badly needs replacement.

As a bonus, any such investments in new airports, power grids, better water treatment facilities (such as Detroit’s), alternative energies, roads, bridges—you name it—will increase labor productivity that has been cut in half since 2000.

And increasing labor productivity is the only real ticket to higher economic growth, and increasing the take-home pay for those middle-income wage earners.

Harlan Green © 2017

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

Boom Times for Manufacturing

Popular Economics Weekly

A measure used by economists to track investment, known as core capital orders (minus defense and aircraft), rose 4 percent in the 12 months ended in September. It has risen 1.3 percent for three consecutive months, according to the Commerce Department.

Core orders are spent domestically for the most part, so this is happening just when it’s needed—to rebuild the hurricane and wildfire damaged states of Florida, Texas, California, as well as U.S. Territories of Puerto Rico and the Virgin Islands.

Graph: FRED

It will also boost economic growth, since it boosts labor productivity, one of the two components that determine GDP growth. The other component is population growth, but the U.S. population is barely growing, as is immigration that supplies the majority of new workers.

The main beneficiary of higher capex spending will be manufacturing, which is already showing improvement with a cheaper dollar exchange rate that has boosted exports.

And today we have durable-goods orders that rose 2.2 percent in September, beating forecasts. Durable goods are all goods that last three or more years—including auto vehicles, defense and aircraft. These orders have climbed 7.8 percent in the past year, the fastest pace since early 2012.

“Strength in the manufacturing sample is centered in new orders and employment,” says Econoday. “Of special note are unusual delivery delays, which help lift the composite indexes and are the result of lingering disruptions and stretched workloads following Hurricanes Harvey and Irma.”

So we are seeing effects of the hurricanes in boosting economic activity. The role of capital expenditures is especially important, as it means the replacement of much of our aging infrastructure as well.

And don’t forget at least 1 million motor vehicles were destroyed by the hurricanes that will need to be replaced. But buyers shopping for used replacement vehicles should be aware of the pitfalls of those storm-damaged cars that are put back on the market.

Consumers should take precautions like getting a history of repairs and checking the VIN number in the National Insurance Crime Bureau and National Motor Vehicle Title Information System databases, reports Fortune Magazine. Even without a database, strange stains and smells can be a red flag that a car has weathered a flood. Consumers buy a used car should check for signs of water damage — mineral deposits, mildew and the smell of mold or overpowering scents of cleaning supplies that may be trying to mask it.

Harlan Green © 2017

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

Rising Existing-Home Sales Not Enough

WASHINGTON (October 20, 2017) — After three straight monthly declines, existing-home sales slightly reversed course in September, but ongoing supply shortages and recent hurricanes muted overall activity and caused sales to fall back on an annual basis, reports the National Association of Realtors.

There aren’t enough homes for sale, in other words, at a time when many more homes are needed.  The inventory for sale is down to 4.2 months’ supply at the current sales rate. How will all the homes lost in the hurricanes and California wild fires be replaced with such low inventories?

It will take massive help from governments and disaster relief agencies, for starters. The U.S. House has voted $51.8 billion in relief aid to date that the Senate will also have to approve; much of it for replacement housing. But that means mobile homes providing immediate shelter from the approaching winter, as happened in New Orleans with Hurricane Katrina.

It will take much longer to replace those homes destroyed. The ongoing California wildfires have destroyed more than 6,000 homes in Northern California, which is more than half the average total of new homes built in California during ordinary years. And 185,149 homes are estimated to be damaged or destroyed just by Harvey, according to recent data from the Texas Division of Emergency Management.

This will certainly boost the construction industry. But construction also is suffering from a shortage of workers. And affordability is now a problem slowing sales, as housing prices have risen faster than incomes due to the current housing shortage.

Graph: Econoday

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 0.7 percent to a seasonally adjusted annual rate of 5.39 million in September from 5.35 million in August. Last month's sales pace is 1.5 percent below a year ago but is the second slowest over the past year (behind August).

