Friday, May 18, 2018

April Retail Sales, Consumer Spending Just Ok

Popular Economics Weekly

Consumers have to do better, if GDP growth is to exceed 3 percent, as the recent tax cut bill promised. Consumer spending was weak in the first quarter and the first look at the second quarter is no better than moderate. Total retail sales rose an as-expected 0.3 percent in April. That still means retail sales are increasing almost 5 percent annually, but that can’t continue with such small monthly increases.

Vehicle sales, despite a decline in previously reported unit sales, posted a rise of 0.1 percent in the month which is very respectable given the oversized comparison with March when sales jumped 2.1 percent. Gasoline sales rose 0.8 percent on higher prices in the month and when excluding both vehicles and gas, retail sales matched the 0.3 percent showing at the headline level.

And manufacturing is picking up for the second straight month. Industrial production rose 0.7 percent in April, the Federal Reserve said Wednesday. Strength is the message from industrial production which rose 0.7 percent in April on top of an upward revised 0.7 percent gain in March, which should boost Q2 GDP growth above the 1.9 percent Q1 initial estimate. But that won’t get us to 3 percent GDP growth, either. Manufacturing production moved 0.5 percent higher. Mining once again leads the gains with a 1.1 percent surge in the month with utility output also positive at a 1.9 percent gain.

Details throughout the retail report were mixed: furniture, which offers a reading on housing demand, extended recent strength with a 0.8 percent gain but restaurants, and their indication on discretionary spending, fell 0.3 percent but following a sharp gain in February, reports Econoday. Building materials rose 0.4 percent in another positive sign for residential investment while nonstore retailers, the report's strongest component, posted a solid 0.6 percent gain.

Today’s new-home construction report was also positive, as housing demand remains robust, but the jury is still out on whether the massive tax cuts will boost consumer spending at all, and so economic growth past the 2 percent plus annual rate that has prevailed since the end of the Great Recession.

Harlan Green © 2018

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Friday, May 11, 2018

Our New 'Drip-Down' Economy

Popular Economics Weekly

The results are already in on the current administrations tax and economic policies. They are carrying Ronald Reagan’s trickle-down economy to an even lower level. Let’s call it the ‘Drip-Down Economy’, since none of the benefits will reach the bottom wage-earners. In fact, they will lose money and benefits with the latest economic policies enacted by the Trump administration and Republican congress.

This is when corporate America is expected to post its best quarter of profit growth in seven years, according to Marketwatch’s Ryan Vlastelica. Through 2016 “For the poorest American families, in the lowest fifth of wealth, their net worth shed 29 percent over that period (actually 2007-16). Drops of at least 20 percent were also seen in every income percentile for those in the 80-89.9 percentile, where the decline was a more modest 5 percent. The wealthiest decile, however, saw a jump of 27 percent, as seen in the above chart.”

Nobelist Paul Krugman has chimed in on the same growing inequality topic several times, since the recently passed record tax cuts that finally gave Republicans what they wanted—much lower corporate and small business tax cuts (including real estate LLCs like Trump’s) will further increase the record federal debt:
“Anything that increases the budget deficit should, other things being the same,” says Krugman, “lead to higher overall spending and a short-run bump in the economy (although there’s no indication of such a bump in the first-quarter numbers, which were underwhelming). But if you want to boost overall spending, you don’t have to give huge tax breaks to corporations. You could do lots of other things instead — say, spend money on fixing America’s crumbling infrastructure, an issue on which Trump keeps promising a plan but never delivers.”
The main problem with the new tax bill is it allows an additional $1.5T added to the deficit over ten years, while cutting Medicare and Medicaid spending by almost as much. This is while most S&P 500 corporations have said it doesn’t change their overall spending plans (except for a few token raises).

To rub even more salt into the wounds of working adults, their incomes still aren’t rising above inflation, as has been mostly the case for the past 30 years.

“Average hourly earnings were expected to approach the 3 percent line two years ago when the unemployment rate first started to move below 5 percent, let alone the sub 4 percent rate where it is now,” says Econoday with the accompanying graph.

The tight labor market is especially evident in what’s often called the “real” unemployment rate. The so-called U6 rate includes people who can only find part-time work, and those who’ve gotten so discouraged stopped looking in the past 12 months. It fell to 7.8. percent in April to drop below 8 percent for the first time since 2006. The labor market almost back to normal, in other words, yet it hasn’t boosted the incomes of most working adults.

So why do we have even worse inequality today with nearly full employment, in which economic benefits are being taken away from not just the lowest income brackets with reduced health care and other benefits, but almost all of us?

All signs say we are nearing the end of the second-longest growth cycle since the Clinton era’s 10-year 1991-2001 boom years, as I said last week; and once again a huge amount of debt has accumulated that ultimately has to be paid for.

These are the conditions that ultimately led to both the Great Depression and Great Recession. Are we to have an even greater recession, or depression—God forbid?

Not unless something is done in the next congress to restore those benefits and rescind most of the tax cuts that are neither benefiting most of US, nor improving the record budget deficit.

Harlan Green © 2018

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Thursday, May 10, 2018

A 17-year Low Jobless Rate

Popular Economics Weekly

Total nonfarm payroll employment increased by 164,000 in April, and the unemployment rate edged down to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, manufacturing, health care, and mining, with manufacturing contributing an oversize 24,000 to payrolls.

The unemployment rate slipped to 3.9 percent—a 17-year low—after holding at 4.1 percent, for six months in a row, said the BLS. The decline owed to a shrinking labor force and fewer people saying they were unemployed instead of an increase in how many people found work. The labor force actually shrank by 236,000, while the number of unemployed dropped by 236,000 in the Establishment (payrolls) survey.

The tight labor market is especially evident in what’s often called the “real” unemployment rate. The so-called U6 rate includes people who can only find part-time work and those who’ve gotten so discouraged they recently stopped looking. It fell to 7.8. percent in April to drop below 8 percent for the first time since 2006. The labor market is almost back to normal, in other words.

All signs say we are nearing the end of the second-longest growth cycle since the Clinton era’s 10-year 1991-2001 boom years I said yesterday; and once again a huge amount of debt has accumulated that ultimately has to be paid for.

Are we dangerously close to the end of this growth cycle, as the Fed tightens credit after years of easy money and consumers then cut back on their spending that powers some 70 percent of GDP growth?

The Fed passed on raising interest rates in this week’s FOMC meeting, mainly because there were few signs of inflation, which was backed up by today’s unemployment report. Hourly pay rose just 0.1 percent to $26.84. The 12-month increase in pay was flat at 2.6 percent for the third month in a row. But prior months were revised upward, at a net 30,000 gain in March and February. Payroll growth includes a solid and slightly better-than-expected 24,000 gain in manufacturing with construction up 17,000, mining up 8,000, and professional business services up a sizable 54,000.

The good news there are still 5.0 million job seekers working part time that want to work full time, and an additional 1.4 million that have looked for work in the past 12 months, but not in the past 4 weeks. The private service-sector contributed the most jobs as usual—119,000, with professional and business services up 54,000 jobs, and education and healthcare contributing an additional 31,000 to the total.

