Tuesday, September 18, 2018

Why Slowing Retail Sales?

Popular Economics Weekly

Retail sales are slowing this fall, yet consumers’ confidence is at an all-time high with incomes finally inching above the inflation rate. Why are consumers saving more and buying less this season? It could be higher interest rates, as the Fed has raised short term rates 5 times, already, so that the Prime rate that determines credit card debt is now 5 percent when it was 4.25 percent one year ago.

Or, they see this recovery from the Greatest Recession since the Great Depression as not that impressive. August retail sales barely managed a 0.1 percent monthly gain as tracked in the blue column of Econoday’s graph. Retail sales are only about 1/3 of total consumer spending which are mostly services. Nevertheless, August's results are pointing to slowing for total consumer spending as tracked in the green bars and which will be posted at month end, when third-quarter GDP numbers are first released.

In fact, wages are rising for just the top one percent of income earners, according to Thomas Piketty, who should win the Nobel Prize in economics this year for his research on the real and growing income disparities in western countries. The U.S. is at the bottom of developed countries, because other developed countries offer far more in benefits; such as universal health care, paid maternity leave, and higher minimum wages that offset the income disparities.

His 2014 best-seller, Capital in the Twenty-First Century  pulled back the curtain on the rising wealth of the one percent due to their ownership of capital; the means of production; as described by Nobelist Paul Krugman in the New York Review of Books.
“Capital still matters; at the very highest reaches of society, income from capital still exceeds income from wages, salaries, and bonuses. Piketty estimates that the increased inequality of capital income accounts for about a third of the overall rise in US inequality. But wage income at the top has also surged. Real wages for most US workers have increased little if at all since the early 1970s, but wages for the top one percent of earners have risen 165 percent, and wages for the top 0.1 percent have risen 362 percent.”
Then why are consumers so optimistic? The University of Michigan sentiment survey rose to 100.8 from 96.2 in July for the strongest showing since March this year, as well as since 2004. It has to be the ‘goldilocks’ growth consumers and employers are experiencing at present.

Economic growth is neither too hot nor too cold, as I said last week. Both retail CPI and wholesale PPI inflation indexes have been falling (i.e., prices not too hot), while it has become easier to find jobs with higher salaries (i.e., job market not too cold).

It does look like American consumers feel we are in a sweet spot, even though costs are now rising due to the new tariffs. Maybe it’s one last fling before the inevitable downturn when interest rates continue to rise and consumers can buy no more. But who knows when that will happen?

Harlan Green © 2018

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

Thursday, September 13, 2018

Does Lower Inflation Mean a Goldilocks Economy?

Popular Economics Weekly

Consumers are being helped by consumer prices that are barely rising. The Consumer Price Index is up just 2.7 percent, and core CPI without food and energy prices up 2.2 percent in 12 months. This has kept interest rates at historic lows since the Great Recession and is the reason for an economy that is neither too hot nor too cold.

Just how long it will last is an enduring question for economists. One infallible feature of an incoming recession is sharply rising interest rates. But historically low interest rates over an extended period can also mean most consumers aren’t earning enough to boost their buying power, which in turn ‘powers’ higher prices and inflation—a sign of intractable income inequality.

The Great Recession was largely caused by Alan Greenspan’s Fed raising interest rates 16 consecutive times—a total of 4 percent—that caused all the ‘liar’ loans with negative amortization and no real income or asset verification to become unaffordable to lower-income borrowers and homeowners.

That isn’t the case today—yet. The wealthiest 10 percent—what is basically left of the middle class that has profited since the Great Recession—has a very high savings rate. But not the ‘other’ 90 percent, so that average annual incomes are rising at 2.7 percent; also the consumer inflation rate today.

Households carried a record $13.3 trillion in debt at the end of June, Federal Reserve records show. That tops the prior peak of $12.7 trillion in 2008 during the middle of the Great Recession. High debt levels, especially in mortgages, contributed to the 2008 financial panic and the severity of the recession, as I said.

But low interest rates and inflation are keeping delinquencies very low at the moment, and lending standards remain quite stringent in the post-crisis era, according to a recent Moody’s study reported by MarketWatch. As such, there’s less danger of another housing market collapse.