Lawrence Yun, NAR chief economist, says closings mustered a meager gain in September, but declined on an annual basis for the first time in over a year (July 2016; 2.2 percent). “Home sales in recent months remain at their lowest level of the year and are unable to break through, despite considerable buyer interest in most parts of the country,” he said. “Realtors® this fall continue to say the primary impediments stifling sales growth are the same as they have been all year: not enough listings – especially at the lower end of the market – and fast-rising prices that are straining the budgets of prospective buyers.”

Bottom line is that U.S. and state economies will be given a massive boost by the recent disasters. We can really call it a new, New Deal, since governments will have to approve massive spending bills to rebuild as if it were wartime. Much of that spending has to be for modernizing our infrastructure—which includes all the roads, bridges, water systems, and electrical grids destroyed.

And don’t forget the replacement housing needed. We see such spending can and will prolong this recovery another one or two years. Since such massive spending will require bipartisan support, maybe politics can be thrown out the window this time.

Harlan Green © 2017

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

Republicans Are Killing Housing

The Mortgage Corner

The Trump administration and Republicans’ anti-immigration policies will kill the housing market. Why? Trump wants to cut immigration quotas by 50 percent when there aren’t enough qualified workers to fill current job openings. And congress can’t agree on anything that gives easier access to citizenship for the foreign-born; which is why there is a housing shortage.

The housing market can’t provide enough housing even for current population growth. Both new and existing-home sales have declined this year because of the lack of housing. Builders and real-estate agents have complained for years about more red tape, tighter lending standards and a scarcity of inexpensive lots to build on.

And builders are now facing an extreme labor shortage. They can’t find enough carpenters, bricklayers and other workers with the needed skills. “Labor and material shortages are holding construction back, and will continue to do so for some time yet,” says Marketwatch, citing economists at Capital Economics.

Graph: FRED

The number of existing-homes listed for sale in 2017 to date is the lowest since 1999, according to the NAR. That’s in part because distressed sales volumes have fallen from more than 100,000 a month at the peak of the post crisis period, 2009-2012, to about 25,000 today, which means there aren’t many cheaply-priced homes left over from the housing crash. 

I said last week the Labor Department reported there were 6.1 million job openings in August in its JOLTS report, or Job Openings and Labor Turnover Survey, which was “little changed” from July, while hirings remained far behind at 5.430 million. The very large gap has been little changed for more than a few months. At 652,000, the current spread between openings and hirings is one of the very widest on record, and two months ago it was even higher—the spread was 1 million.

Why? There aren’t enough workers to fill current job openings; as I said—and the Trump administration wants to restrict the supply even further in its single-minded pursuit of minority white-nationalist voters?

Economists know that to advance economic growth to say, 3 percent for any length of time, 2.8 million new workers are needed each year, when our domestic population is capable of just 600,000 new adult workers, according to the U.S. Census Bureau. So where are the additional workers to come from if Trump and the Republican congress continue to block a more enlightened immigration policy?

Housing affordability will suffer the most, when household incomes are rising at half the rate of both housing prices and rental rates. It’s a sad fact that the average production and non-supervisory worker earned $37,600 annually in 2016. “When adjusted for inflation, the average wage has remained stagnant for 50 years,” said Executive Pay Watch, in a report conducted by the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO).

So we are at a crossroads, if we want to provide the necessary housing for our growing population. A more enlightened immigration policy is the first step. And then Republicans should drop their obsession with unnecessary tax cuts and instead focus on that $1 trillion infrastructure bill they’ve talked so much about.  It’s even more necessary because of the horrific hurricanes.

Harlan Green © 2017

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

JOLTS Report And Too Many Job Openings!

Financial FAQs

The Labor Department reported today there were 6.1 million job openings in August in its JOLTS report, or Job Openings and Labor Turnover Survey, which was “little changed” from July, while hirings remained far behind at 5.430 million.  Corporations are flush with cash from record profits, so they need to put that cash to work by filling more of those job openings instead of asking for tax cuts they don’t need.