Business investment and exports are rising, but should be rising faster with the new tax bill, according to New York Times Paul Krugman:
“Anything that increases the budget deficit should, other things being the same,” says Krugman, “lead to higher overall spending and a short-run bump in the economy (although there’s no indication of such a bump in the first-quarter numbers, which were underwhelming). But if you want to boost overall spending, you don’t have to give huge tax breaks to corporations. You could do lots of other things instead — say, spend money on fixing America’s crumbling infrastructure, an issue on which Trump keeps promising a plan but never delivers.”
So what is normal at this late stage of the business cycle? Wages aren’t yet rising fast enough to warrant a more hawkish inflation watch by the Fed, but they ultimately will as even fewer new workers are available, so that companies have to pay more for skilled workers, as well as invest more in automation to keep growing.

But we still have all that new public debt to worry about, so interest rates will continue to rise to finance the additional debt, until it crimps further business expansion; as always happens at this stage of a business cycle. So stay tuned!

Harlan Green © 2018

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Wednesday, May 2, 2018

When is the Next Recession?

Financial FAQs

We are nearing the end of the second-longest growth cycle since the Clinton era’s 10-year 1991-2001 boom years; because once again a huge amount of debt has accumulated that ultimately has to be paid for. Are we dangerously close to the end of this growth cycle, as the Fed tightens credit after years of easy money and consumers then cut back on their spending that powers some 70 percent of GDP growth?

The Clinton era ended with four years’ of budget surpluses, thanks to higher taxes, and caps on government expenditures that included lower defense spending as the USSR disintegrated and the Cold War wound down; a virtuous cycle that paid down the public debt substantially for future generations.

Then GW Bush was elected and he immediately pushed through huge tax cuts, while declaring war on Afghanistan and Iraq after 9/11. This meant massive budget deficits as they hadn’t put aside any monies to pay for those tax cuts and ongoing wars. To make a long story shorter, the massive borrowing that resulted to finance that debt left us with the busted housing bubble and Great Recession.

Which of these endings will we see with the current business cycle, the second-longest since the Clinton era? How will this cycle end with the current wild swings in stock and bond values? Does such uncertainty signal an oncoming recession, as more investors lose faith in the financial markets?

A simplified description of business cycles is economies begin a new cycle with big boosts in borrowing to stimulate additional demand with easier credit after a prior downturn (e.g., 2001 dot-com recession), and end with too much borrowed money in circulation that overextends business activity and ultimately begins the next downturn in business activity (e.g., Great Recession).

And when the day of reckoning comes that requires some of the debt to be paid down—it can be because foreigners flee our credit markets, or record credit defaults as happened with the busted housing bubble—credit is tightened, interest rates rise, and demand declines so that economic growth begins to contract causing millions of job losses.

The US economy is again dangerously over indebted, so much so that Congress cannot find the monies to fund some of the $2.2T in deferred infrastructure maintenance and replacement that would boost growth and create more good jobs. Republicans have instead focused on cutting back health care spending and taxes of businesses that say they don’t plan to spend very much of the savings on increased wages and future investments that would grow more jobs.
“In short,” says New York Times Nobel columnist Paul Krugman, “the effects of the Trump tax cut are already looking like the effects of the Brownback tax cut in Kansas, the Bush tax cut and every other much-hyped tax cut of the past three decades: big talk, big promises, but no results aside from a swollen budget deficit.”
So once again we are approaching that budget precipice of December 2007, which was the beginning of the Great Recession—too much debt with no additional tax revenues to pay for it. The Trump tax windfall has gone to those that invest and spend the least—corporations, their CEOs, stockholders, Wall Street, as I’ve said—while the Federal Reserve will continue to restrict credit to consumers by raising short term borrowing rates.

When do we reach the end of this boom cycle and begin another recession? One indicator is the narrowing difference between short and long term interest rates—the so-called declining Treasury yield curve. Long term rates are still at post-WWII lows, so the gap has narrowed, meaning commercial lenders cannot make much of a profit on what they lend longer term, which also restricts available credit.

Another sign is the very low personal savings rate of consumers today—some 3.4 percent of disposable income (because they must borrow to keep spending). Fourth quarter GDP growth surged to 2.9 percent because consumers went on a spending spree. But Q1 GDP’s advance estimate was lowered to a 2.3 percent growth rate because consumers were tapped out. And most of the tax cuts benefit just 10 percent of skilled professionals and stock holders, according to initial estimates—so this won’t benefit most consumers.

That means government expenditures on public works and other forms of public assistance that directly boost economic growth is needed to mitigate the effects of the next recession, as it did during the Great Depression. The lesson, as always, is our tax dollars should primarily be used for the public good, not to increase the private wealth of wealthy donors and their special interests.

Harlan Green © 2018

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Monday, April 30, 2018

Good Initial Q1 GDP Growth

Popular Economics Weekly

Real gross domestic product (GDP) increased at an annual rate of 2.3 percent in the first quarter of 2018, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.9 percent.

It dropped from the Q4 2.9 percent growth rate because of a decline in consumption. Consumers were probably tapped out from the holiday shopping splurge, and consumer spending now makes up 70 percent of GDP activity.
“The increase in real GDP in the first quarter reflected positive contributions from nonresidential fixed investment, personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased,” said the report.
Businesses picked up the slack, however, said commentators. Investment in structures such as office buildings and drilling rigs doubled to 12.3 percent while spending on equipment was up 6.1 percent. It looks like the biggest corporate tax cuts in 30 years may have helped give a lift to investment in the first quarter.

More drilling rigs won’t help our aging infrastructure, however, now some $2.5T in arrears on the deferred maintenance and replacement of our roads, bridges, electrical grid, water systems, and so forth. And the longer we wait to repair and upgrade our infrastructure, the further we fall behind China and other surging economies in growth.

Congress gave corporations the tax cuts, but that won’t help our productivity or future growth if they don’t now begin to spend on the public works that keep us competitive with the likes of China that is spending on everything including developing alternative energies to wean them from the polluting fossil fuels that the current US administration will not.

It is economic suicide, really, for Republicans to be cutting taxes to line their supporters’ pockets (some $1.5T over 10 years) and cut spending on Medicare and Medicaid to pay for it in the latest tax bill, when the $1.5T should have been used to keep the US competitive with the rest of the world.

The value of inventories, which adds to GDP, also increased to $33.1 billion from $15.6 billion. Investment in new housing was flat. In a surprise, the U.S. trade picture brightened. That also contributed to the higher-than-expected GDP. Exports rose 4.8 percent to outpace a 2.6 percent increase in imports. Government spending was also a bit stronger than expected, up 1.2 percent, said the BEA.