That is the catch. Interest rates and inflation must remain very low for delinquencies to remain ‘very low’, and that won’t last much longer with wage pressures growing, fewer workers available for hire, and the Federal Reserve saying it will continue to raise short-term rates.

Business confidence is soaring as well, thanks to the economic ‘porridge’ being neither too hot nor too cold. The NFIB Small Business Optimism Index soared to 108.8 in August, a new record in the survey’s 45-year history, topping the July 1983 high-water mark of 108. The record-breaking figure is driven by small business owners executing on the plans they’ve put in place due to dramatic changes in the nation’s economic policy.
And small businesses create most of the jobs. “Today’s groundbreaking numbers are demonstrative of what I’m hearing every day from small business owners – that business is booming. As the tax and regulatory landscape changed, so did small business expectations and plans,” said NFIB President and CEO Juanita D. Duggan. “We’re now seeing the tangible results of those plans as small businesses report historically high, some record breaking, levels of increased sales, investment, earnings, and hiring.”
So how long can such goldilocks growth last? It is the ideal condition economic planners work for, but lasts only very briefly until debt levels rise to unsustainable levels, given the inherent fluctuations and dynamism in any economy. Vigilance in looking for signs of higher interest rates and slower growth is therefore a major requirement to stay ahead of those fluctuations.

Harlan Green © 2018

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

The Red Tide in Education


Red tide algal blooms have been threatening coastal beaches for decades, killing sea life and sickening bathers; a sign of rising ocean temperatures due to global warming as well as human pollution.

But another red tide is benefiting Americans by threatening the wealth of oligarchs like the Koch Brothers and U.S. Education Secretary Betsy DeVos, who have diverted funds so desperately needed by America’s public schools where most of our children are educated, to not only preserve their wealth, but increase it.

It is the red state Teacher’s movement for better salaries and benefits in public schools in the conservative states that have either cut education spending in public schools, or diverted funds to Charter Schools and private school vouchers benefiting the wealth-holders of this country and their supporters who own and operate for-profit schools that can receive up to 90 percent of their revenues from federal taxpayers, typically in the form of student loans and Pell Grants.

The Teacher’s movement is another example of powerful ‘grass-roots’ movements generated in local communities to solve grievances that have worsened their citizens’ quality of life.
A 2016 report by the NYU Brennan Center for Justice entitled Secret Spending in the States stated in its introduction: “Six years after Citizens United enabled unfettered spending in our elections, the use of so-called dark money has become disturbingly common. Contrary to the Supreme Court’s assumption that this unlimited spending would be transparent to voters, at the federal level powerful groups have since 2010 poured hundreds of millions of dollars into influencing elections while obscuring the sources of their funding.”
In the six states the Brennan Center report detailed—Alaska, California, Arizona, Colorado, Massachusetts and Maine—1) At these levels, dark money sources often harbor a narrow, direct economic interest in the contest’s outcome;  money sources often harbor a narrow, direct economic interest in the contest’s outcome; (2) relatedly, contentious ballot measures that carry major economic consequences frequently attract dark money; and (3) in the relatively low-cost elections at these levels, it is easy for dark money to dominate with unaccountable messages that voters cannot meaningfully evaluate.

Who were the recipients of this largesse in PAC money that ballooned after Citizens United? It has to be no secret that the supporters of vouchers and/or Charter schools that favored higher-income constituencies won out in the funding struggle.