Graph: BLS.gov

In fact, the very large gap has been little changed for more than a few months. At 652,000, the current spread between openings and hirings is one of the very widest on record, and two months ago it was even higher—the spread was 1 million.

Yes, the gap between openings and hiring first opened up about 2-1/2 years ago signaling that employers are either not willing to offer high enough pay to fill empty positions and/or are having a hard time finding people with the right skills.

It’s worse than that. I maintain companies (corporations in particular) are using their record profits (up 7.4 percent in one year) to buy back their stock, instead; which enhances CEO pay.

I reported two weeks ago that Executive Pay Watch, in a report conducted by the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), said last year CEOs were paid 335 times the average worker. The average production and non-supervisory worker earned $37,600 annually in 2016. “When adjusted for inflation, the average wage has remained stagnant for 50 years,” said the report. 

This brake on economic growth is mainly because corporations have been able to successfully resist their employees’ demands for higher wages due to corporations’ monopoly positions in many industries, and massive lobbies. Instead they’ve used most of those profits to buy back their stock, and so enhance their earnings. CEO pay spiked 19.6 percent last year, before inflation.

And next year may not be better for their employees. I also reported recently that “Pay raises for U.S. employees are not expected to improve next year, according to a survey released recently by global professional services company Aon, based on a survey of over 1,000 companies. Base pay is expected to rise 3 percent in 2018, up slightly from 2.9 percent in 2017. Spending on variable pay — incentives or bonuses — will be 12.5 percent of payroll, low levels not seen since 2013. This suggests a “pessimistic view of corporate performance in the coming year,” Ken Abosch, a strategy and development analyst at Aon, said in a statement.

Graph: Popular Economics

How can corporations be pessimistic about their prospects with their record profits? They now have the largest profits as a percentage of Gross Domestic Income (a measure of total national income) in history.

So, it should be obvious corporations want more tax breaks, rather than pay their employees more, so the Aon survey is suspect. Corporations are really not interested in expanding their markets—at least in the U.S. of A. They are more interested in expanding the pocketbooks of their executives and stockholders, which is why GDP growth has been below the long term average.

As Nobel economist Joseph Stiglitz has been saying for years, “…it is not as if America’s large corporations were starved for cash; they are sitting on a couple of trillion dollars. And the lack of investment is not because profits, either before or after tax, are too low; after-tax corporate profits as a share of GDP have almost tripled in the last 30 years.”

Consumers power two-thirds of economic activity, so economic growth can’t improve unless the incomes of consumers grow, and that won’t happen as long as corporations hoard their profits rather than invest in their own employees future growth.

Harlan Green © 2017

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

A Poor Employment Report?

Popular Economics Weekly

What does it mean when 33,000 nonfarm payroll jobs were lost in September? Not much, when many of the losses came from the hurricanes that threw 1.5 million out of work, according to Marketwatch’s Jeff Bartash, and the rest of our economy is doing very well.

Wages jumped, also good news, but it was mainly because many of those lost jobs were in retail and restaurants which tend to pay the lowest incomes, hence the upward trend may be temporary.

Graph: Marketwatch.com

The number of employed jumped by a huge 906,000 in the smaller household survey that determines the unemployment rate—in spite of the storms—while the number of job losses was smaller; at 331,000, hence the lower unemployment rate. So the rest of the U.S. is doing well.

And we now have a fast growing manufacturing sector that will grow even faster with the cleanup and rebuild from those disasters. Its growth is also helped by the cheaper dollar, which is boosting exports.

Econoday reports ISM's manufacturing index, already running well beyond strength in factory data out of Washington, is accelerating even further, to an index of 60.8 in September which is a 13-year best. Part of the gain in the index is tied to hurricanes and specifically deliveries times where slowing is translated as strength, as we said.