But hints of higher inflation in wages and salaries may cause the Fed to act sooner in this week’s FOMC meeting, rather than in June. The government reported the employment cost index rose 0.8 percent in Q1 which is the high end of expectations. The year-on-year rate is up 1 tenth to 2.7 percent for the highest reading of the last 10 years.
“And wages & salaries, not benefits, are the leading source of pressure, up 0.9 percent in the quarter for an annual 2.7 percent increase. But benefits are also up, climbing 0.7 percent for 2.6 percent year-on-year,” reports Econoday.
I maintain the Fed should not be raising rates further, until employee incomes have a sustained chance to break the inflation barrier of 2.5 percent—maybe for the rest of this year? The fact that it’s taken 10 years for wages and salary rises to return to levels prior to the Great Recession (per above graph) should tell us why it has taken us so long to recover. It’s the workers who have suffered most from the Greatest Recession since the Great Depression, not the banks and corporations.

Harlan Green © 2018

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Thursday, April 26, 2018

New-Home Sales, Consumer Confidence Surging

The Mortgage Corner
Graph: Econoday

In spite of rising mortgage rates, new-home sales are booming and consumer confidence is at multi-year highs. March new-home sales rose 4.0 percent annualized to 694,000 and is just off the expansion high of 711,000 set in November last year.
"Sales of new single-family houses in March 2018 were at a seasonally adjusted annual rate of 694,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.0 percent above the revised February rate of 667,000 and is 8.8 percent above the March 2017 estimate of 638,000," said their report.
Interest rates are rising, so what gives? Part of the answer is newly married millennials (Gen Y’ers) are entering the housing market in greater numbers, and personal incomes continue to rise faster than inflation. The share of new, entry-level buyers for existing single family homes has risen back to 40 percent of sales, according to the NAR.

Interest rates haven’t risen that much, either, and it’s April when consumers should be seeing larger tax refunds with the new tax bill. The 30-year conforming fixed rate is still 4.125 percent in California for a 1 pt. origination fee with the best lenders, for instance, which is up just 0.375 percent from last year’s low.


The Conference Board’s Consumer Confidence Index is up 6 percent in one year, and those surveyed said buying plans are special positives of the April report including big gains for autos, where sales were already strong in March, and also housing where this week's data are confirming strength. Inflation expectations, however, remain unchanged at 4.7 percent which is low for this reading.
“Consumer confidence increased moderately in April after a decline in March,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions improved somewhat, with consumers rating both business and labor market conditions quite favorably. Consumers’ short-term expectations also improved, with the percent of consumers expecting their incomes to decline over the coming months reaching its lowest level since December 2000 (6.0 percent).”
Rising interest rates are affecting both stocks and bonds, with the S&P having lost all its gains this month, and the 10-year bond yield breaching 3 percent. Traders are spooked because they have been living off fabulously cheap borrowed money to do their trading, the lowest rates over the past 4 years equaling post-WWII lows, which may no longer be the case. The Fed says so, at least, as they no longer want to buy some of those T Bonds to keep long term rates this low.

But stay tuned, with the world order changing rapidly, and a President being investigated for criminal activities. Bonds have been a notoriously popular safe haven in times of panic, and we are seeing such signs on many fronts, which could drive interest rates back down to historic lows, even with a booming economy. Markets need supervision by capable adults, while budgets have to be paid for, eventually.

Harlan Green © 2018

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Thursday, April 19, 2018

The Results of Record Income Inequality

Financial FAQs

We know the results of trickle-down economic theory that says lower taxes and government regulations are supposed to lift all boats, as epitomized in Republicans’ latest tax bill. After the ninth year of this recovery, just 10 percent of American household benefited at all from subsequent economic growth.

In spite of the huge stock market recovery that has the S&P 500 index of largest US corporations up more than 25 percent since 2009, only the top 10 percent of income earners increased their net worth.
The busted housing bubble was a culprit, but also labor practices that have literally either outlawed collective bargaining for many workers, or enacted so called right-to-work laws that enable union members not to pay dues, even if they have benefited from union bargaining.

The result is that 25 percent of American workers earn less than poverty-level wages of $24,000 for a family of four, and household incomes haven’t risen faster than inflation since the 1980s. The national minimum wage hasn’t risen above $7.25 per hour since 2009, either.

Princeton’s Nobel laureate Angus Deaton has studied poverty and its causes for most of his professional live.
He said in a recent Project Syndicate article, a progressive journal: “Making matters worse”, he said, “more than 20 percent of workers are now bound by non-compete clauses, which reduce workers’ bargaining power—and thus their wages. Similarly, 28 US states have now enacted “right-to-work” laws, which forbid collective-bargaining arrangements that would require workers either to join unions or pay union dues. As a result, disputes between businesses and consumers or workers are increasingly settled out of court through arbitration—a process that is overwhelmingly favorable to businesses.”

This is while corporate America is expected to post its best quarter of profit growth in seven years, according to Marketwatch’s Ryan Vlastelica. “For the poorest American families, in the lowest fifth of wealth, their net worth shed 29 percent over that period. Drops of at least 20 percent were also seen in every income percentile except for those in the 80-89.9 percentile, where the decline was a more modest 5 percent. The wealthiest decile, however, saw a jump of 27 percent, as seen in the above chart.”
As I have covered in countless past columns, America actually ranks among the worst countries when it comes to income inequality, based on its Gini coefficient, a measure of the wealth distribution of a country’s residents. The coefficient for the U.S. is slightly less than 0.40, which puts it roughly even with Turkey and Botswana, and more unequal than nations as Israel, Greece, Spain, and Germany. Iceland, the most equal society measured by Deutsche Bank, has a coefficient below 0.25.

There are many remedies to this situation. One has but to look at past history. Our fastest growth period was during the 1950s and 1960s, when the top income-earners’ tax bracket was 92 percent, unions were strong, and corporate CEOs earned 25 times what their employees earned. This built both the physical and digital infrastructure that gave us the record prosperity of that era. We also developed the Internet, and landed on the Moon.That tax structure was a way of redistributing income where it would do the most public good. 

Today, corporate CEOs in the largest corporations earn on average 300 times what their employees earn. We enrich the already wealthy, in other words, and neglect to plant the seed corn that would create future prosperity.

Harlan Green © 2018

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Monday, April 2, 2018

Q4 GDP Growth Up 2.9% Q/Q

Financial FAQs

Fourth quarter Gross Domestic Product, the total value of the country's production of purchases of domestically-produced goods and services by individuals, businesses, foreigners and government entities, rose to 2.9 percent from 2.6 percent in its third and final revision by the Commerce Department, finishing off 2017 with a bang and raising total 2017 GDP growth to 2.6 percent.

It was mostly consumer spending, up 4 percent, but personal incomes are rising faster as well, which will boost spending and continued good growth in 2018. This is because Real Disposable Income (less inflation and taxes) rose 0.4 percent pushing the annual increase to more than 2 percent.

“The strongest news in the report comes from the wages & salaries component of personal income which posted a fourth straight sharp gain,” reports Econoday, “at 0.5 percent. This helped total income which rose 0.4 percent for a third straight month and also helped the savings rate which rose 2 tenths to a still modest 3.4 percent.”

This measure includes all forms of compensation including employer contributions to medical insurance and pensions and has been showing more life than average hourly earnings, which is part of the monthly employment report and is the most closely watched of all wage measures.