This is what started the “Red for Ed” teachers’ movement fighting for better school funding who had suffered for years, in underpaid salaries and underfunded public schools. “Red shirts and blouses had emerged as the official uniform of teacher uprisings against low pay that were spreading from West Virginia to Oklahoma and Kentucky under the rallying cry “Red for Ed,” said an excellent NYTimes Magazine article, about the Arizona teachers’ uprising.
Public education is a $650 billion national enterprise,” said the NYTimes, “comparable to the U.S. defense budget, except that the federal government pays only 8.5 percent of the cost. States and local school districts split the rest in varying proportions, but each state finances it differently. Texas and Louisiana tap plentiful oil and gas revenues; Northeastern states like Massachusetts and New Jersey rely on high income and property taxes.”
Arizona is an example that hasn’t raised income taxes in more than 25 years, and counts more on sales taxes and other revenues generated by a growing economy. However they pay for it, K-12 schooling is the biggest single expenditure for all states, accounting for 36 percent of general-fund budgets on average.
“A half-dozen Arizona teachers — and more than 25 others, current and retired, with education backgrounds — declared their candidacy for the State House and Senate with a promise to increase funding for public schools, said the NYTimes. “They’re part of a sudden wave of educators on ballots as first-time candidates in every walkout state.”
The ultimate solution has to be political action, especially political action by women who make up 80 percent of the teaching profession. In fact, the red wave is turning into a blue wave, as this has energized even the less liberal voter base. Data from the Center for American Women and Politics at Rutgers University shows that more women have filed to run for Congress than at any point since at least 1992 — and by a wide margin. That year, 298 women ran for the House of Representatives. This year, 476 have — most of them Democrats.

Education has always been the responsibility of governments, not private institutions, if we want to educate all Americans, not just those most favored by circumstances.

Harlan Green © 2018

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Monday, September 10, 2018

What To Do About America's Homeless Problem?


A study released in December 2017 by the U.S. Department of Housing and Urban Development (HUD) reported America’s homeless population has risen this year for the first time since the Great Recession, propelled by the housing crisis afflicting the west coast, according to a new federal study.

The study has found that 553,742 people were homeless on a single night this year, a 0.7 percent increase over last year. It suggests that despite a booming economy, the poorest Americans are still struggling to meet their most basic needs.

Most affected are the western states of California, Oregon and Washington, where soaring housing prices have made even rental housing expensive and out of range for many low-income citizens that live and work in their largest cities.

The state of California estimates that 180,000 new housing units are needed each year in order to keep up with population growth. Over the last decade, however, there was an annual average of less than 80,000 units, because developers often face a long review process and local opposition.

Government investment in low-income homes has lagged since it was slashed during the Reagan administration, and today most people on the cusp of homelessness do not receive government rental assistance. In fact, the government spends twice as much on a housing tax break for the wealthiest Americans, and the tax reforms just enacted by Congress could deal a further blow to affordable-housing.

Localities are left to improvise solutions. Los Angelenos voted to tax themselves to provide billions in funding. Tiny-home villages have taken root in Oregon and Washington state (though a plan to erect them in Silicon Valley was met recently by angry residents chanting “build a wall” to keep homeless residents out). Hawaii is pursuing the idea of authorized tent encampments, according to The Guardian.

“The improved economy is a good thing, but it does put pressure on the rental market, which does put pressure on the poorest Angelenos,” said Peter Lynn, head of the Los Angeles homelessness agency, in an LA Times interview. The most dramatic spike in the nation was in his region, where a record 55,000 people were counted. “Clearly we have an outsize effect on the national homelessness picture.”

LA Mayor Eric Garcetti has pushed through a record budget to build and house homeless denizens of Los Angeles. A recently passed Measure H initiative is generating $355 million each year to provide a wide range of services to help people in desperate need. Proposition HHH is giving the City $1.2 billion to build thousands units of supportive housing over the next decade — units that will be paired with those same services, so that unsheltered Angelenos can go home for good.

Because it will take years to build permanent housing, Garcetti has launched a new plan called A Bridge Home — to give homeless Angelenos in every neighborhood a refuge in the community they already know and love by housing them in “trailers, tents, and other temporary shelters across the city,” until they can be connected with a permanent home.

It’s one remarkable solution to the homeless crisis that a major city like Los Angeles can afford. The Mayor, who has set a goal of ending street homelessness by 2028, has said at least 6,000 people a year could be served by the shelters, which are planned for each of the city’s 15 council districts. New state funds may boost available funds, but the mayor’s budget set aside $1.3 million for each of the 15 shelters.

We are saying, in other words, that part of the solution to the housing and homeless crisis has to be the responsibility of governments. The private housing industry is booming for the most fortunate, but local, state and the federal governments must acknowledge that homelessness should be the concern of all Americans.

Harlan Green © 2018

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Friday, September 7, 2018

Popular Economics Weekly

Total nonfarm payroll employment increased by 201,000 in August, and the unemployment rate was unchanged at 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, health care, wholesale trade, transportation and warehousing, and mining.