But it's more than that—maybe those higher exports are boosting GDP growth as well? Factory new orders rose 4.3 points in the month to 64.6 which is a 4-year high. And the hurricanes didn't slow down production which is at a very strong 62.2. Employment is a big standout in today's report, posting the first 60 score at 60.3 in 6-1/2 years.

Graph: Econoday

The ‘other’ non-manufacturing service sector part of the economy is also growing robustly. The headline ISM non-manufacturing survey index jumped to 59.8 for the highest score in more than 3 years. New orders, that include strength for exports, jumped nearly 5 points to a robust 61.3 level that was last exceeded in April this year. Backlog orders jumped 2.5 points to 56.0 which helped employment rise 6 tenths to 56.8 with both these readings the strongest since May this year.

So the U.S. economy is firing on all cylinders, which is why the Fed is making louder noises re a December rate hike, in spite of nonexistent inflation. Why do so? Because it wants to gradually sell off its $4.5 billion hoard of government securities, which reverses the various QE programs that injected that much cash to boost growth.

So with less cash in circulation, money is no longer so cheap and market interest rates tend to rise. The Fed wants to be able to anticipate this trend.

But shouldn’t we be seeing more indications of higher growth than just one quarter of 3.1 percent GDP growth? That may happen if more federal funding than a measly $14.6 billion is available for Hurricane Harvey alone, when cleanup may cost $200 billion

Government-is-the-problem Texas Gov. Greg Abbott has changed his tune now that Texas is in need of federal funding. He said he thinks the state will need "far in excess" of $125 billion in federal relief dollars. Houston Rep. Sheila Jackson Lee called for a record-breaking $150 billion aid package on CNN recently.

Really, and who knows what Florida and Puerto Rico’s cleanup will cost? In fact, it will take such large amounts of federal spending to even sustain last quarter’s 3.1 percent growth rate, in my opinion.

Harlan Green © 2017

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It's Time to Build More Housing!

The Mortgage Corner

The National Association of Home Builders (NAHB) analysis of Census Construction Spending data shows that total private residential construction spending is soaring, as it rose to a seasonally adjusted annual rate (SAAR) of $520.9 billion in August, 0.5 percent up from downwardly revised July estimates.

But that’s not enough housing to satisfy current demand. There will be plenty of housing to replace, however, after this hurricane season has devastated so many U.S. states and territories.

Graph: NAHB.org

It was the fourth consecutive monthly increase after a dip in April, said the NAHB, Hurricane Harvey that made landfall late in August did not have significant impacts on construction spending in the same month, but will have a huge impact in months to come, as I said. The total private residential construction spending was 11.7 percent higher than a year ago. However, the blue line in the graph that represents residential construction spending still lags far behind commercial (red) and home improvement construction (gray lines).

The Midwest region is currently hurting the most from a housing shortage. Marketwatch’s Andrea Riquier reports the Home Affordability Index from real estate data provider Attom Data Solutions edged down to 100 in the third quarter, the lowest level since the third quarter of 2008, which was just as the financial crisis was taking hold.

Affordability is a problem because incomes haven’t risen as much as housing prices (especially in the Midwest). Attom notes that median home prices have risen 73 percent since bottoming out in 2012, while average weekly wages have increased only 13 percent in that time.

Why such a housing shortage so late in this recovery? For starters, the number of existing-homes listed for sale in 2017 to date is the lowest since 1999, according to the NAR. That’s in part because distressed sales volumes have fallen from more than 100,000 a month at the peak of the post crisis period, 2009-2012, to about 25,000 today, which means there aren’t many cheaply-priced homes left over from the housing crash.

And the construction industry because of a labor shortage has yet to catch up to soaring demand from a fully employed economy. More than half of the 3.5 million construction workers were laid off during the recession, and replacements are hard to find in this now fully employed economy.