However, it did nothing to inflation, as the GDP’s price index rose 2.3 percent Q/Q, but is up just 1.8 percent annually, as is the Fed’s preferred Personal Consumption (PCE) index. So still no inflation, even though wage and salaries are beginning to surge, and labor costs account for 2/3rds of product costs.

The Fed has said it will probably raise their interest rate twice more this year, which will put the Prime Rate at 5.25 percent, raising credit card rates and crimping consumer borrowing.

But with wages soaring, that may not slow down consumer spending or the growing foreign trade deficit. The goods deficit from countries such as China is now $75B/per in February and growing. So why is this administration pushing for trade tariffs, which is already instigating a trade war, and making those same goods more expensive to Americans?

No one believes this will reduce the trade deficit, either, as the manufactured goods we export will become more expensive, as well, reducing the demand for exports.

Harlan Green © 2018

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Wednesday, March 28, 2018

US Manufacturing Leads 2018 Growth For How Along?

Popular Economics Weekly

Graph: Econoday

US manufacturing looks to lead US economic activity this year. Why? Durable goods orders are growing incredibly fast, which are any products that last more than 3 years. This means aircraft and military goods orders, as well as appliances and other household items.

The blue columns of the graph track monthly order totals for durable goods which came in at $247.7 billion in February for a jump of 3.1 percent compared with January. The green line tracks shipments of durables which totaled $249.7 billion for a 0.9 percent increase which is sizable for this measure.

A subset of these factory orders are core capital goods, which boost labor productivity (meaning goods produced per worker hour) that has been lagging for years. Capital goods get the most attention as demand for these, from machinery to computers points to increasing fixed investment as businesses put new equipment in place to meet what they expect will be rising demand ahead.

Much of the strength comes from core capital goods orders (i.e., nondefense ex-aircraft that boost manufacturing productivity) where year-on-year growth, moved up nearly 2 percentage points to 8.0 percent, says Econoday. One caveat is that orders for primary metals surged a monthly 2.7 percent in a gain that may reflect, based on reports from regional and private surveys, rising prices for steel and aluminum.

That is a sign that the ongoing tariff negotiations mean rising prices for manufactured and consumer goods. Let’s not forget that most of the world’s trade agreements are centered on reducing prices by locating production of these goods where they are most cheaply produced—an economic concept called comparative advantage. Adding tariffs only adds to their costs, and American consumers with their limited incomes will suffer, as we import most of our consumer products.

But Americans working in industries that use steel and aluminum products will also be affected by rising prices, which has to reduce demand for their products, as well.

It's worth noting that these prices were already climbing ahead of possible steel and aluminum tariffs announced earlier this month. Fabrication orders rose 0.8 percent in February with machinery, which is at the very heart of the capital-goods group, rising 1.6 percent.

So it seems the cost of equalizing our trade agreements will on balance do little to correct our trade imbalance, because as products become more expensive they reduce demand for those products. That is, unless the salaries of US workers and consumers increase at the same rate. But then aren’t we back to the feared wage-and-price spirals of the 1970s that caused record inflation, and caused the Fed to raise interest rates to record levels in the 1980s?

The Fed might do the same if it sees such inflation in the cards again.  The way to increase demand for anything is to lower their costs, not raise them, which our current low-tariff trade agreements have been doing.

Harlan Green © 2018

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Monday, March 26, 2018

Housing Sales, Leading Economic Indicators, Higher

The Mortgage Corner

Higher new and existing-home sales, and continued economic growth are the reason the Fed raised their overnight rate into a range between 1.5 to 1.75 percent on Wednesday. Even with consistently low inventory levels and faster price growth, existing-home sales bounced back in February after two straight months of declines, according to the National Association of Realtors.

And The Conference Board Leading Economic Index (LEI) for the U.S. that measures future growth possibilities increased 0.6 percent in February to 108.7 (2016 = 100), following a 0.8 percent increase in January, and a 0.7 percent increase in December. It points to accelerating growth this year.

Total existing-home sales, , which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, grew 3.0 percent to a seasonally adjusted annual rate of 5.54 million in February from 5.38 million in January. After last month’s increase, sales are now 1.1 percent above a year ago.

Lawrence Yun, NAR chief economist, says sales were uneven across the country in February but did increase nicely overall. “A big jump in existing sales in the South and West last month helped the housing market recover from a two-month sales slump,” he said. “The very healthy U.S. economy and labor market are creating a sizeable interest in buying a home in early 2018. However, even as seasonal inventory gains helped boost sales last month, home prices – especially in the West – shot up considerably. Affordability continues to be a pressing issue because new and existing housing supply is still severely subpar.”
New-home sales are also surging, up 2.2 percent annually in February reports the Commerce Department, and 9.4 percent in 2017 overall. Inventories are also up to a 5.9-month supply and the median sales price in February was $326,800, nearly 10 percent higher than a year ago.

And, “The U.S. LEI rose again, despite a sharp downturn in stock markets and weakness in housing construction in February,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The LEI points to robust economic growth throughout 2018. Its six-month growth rate has not been this high since the first quarter of 2011. While the Federal Reserve is on track to continue raising its benchmark rate for the rest of the year, the recent weakness in residential construction and stock prices – important leading indicators - should be monitored closely.”
What recent weakness? Single-family starts, which are key to restocking the new home market, rose 2.9 percent to a 902,000 rate which is up 2.9 percent from this time last year.  Director Ozyildirim was really talking about the fears of a trade war with Trump’s tariffs on China and Japan about to be enacted. The administration is exempting Australia, Brazil, S Korea, Great Britain, EU, Mexico and Canada at the moment.

Total housing inventory at the end of February rose 4.6 percent to 1.59 million existing homes available for sale, said the NAR, but is still 8.1 percent lower than a year ago (1.73 million) and has fallen year-over-year for 33 consecutive months. Unsold inventory is at a 3.4-month supply at the current sales pace (3.8 months a year ago).

What about future interest rates? Fed Chairman Powell wants to toe the “middle ground” on rates, which means raising them slowly this year, as he sees no inflation at all on the horizon. The problem with raising interest rates with so little inflation is it crimps household spending and so growth. This particular set of conditions—raising interest rates with little inflation—has always been the precursor to a recession.

Harlan Green © 2018

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Tuesday, March 20, 2018

POTUS's Reptilian Brain

Does this description sound familiar? “Territoriality, hierarchical structure of power, control, ownership, wars, jealousy, anger, fear, hostility, worry, stuck or frozen with fear, aggressiveness, conflict, extremist behavior, competitiveness, cold-blooded, dog-eat-dog beliefs, might is right, and survival of the fittest,” is one definition of reptilian behavior.

It also describes the behavior of President Donald Trump. Psychotherapists have been attempting to explain POTUS’s behavior in psychological terms. Many have said he suffers from NPD, or Narcissistic Personality Disorder, defined in the DSM V treatment manual, as “… grandiosity, seeking excessive admiration, and a lack of empathy (Ronningstam & Weinberg, 2013).”