Very little happened with the August Unemployment report. Average hourly wages rose slightly, and more service sector jobs were created, but fewer new jobs were created in the more highly-skilled manufacturing and high tech sectors.

White-collar professional firms filled 53,000 positions, bringing the total created over the past 12 months to more than half a million, which includes both the professional and business services, and health care. These are the fastest growing jobs in the country. Health-care providers hired 33,000 people, transport firms added 20,000 jobs and construction companies hired 23,000 workers.

Employment fell by 3,000 in manufacturing, the first decline in 13 months. U.S. tariffs and a scarcity of (higher paid) skilled laborers may finally being felt by employers. And gains for July and June were revised down by a combined 50,000, the Labor Department said Friday.

This could be a sign that economic activity is peaking, although wholesale trade, transportation and warehousing job growth was robust.

The (other) Household Survey that actually measures the unemployment rate—a smaller telephone survey of households that is slightly less accurate—held steady at 3.9 percent though the labor participation rate slipped 2 tenths to 62.7 percent.

This was because the number of people in the labor force went down by a half of million, to 161.8 million from 162.3 million reflecting a decrease in the number of employed which in this survey, in contrast to the BLS Establishment survey, includes the self-employed.

The big news was the 2.9 percent rise in average hourly earnings, the highest since December 2007 and the beginning of the Great Recession, according to Econoday.

The Labor Department also reported the number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers), at 4.4 million, changed little over the month but down by 830,000 over the year. “These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs,” said Labor.

The fall in part-time employment tells us why wages are finally rising above the inflation rate—most have found full-time work. This may cause the inflation rate to rise, since workers’ salaries are about two-thirds of product costs. Inflation is still tame, however, with the Fed’s preferred ‘core’ PCE inflation index holding at 2 percent. We believe the Fed will raise short term interest rates by another 1/8 percent at its next FOMC meeting, anyway, in spite of President Trump’s tendency to berate Fed Governors in an effort to hold interest rates down; because higher interest rates make imported goods more expensive for consumers.

Inflation, in other words, is only this low because of the slow rise in hourly wages. It means a majority of new jobs being created are either in those warehousing and transportation sectors, or leisure services that still pay barely subsistence wages.

There was nothing else of note in the August jobs report. Consumers seem to be happy, with consumer confidence and retail spending at their highest levels in years, which should mean continued high GDP growth for the rest of this year.

That’s because neither consumers nor investors seem to be taking rising import and export prices from the new tariffs very seriously, yet.

Harlan Green © 2018

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

Thursday, September 6, 2018

How Important is Tomorrow's Employment Report?

Financial FAQs

Tomorrow’s U.S. unemployment report is predicted to drop the unemployment rate to 3.8 percent, according to MarketWatch. But that may be misleading, as almost one million job openings remain unfilled, which could boost the payroll jobs total much higher. Even though just 157,000 payroll jobs were created in July, it may have been because so many work seekers were in vacation, and didn’t choose to take up a new job.

Tomorrow is important because it could foretell whether economic growth is slowing due to the trade war uncertainties. The just revised Q2 GDP growth estimate was left unchanged at 4.2 percent, a good showing.

Meanwhile, initial weekly jobless claims have fallen to 203,000, the lowest since 1969, which is another sign fewer workers are being laid off. Today’s August ADP private payrolls survey reported 163,000 jobs created. It is sometimes a predictor of the U.S. jobs report, as the above graph shows, but usually underestimates the U.S. Labor Department report.

Another sign of economic strength is the just released August ISM non-manufacturing survey of Supply Managers. ISM's non-manufacturing sample reports sharp acceleration in overall growth during August, at an index of 58.5 vs July's 55. Strength is centered in orders with both new orders, at 60.4, and backlog orders, at 56.5, posting strong monthly gains. And new export orders are up 2.5 points to 60.5, a special plus and one that underscores the importance of service exports for the U.S. economy, says Econoday.
“Export orders expanded at stable levels,” commented Timothy R. Fiore, Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee. “Prices pressure continues, but the index softened for the third straight month and remains above 70. Demand is still robust, but the nation’s employment resources and supply chains continue to struggle. Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations. Panelists are actively evaluating how to respond to these business changes, given the uncertainty.”
Prices are rising for parts as well as finished products, in other words. But companies are not yet passing said costs on to consumers; maybe because of the recent tax cuts. That is, except for the two industries reporting contraction in August: Wood Products and Primary Metals, which are already subject to higher tariffs.