Harlan Green © 2017

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

It's Time For 2018

Financial FAQs

We will need the 2018 elections now more than ever to vote out the greed and cowardice of those members of our national legislature who oppose all forms of gun control in the wake of the Las Vegas massacre of innocents.  It is those who have supported gun-rights groups that need to be replaced to protect Americans from such random acts of violence.

Gun-rights groups have allowed the killing of thousands of Americans in mass shootings over the past decade, including 521 mass shootings in just the last 477 days, according to New York Times columnist Frank Bruni.

That’s also because we have to vote out supporters of the largest terrorist organization in the U.S., the National Rifle Association, that opposes any controls on military-style weapons of mass destruction.

Yes, that’s right. Military weapons, such as the AK-47 developed by the Soviets because it was cheap to manufacture and easy to use, are responsible for more American deaths than ISIS; or any other terrorist organization that has killed maybe 15-20 Americans in all, yet we spend $billions trying to eliminate them, but nothing on eliminating American terrorism.

Instead those monies are donated to the candidates that support American anti-gun control organizations, such as the NRA. Ted Cruz and Marco Rubio were the top recipients of monies from organizations that oppose any form of gun control in 2016, reports Marketwatch — no surprise, since they both ran for president.

Cruz raked in $360,727 to lead the way, according to OpenSecrets.org. Just two years earlier, Cruz had collected $18,300 when he was the junior senator from Texas and lacked any significant influence in the Senate.

Third on the list of recipients of their largesse is House Speaker Paul Ryan, who said of the Las Vegas massacre, “this is not who we are”. Do we really believe him when he was the recipient of $171,977 from such organizations?

Who are we when President Trump, our elected President said, “You came through big for me, so I will come through big for you,” at the NRA’s latest convention?

Graph: Marketwatch.com

That is in fact “who we are” at the moment, but not who we can become if we will take on such American terrorist organizations as the NRA that are responsible for the indiscriminate killing of so many women and children.

The big lie broadcast by gun-rights groups is that banning military-style weapons is banning the Second Amendment right to bear arms. No, that right is protected by the Second Amendment, but not the right to bear arms that slaughter so many innocents.

Harlan Green © 2017

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

Guns Kill People

Popular Economics Weekly

“Guns don’t kill people, people kill people” has been the credo of the NRA, gun lobby and most Republicans since the 1980s when gun manufacturers came up with automatic pistols, so that guns could kill more people.

But Las Vegas shooter Stephen Paddock had no discernable mental illness, criminal record—or anger problems, according to his brothers. The NRA will try in vain to find a reason this inhuman act was committed when there is no reason, other than the fact that semi-automatic military-style weapons are legal in much of America and easily obtainable.

Only guns can kill that many people—including women and children. His brothers didn’t even know he was a gun nut who owned more than 30 weapons, and was able to smuggle in 10 suitcases containing 23 of those weapons without any Mandalay Bay staff even noticing such an oddity. Who needs that many suitcases in a hotel room?

The odds are that nothing will be done about this massacre, as long as President Trump and Republicans are in power. President Trump called it an act of evil, yet he won’t look at the evil in his own soul; the countless times he has lied and cheated to build his real estate empire that have been documented in many of the 3,500 lawsuits he has been involved in.

Australia had a similar gun problem until 36 people were killed in Port Arthur, and Prime Minister John Howard was able to pass strict gun control laws in 1996, the same year of the Port Arthur massacre. There hasn’t been a mass killing since then in Australia.

Australians apparently don’t believe owning an assault rifle is the ticket to manhood. Their gun control laws are maintained by weapon buyback programs and the requirement that gun owners must belong to a certified gun club.

How did our gun laws become so lax that military-style weapons are easy to obtain? It was a little known Supreme Court decision authored by its most extreme ideologue, Justice Antonin Scalia in the 1980s, which said that gun owners no longer must heed the constitutional Second Amendment stricture that gun owners are members of a well-regulated militia in order to bear arms.

Our founding fathers must have thought it would help to curb the random gun violence we have today.

Harlan Green © 2017

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