But why not turn to the biological sciences to describe President Trump’s behavior? The human brain is most simplistically described as having 3 parts; the earliest reptilian brain that contains our brute survival mechanisms; the mammalian limbic brain is the center of emotions and empathy; and neo-cortex the thinking part that modulates urges emanating from the other regions of the brain because of its ability to reason and judge.

A more basic way to define the reptilian brain is it contains the fight, flight, or freeze commands when an animal or human feels threatened. I am reminded of the behavior of pet Pythons, the largest of our snakes, who have literally turned on their owners—some eaten, others strangled, even though said Pythons were supposedly domesticated.

The most common explanation given by Herpetologists for such ‘aberrant’ behavior is that some pet Pythons were just biding their time when handled by their owners—they were measuring the size of their owner to know if they could be ingested. So they were following their basic instincts, as Trump is want to do. There have been cases of adult humans being attacked and fully ingested by Burmese Pythons—the largest Pythons—in the wild, as well.

What else could explain the behavior of this President whose success can only be attributed to a lifetime of lies and deceptions; who has ‘ingested’ those working closest to him by destroying their reputations, if they displease or are no longer of use to him?

The human species is mammalian because we give live birth to our offspring. But mammals evolved originally from reptiles; hence we still have the earliest reptilian brain that has been called the “lizard brain” because it provides the basic elements we need to survive.

This also explains POTUS’s authoritarian behavior, as perhaps that of the most extreme autocrats; Hitler, Stalin, and Vladimir Putin, who have literally killed their own people.

The question is how much longer Americans will tolerate such reptilian behavior.

Harlan Green © 2018

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Friday, March 16, 2018

A Gangbuster Employment Report

Popular Economics Weekly

The U.S. added 313,000 new jobs in February, the biggest gain in a year and a half and clear evidence that a strong economy has plenty of room to keep expanding, said Marketwatch. The unemployment rate of 4.1 percent remained at a 17-year low.

And despite the big increase in hiring, wage growth did not keep up. Hourly pay rose 4 cents to $26.75 an hour, but the yearly increase in wages tapered off. The 12-month increase in pay slipped to 2.6 percent from a revised 2.8 percent in January.

Construction companies hired 61,000 people to mark the biggest increase in 11 years. Retailers added 50,000 jobs, as did professional-oriented businesses. And manufacturers filled 31,000 positions. Workers also put more time in on the job, reversing a weather-induced decline in the first month of the year.

What’s more, the economy added 54,000 more jobs in January and December than previously reported. Altogether, the economy has gained an average of 242,000 new jobs in the past three months. That’s much stronger than the 182,000 monthly average in 2017.

Hourly pay is still not rising fast enough to cause inflation. We have to watch the 10-year T Bill for any signs of future inflation. Its yield is still below 3 percent, so the Fed might not raise their rate as quickly. The Chicago Fed’s Charles Evans just suggested the Fed could wait until mid-year before hiking short term rates.

But effects of the steel and aluminum tariff hikes will be the big unknown for inflation. If this initiates a trade war with the EU and China, in particular, all bets are off for continued high growth as rising primary metal prices will boost inflation with a vengeance, and endanger the jobs of those 6 million workers that make products from those metals.

There is also a problem with our national savings rate. Marketwatch’s Rex Nutting points out it has sunk to a post-WWII low, which means more foreign investment than ever is needed to fund our balance of payments problem; something better trade agreements won’t cure. Because Americans still like to import more consumer goods than they export manufacturing goods and services, as I said yesterday.

Consumer products and automobiles are the primary drivers of the current $566 billion trade deficit. In 2017, the United States imported $602 billion in generic drugs, televisions, clothing, and other household items. It only exported $198 billion of consumer goods. The imbalance added $404 billion to the deficit. America imported $359 billion worth of automobiles and parts, while only exporting $158 billion.

So there are many caveats to continued strong jobs growth in 2018. Firstly we can’t have a trade war, and secondly, foreign investors still must buy enough US stocks, bonds, and Treasury securities to keep long term interest rates stable.

Harlan Green © 2018

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Wednesday, March 14, 2018

Where is the Inflation, and Higher Growth?

Financial FAQs

The drumbeat for a higher inflation target is picking up. The Chicago Fed’s Charles Evans recently advocated a less hawkish Fed stanch on maintaining the 2 percent inflation target with few signs of inflation even on the horizon.

Elizabeth Sawhill, a Senior Fellow at Brookings in a New York Times Op-ed, on the heels of February’s almost record 313,000 job creation number, is also saying that higher inflation would be desirable after many years of too low inflation.
“In fact, a high-pressure economy, with wages and prices a little higher than we’ve become used to, might actually do a lot of good for the people who need it most,” said Sawhill. “Working families need a tight labor market — and higher wages — to get ahead. It would be a costly mistake to raise rates too much or too soon.”
I have been saying this for years, as we know that higher growth and higher inflation go hand-in-hand, which in turn boosts wages. The Fed’s preferred PCE and retail CPI indexes have remained below 2 percent since 2008, while the GDP growth rate has also averaged just 2 percent.

Why don’t we have higher growth? Because higher GDP growth requires corporate profits reach those that will invest or spend them, including governments, working folk, and corporations have been better at buying back their own stock rather than investing their profits, as I’ve also been saying in past columns. While governments have been living on austerity budgets since the Great Recession.
“We are in the midst of a big fiscal and monetary experiment, says Sawhill. “And as with any experiment, the consequences are unknown. What we do know is that the costs of the Great Recession were enormous — at least $4 trillion in lost income, or about $30,000 per household, according to my calculations. The biggest losses were experienced by those in the bottom and middle portions of the income distribution who lost jobs and saw much of the equity in their homes destroyed.”

What is the best way to boost growth and wages? It is to boost labor productivity, which is a measure of the amount produced per hours worked, and largely depends on capital investment.  The productivity chart above portrays it’s fluctuations over the years with Q4 2017 showing no change in labor productivity at all.

How do we improve productivity?  It is very basic economic theory--improve capital investment. Taxing those that don’t invest their profits in productive uses—the wealthiest among us and corporations—would allow governments to spend more on education, infrastructure, environmental protection, R&D, health care; need I go on? By doing so, we boost extremely low labor productivity, and even a slight boost in productivity can boost everyone’s standard of living.

So it really means reversing the politics du jour in Washington that is paid for by Big Business lobbyists, and the Fed policy of raising interest rates before there are any real signs of inflation.

Harlan Green © 2018

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Wednesday, March 7, 2018

How Bad Is Our Trade Deficit?

Financial FAQs

President Trump just announced a 25 percent tariff (tax) on imported steel, and 10 percent tariff on aluminum. Will this improve our 2017 $566 billion trade deficit? Can we lower our trade deficit with higher tariffs on such strategic products? Is the deficit so dangerous to our economic health that we have to lower it in this way?

No, because most of the trade deficit comes from US consumers’ love of imported goods--$54.3 billion in January, according to Econoday. In 2017, the total U.S. trade deficit was $566 billion. It imported $2.895 trillion of goods and services while exporting $2.329 trillion.

Graph: Econoday
Whereas the trade gap in primary metals is minuscule. This gap totaled $3.8 billion in the latest data for this reading which is November. Econoday says, “But here it's important to note that this deficit isn't only one way. U.S. firms actually exported a very sizable $4.0 billion in primary metals to foreign buyers in the month as tracked in the blue columns of the graph, a sum that could be at risk should a trade battle for metals begin to open up. What the administration is of course aiming to reduce is the graph's red columns, the roughly $8 billion in monthly imports of primary metals.”

Consumer products and automobiles are the primary drivers of the trade deficit, according to, a personal finance website. In 2017, the United States imported $602 billion in generic drugs, televisions, clothing, and other household items. It only exported $198 billion of consumer goods. The imbalance added $404 billion to the deficit. America imported $359 billion worth of automobiles and parts, while only exporting $158 billion.

That added $201 billion to the deficit. So why is President Trump picking on the more strategically important primary metals so necessary for our defense and other manufacturing products, like automobiles that use steel and aluminum products and employ more than 6 million workers?

We should be taxing those imported consumer goods, or automobiles to bring down the trade deficit. But Americans love their cheaper imported consumer goods and automobiles.

Harlan Green © 2018

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Tuesday, March 6, 2018

The Dangerous Treasury Yield Curve

Popular Economics Weekly

New Federal Reserve Chairman Jerome Powell has maintained that the Fed is on track to raise their short term interest rates at least 3 times this year. Why? It sees higher inflation down the road because of the huge federal budget deficit, and growing federal debt that now totals more than $20 trillion, combined with declining tax revenues due to the recent tax cuts.

But that’s not the real danger to continued growth, according to a new report by the San Francisco Fed. It is the danger than short-term interest rates may rise above long term bond rates, which would be what is called an inverted yield curve. And an inverted yield curve has correctly signaled all nine recessions, with only one false positive in the 1960s, says the SF Fed.

When short-term rates exceed long-term rates, the banks’ cost of money exceeds what they can earn, which makes it less profitable for them to lend. This can choke off available credit. The above graph shows the last 3 recessions when the yield curve was negative—in 1991, 2001, and 2007.

I maintain the inverted curve is not the only reason for the coincident recessions. It has as much to do with why long term Treasury bond rates are still so low in the ninth year of this economic recovery; the 10-year bond yield is still below 3 percent.

Rates are still low because there isn’t enough aggregate demand for the $trillions in excess cash being held by corporations, the Fed, and banks. That is to say, it’s not being used for investment purposes by the private or public sectors, or returned to the employees of those businesses. Instead, it’s being hoarded or used to buy back the shares of private businesses, which inflates stock prices but doesn’t increase the demand for their goods and services.  And government spending has been in a austerity mode since Republicans took over the US House of Representatives in 2010.

Boosting aggregate salaries of their employees would boost demand.  The incomes of wage and salary earners aren’t even keeping up with their spending, which is why the personal savings rate is just 3.2 percent, when it should be at least double at this stage of an economic recovery.

Macroeconomists look at aggregate demand to predict economic growth, which is the sum of activity in the private and public sectors. And they see weak demand, because average household incomes haven’t risen faster than inflation over the past 30 years, and government isn't upgrading our aging infrastructure, education system, R&Development--all necessary to boost productivity.

Average real household incomes have literally not grown at all when inflation is factored in as I said last week. This has been happening since the 1980s when trickle-down economics came into vogue, which said that the owners of capital and industry should receive the lion’s share of national income (via lower taxes and regulations), and that would create more jobs and growth for everyone.

So beware of another inverted yield curve, if the Fed continues to raise their rates as predicted. And stock traders know that. Hence the extreme price volatility of late. They see the same shrinking credit and declining growth picture, if long term bond rates don’t begin to rise soon.

But that won’t happen unless corporations and our government actually begin to spend their monies on productive uses, not tax cuts and share buybacks.

Harlan Green © 2018

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Friday, March 2, 2018

Where Have All the Profits Gone?

Popular Economics Weekly

I first wrote about the reasons for the huge stock selloff in early February when the DOW plunged more than 1,000 points in one day. It seems to be repeating itself this week, with the DOW losing almost as much over the past 2 days when the economic news was good—GDP growth averaged 2.3 percent in 2017, and both the manufacturing and service sectors are booming. Then why the selloff with new tax cuts that will put more money into people’s (and corporate) pockets as well?

The short answer is investors fear inflation and higher interest rates will kick in later this year with continued growth and a very tight labor market. But the longer answer is that investors are looking at the wrong economic model, if they believe inflation is about to rise even when it isn’t. Nor are interest rates rising, which is another indicator of incipient inflation with the 10-year Treasury security yield declining of late and still below 3 percent.

Graph: Econoday

Core inflation with the PCE consumption index did rise 0.3 percent in January, but not enough to lift the year-on-year rate which holds at an as-expected 1.5 percent. Total prices, reflecting a rise in gas, rose 0.4 percent with this year-on-year rate also unchanged, at 1.7 percent. 

That is barely a hint of inflation, folks, and certainly no reason for the Fed to move up its interest rate forecast, even with the good economic news. Then why the inflation fears? It’s really the Fed Governors, which are usually bankers, which means they listen mostly to business economists.

Whereas, they should be listening to macroeconomists such as Nobelist Paul Krugman or the IMF’s Olivier Blanchard, that study what is behind the larger picture of national and international economic growth.

Macroeconomists look at aggregate demand to predict economic growth, which is the sum of activity in the private and public sectors. And they see weak demand, because average household incomes haven’t risen faster than inflation over the past 30 years.

In other words, average real household incomes have literally not grown at all when inflation is factored in. This has been happening since the 1980s when trickle-down economics came into vogue, which said that the owners of capital and industry should receive the lion’s share of national income (via lower taxes and regulations), and that would create more jobs and growth for everyone.

This is also when labor laws were weakened that has resulted in 25 red states having right to work laws that mean members of a union don’t have to pay union dues, if they don’t like their policies. Yet they enjoy the benefits. This has weakened the bargaining power of ordinary workers, needless to say. Several states like Wisconsin even ban most public service employees of the state from collective bargaining. So their salaries have actually declined, rather than grown.

Therefore, better-paying jobs and higher growth never materialized. This is something conservative economists don’t want to believe, because it means government regulations are needed to tame the greed of corporate and hedge fund managers who do little to boost aggregate demand, so that very little trickles down to the 80 percent of our workforce that earns wages and salaries. And that 80 percent are the drivers of real economic growth.

Shouldn’t the new Republican tax bill that repatriates overseas profits and lowers the corporate tax rate be helpful? Not really, because history shows most of those increased profits buy back stock to enrich their shareholders and corporate CEOs, rather than ‘trickle down’ to substantial pay raises.

The New York Times reported that historically, American companies had paid out profits with a quarterly check, known as a dividend. But after the S.E.C. changed its rule in 1982, companies started using more of their profits to buy their own shares, in the process giving their shareholders a bigger piece of the company.
“Buybacks soon soared,” reported the Times. “That was about 5 percent less than those companies spent on new plants, research and development and other investments. By contrast, 20 years ago, companies spent four times as much on such investments as they did on buybacks.”
And hedge fund managers are still taxed at the lower capital gains tax for carried trades on the 20 percent they earn from any profits their hedge funds earn, rather than at the higher personal income tax rate.

Unfortunately, this means the siphoning of profits to nonproductive uses will continue, and stagnation of household incomes will depress any potential for higher growth and wages.

Harlan Green © 2018

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Friday, February 23, 2018

Lower Inventory = Fewer Home Sales

The Mortgage Corner

WASHINGTON (February 21, 2018) — Existing-home sales slumped for the second consecutive month in January and experienced their largest decline on an annual basis in over three years, according to the National Association of Realtors. All major regions saw monthly and annual sales declines last month.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, sank 3.2 percent in January to a seasonally adjusted annual rate of 5.38 million from a downwardly revised 5.56 million in December 2017. After last month’s decline, sales are 4.8 percent below a year ago (largest annual decline since August 2014 at 5.5 percent) and at their slowest pace since last September (5.37 million).

Graph: Econoday
Lawrence Yun, NAR chief economist, says January’s retreat in closings highlights the housing market’s glaring inventory shortage to start 2018. “The utter lack of sufficient housing supply and its influence on higher home prices muted overall sales activity in much of the U.S. last month,” he said. “While the good news is that Realtors in most areas are saying buyer traffic is even stronger than the beginning of last year, sales failed to follow course and far lagged last January’s pace. It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.”
Total housing inventory at the end of January rose 4.1 percent to 1.52 million existing homes available for sale, but is still 9.5 percent lower than a year ago (1.68 million) and has fallen year-over-year for 32 consecutive months. Unsold inventory is at a 3.4-month supply at the current sales pace (3.6 months a year ago).

“Another month of solid price gains underlines this ongoing trend of strong demand and weak supply. The underproduction of single-family homes over the last decade has played a predominant role in the current inventory crisis that is weighing on affordability,” said Yun. “However, there’s hope that the tide is finally turning. There was a nice jump in new home construction in January and homebuilder confidence is high. These two factors will hopefully lay the foundation for the building industry to meaningfully ramp up production as this year progresses.”

First-time homebuyers are being squeezed because of the housing shortage, as just 29 percent were buyers, down from 32 percent last month.

The median existing-home price for all housing types in January was $240,500, up 5.8 percent from January 2017 ($227,300). January’s price increase marks the 71st straight month of year-over-year gains, according to the NAR.

New-home sales and construction are beginning to catch up with demand, but interest rates have to remain at their historic lows for this to continue. The 30-year fixed conforming rate is still 4.0 percent for 1 origination point, just 0.50 percent above its historic low. And several Federal Reserve Governors have said the Fed may not hike short term rates anytime soon, if inflation rates don’t move above the current 2 percent target rate.

Harlan Green © 2018

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Monday, February 19, 2018

Who Is Killing Our Children?

Popular Economics Weekly

The fact that the NRA contributed $30 million to Donald Trump’s campaign is all we need to know about who is responsible for deaths of 14 high school children and 3 adults in Florida, or the 58 killed and 851 wounded in Las Vegas.

What made the NRA the killing machine it has become, from the sporting association it once was? The NRA contributed a total of $55 million to 2016 presidential campaigns.

We can thank the Second Amendment of our Constitution that enshrined gun ownership as an unalienable right, and to Supreme Court Justice Antonin Scalia, who wrote the 2008 opinion in District of Columbia v. Heller that interpreted its original wording: “A well-regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.” to mean every individual has the right to bear arms. But he added, that does not prevent the state from banning “dangerous and unusual weapons.”

We can also thank the gun manufacturers themselves that fund the lobbyists that keep Republican congressmen opposing all forms of gun control. We really should be talking about gun safety, rather than gun control, since gun owners aren’t required to have a license or training to own a gun, as is required for operators of other dangerous machines, like car owners.

We also know the carnage that guns can wreak. In 2016 alone there were more than 38,000 gun-related deaths, according to the Center for Disease Control. Just-released autopsy reports from the Las Vegas carnage show the damage done by military-style assault rifles at the Route 91 Harvest country music festival.

A military-style assault rifle bullet travels 3,000 feet per second—more than 3 times the speed of a pistol bullet because it is meant to kill instantaneously. It has such power that many bodies of the Las Vegas victims were literally torn apart by bullets that were probably tumbling by the time they reached the victims more than 500 yards away from Stephen Paddock, the Mandalay Bay Hotel’s 32nd story shooter.

Military-style assault rifles have been banned before; during the Tommy gun era of 1930’s gangster wars, and in 1994 after a series of similar mass shootings with semi-automatic weapons. But it had a ten-year sunset clause that was never renewed when Republicans again dominated Congress.

There have been 1600 mass shootings since the 2012 Sandy Hook massacre of elementary school children, according to Maureen Dowd.

When will American children again feel protected? When a Congress is elected that admits military-style, semi-automatic guns of all shapes and sizes are “dangerous and unusual weapons” needed only by those trained to use them—the police and members of our military.

Harlan Green © 2018

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Tuesday, February 13, 2018

2018 Housing Market To Stay Strong

The Mortgage Corner

Total existing-home sales,, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 1.1 percent in 2017 to a 5.51 million sales pace and surpassed 2016 (5.45 million) as the highest since 2006 (6.48 million).

This is a sign that 2018 could be a record year for housing sales, in spite of the housing shortage that slowed sales in the fourth quarter, and builders hard put to find enough construction workers to ramp up housing construction.

The home ownership rate is back up to historical levels, for starters. Marketwatch’s Andrea Riquier reports the home ownership rate jumped in the fourth quarter of 2017 to 64.2 percent, the Census Bureau said Tuesday to a 3-month high, and in line with 1980 and 1990 averages, before rising into bubble territory in the 2000s.

There were 1.52 million more owner households compared to a year earlier, and 76,000 fewer renter households, according to Riquier. It hit an all-time high of 69.1 percent in 2004 as the housing bubble inflated. In the aftermath of the crisis, it skidded lower and lower, finally bottoming out at 62.9 Percent in 2016.

Lawrence Yun, NAR chief economist, says the housing market performed remarkably well for the U.S. economy in 2017, with substantial wealth gains for homeowners and historically low distressed property sales.
“Existing sales concluded the year on a softer note, but they were guided higher these last 12 months by a multi-year streak of exceptional job growth, which ignited buyer demand,” said Yun. “At the same time, market conditions were far from perfect. New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace.”

That’s in part because total housing inventory3 at the end of December dropped 11.4 percent to 1.48 million existing homes available for sale, and is now 10.3 percent lower than a year ago (1.65 million) and has fallen year-over-year for 31 consecutive months. Unsold inventory is at a 3.2-month supply at the current sales pace, which is down from 3.6 months a year ago and is the lowest level since NAR began tracking in 1999.

What about new-home construction? A surprising but perhaps one-time drop in single-family starts masks what is otherwise a very solid housing starts and permits report for December. Starts fell 8.2 percent to a 1.192 million annualized rate and reflect an 11.8 percent plunge in single-family starts to an 836,000 rate that far offsets a 1.4 percent gain in multi-family starts to 356,000. But it’s probably the cold weather and snows that reach all the down to Florida in January. Starts are affected by the winter weather which along with related adjustments are always factors for this reading.

But the backlog behind future starts continues to build as permits came in very strong, virtually steady at a 1.302 million rate and showing a noticeable 1.8 percent gain for single-family permits to 881,000. Lack of homes has been holding down new home sales though new supply did move into December's market, as completions for single-family homes jumped 4.3 percent to an 818,000 rate.

We mustn’t forget interest rates either, which are still low in spite of the stock market panic over the possibility of higher rates. Guess what? That’s not happening, especially with the Fed’s preferred PCE core index still at 1.5 percent, and mortgage rates for the 30-year fixed conforming rate still @ 4.0 percent, just 0.50 percent above its low.

Harlan Green © 2018

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Wednesday, February 7, 2018

What is a Common Sense Stock Market?

Financial FAQs

Pundits and stock traders seem to believe Friday and Monday’s stock “massacre” was caused by too-quick trigger fingers—in computers controlled by algorithms, not people.

Whereas, investors and traders using their common sense would have seen the ‘yuge’ drop in valuations made no sense for many of the S&P 500 stocks of the largest US corporations that were making record profits.  Then they might not have oversold their holdings, as happened to those with the trigger-finger algorithms.

For instance, Boeing’s common stock price dropped $20 in a day when news came out that its profits are increasing and there are predictions of large future cash flows from its booming airline and defense businesses. And corporations such as Boeing will be saving $billions in future taxes due to the lower corporate tax rate.

What about the rest of the economy? Stocks have historically been a prediction of future economic activity, since they are priced at a discount to future earnings. So the total annual return of capital gains plus dividends can be a prediction of a company’s financial health.

Nobel laureate economist Robert Shiller in his best-selling Irrational Exuberance, a historical analysis of stock and bond yields, says stocks have earned $7 per year on average in capital gains plus dividends, bonds 4 percent per year for the past 100 years

And Dr. Shiller said Price-to-earnings ratios, another measure of stock values, averaged 15 to 1 historically. Today, the S&P P/E ratio is 17, meaning 17 times earnings, which is high, but not that high. In fact, the stock P/E’s reached 26 times earnings just before the Great Depression, and an oxygen-deprived 44 times earnings in 2000 on the eve of the dot-com crash.

That was why Dr.Shiller and Fed Chairman Alan Greenspan sounded the alarm over the  irrational exuberance that was “infecting” investors at the time. Dr. Greenspan’s famous warning was given in 1996, four years before the 2000 crash, when he said: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

Japan has finally worked their way out of two decades of virtual deflation at a tremendous cost to growth, because of their spate of irrational exuberance. They now rank behind China and the European Union in the size of their economy.

Our stock market is in a similar circumstance today when too much money is chasing 50 percent fewer publicly listed stocks than in 1996, as I said in yesterday’s column. And there are already indications that corporations will be doing more of the same with the new tax savings.

But there is good news for employees. Friday’s unemployment report unveiled the largest pay increase in years. Average hourly earnings jumped to a year-on-year expansion best of 2.9 percent.  This is while the Fed’s core PCE inflation index is just 1.5 percent, way below its 2 percent stated target.

Graph: Econoday

Wages and salaries, the actual hourly incomes of normal working stiffs that excludes interest-bearing bank accounts, rental income, retirement benefits, stock dividends or annuities, actually rose year-on-year to 4.9 percent for its 5th straight climb and is now at its highest rate since November 2015.

And the just released JOLTS report of job hires and openings showed more workers quitting jobs voluntarily, which means they were finding better paying jobs. Job openings have slowed a bit, down 2.8 percent in December to 5.811 million, whereas Hires are steady, down fractionally in the month to 5.488 million. But that is keeping the spread between openings and hires also steady, at 323,000—which means 323,000 net job openings that haven’t been filled.

This might be why wages and salaries are finally increasing faster than the inflation rate, but it can also be that minimum wages in coastal states in particular are creeping toward $15 per hour by 2022, since 80 percent of the workforce depends on wages and salaries.

What should we make of the possibility of more irrational exuberance pushing stock valuations too high? Corporate profits will increase with the tax cuts, wages and salaries are soaring, and inflation is far away from the 2 percent target.

I believe investors should focus on price-to-earnings ratios, which also tell us whether stock prices have strayed too far from actual earnings.  Dr. Shiller warns irrational exuberance could infect investors again, if the S&P P/E ratio strays once more into the mid-twenties.

Harlan Green © 2018

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Monday, February 5, 2018

Why the ‘Yuge’ Stock Market Selloff?

Popular Economics Weekly

Stock indexes had the largest one-day drop in history today; what happened? The quick answer is that too much money is chasing too few stocks, believe it or not. The record low interest rates—the 10-year treasury yield just dropped back to 2.75 percent from 2.85 percent before Friday’s selloff—is an indication of the huge cash hoard held by corporations and Wall Street from the successive Quantitative Easing programs by Central Banks that have kept interest rates at record lows.

This is while a Credit Suisse report released last 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.

Why do corporations and their Republican lobbyists keep pushing for lower taxes, as I said in an earlier column? 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 reported 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.

This should tell us who doesn’t use their profits to increase productivity and growth of their markets; as well as where corporate profits are spent; on stock buybacks that have reduced the number of outstanding publicly listed shares to enhance stockholder returns and CEO paychecks.

It means huge swings in stock prices from too much money chasing too few stocks, should traders panic; which is what they did today and Friday. Yet the panic selling had no underlying reason. Factory orders and the service sector economy is growing even faster than last year while the unemployment rate is still stuck at 4.1 percent and maybe going lower as fewer unemployed workers are even available to fill jobs.

The year-on-year growth for durable orders in the factory sector which has been sloping higher, is now 11.5 percent in December from 8.7 percent in November. This a sign that manufacturing growth is still trending higher, while the ISM non-manufacturing index is at an almost all-time high of 59; which means 59 percent of those surveyed see increased growth in the service sector.

The ISM non-manufacturing sample is also reporting some of the very best conditions in the 20-year history of this series, reports Econoday and the ISM. New orders are arguably more important than any composite result and the reading, at 62.7, is back at last year's peak. Employment is a special standout, up more than 5 points to a very rare plus 60 score of 61.6 which is by the far the best of the post-2008 expansion.

So what to make of the 'yuge' selloff? Some traders are saying it was a series of electronic trading “glitches” that sent prices plunging for no economic reason, and stock prices fall below their intrinsic valuations. Algorithms were at fault on selling billions of shares on the click of a button that had been pre-programmed to sell when prices dropped to a certain level, while other algorithms were programmed not to buy while stocks continued to fall.

It meant computers were chasing each other’s tails; as if they had them. That’s what happens when algorithms rule over common sense, and traders lose their common sense.

Harlan Green © 2018

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