Corporate profits are surging almost 8 percent at present because of the tax cuts. But corporations are not yet boosting employees’ wages and salaries above the inflation rate. How is that possible in such a tight labor market? This may be clearer with tomorrow’s unemployment report.

A recent National Bureau of Economic Research Working Paper that surveyed union historical records showed during maximum membership years from 1940-70 unions offered a larger wage premium to less-skilled workers, so that unions have had an important equalizing effect on income distribution to the extent that they are successful in organizing the less-skilled.

But that effect has diminished as union membership shrank and fewer numbers of low-skilled workers have joined unions since then, which is also keeping wages from rising faster. Still, union membership has historically offered greater benefits to union workers than non-union workers.

Harlan Green © 2018

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Wednesday, September 5, 2018

What Happens When Poverty Exists in the Valley of Plenty?


Poverty in the Valley of Plenty is a documentary film that then California Congressman Richard Nixon and growers in the San Joaquin successfully sued to have banned for defamation. It was about the working conditions that early post-WWII farmworkers still suffered under. I was able to show a banned copy of the film to the United Farmworkers of America that had been produced by the Hollywood trade unions when I was a member of the UFW

In 1948, the National Farm Labor Union and Hollywood filmmakers who hated the virulently anti-union big farm grower DiGiorgio Fruit, the largest grape, plum, and pear grower in the world, made the film titled Poverty in the Valley of Plenty to expose the terrible conditions of the farmers. In 1947, DiGiorgio responded to a strike by firing all the strikers and replacing them with a combination of Filipinos, undocumented workers, and migrants coming to the U.S. through the Bracero Program. The last of these was an illegal move against the agreement between the U.S. and Mexico that explicitly stated braceros were not to be used as strikebreakers. The unions hated DiGiorgio so much that they waived all their wage and hour contracts to get the film made.

The conditions of farmworkers in the 1950s were such as portrayed in John Steinbeck’s The Grapes of Wrath during the Great Depression The film portrayed poor farmers from the Dust-bowl that could only find work in California’s crop-filled valleys—under conditions that aren’t much different from many of today’s lower income workers.

We have as much of a problem for at least 25 percent of working Americans that earn no more than the poverty rate for a family of four--$25,100/year in 2018, according to the U.S. Department of Health and Human Services.

Who are they? Many are single-adult families with children—mostly mothers barely making ends meet in menial jobs. The Oxford economist Robert Allen recently estimated needs-based absolute poverty lines for rich countries that are designed to match more accurately the $1.90 line for poor countries, and $4 a day is around the middle of his estimates. When we compare absolute poverty in the United States with absolute poverty in India, or other poor countries, we should be using $4 in the United States and $1.90 in India.
“Once we do this, there are 5.3 million Americans who are absolutely poor by global standards. This is a small number compared with the one for India, for example, but it is more than in Sierra Leone (3.2 million) or Nepal (2.5 million), about the same as in Senegal (5.3 million) and only one-third less than in Angola (7.4 million). Pakistan (12.7 million) has twice as many poor people as the United States, and Ethiopia about four times as many.”
Author Robert Putnam (Bowling Alone), in his book "Our Kids: The American Dream In Crisis," looks at another angle: the way income inequality is trickling down to our public education system.
Putnam points out that Americans of different classes and educational backgrounds are increasingly living apart from each other: either in educated, wealthy enclaves or the inverse—poverty again in the valley of plenty. That has a negative and stratifying effect on schools, particularly on schools in poor areas.
"What we know very well is that when rich kids go to school, in their backpack they bring their parents' aspirations, their parents' resources, their parents' trips to France, their allusions to Proust or whatever, and that benefits all the kids in town," Putnam said..”
"When poor kids go to school, they're bringing in their backpack gang violence—even if they're not personally involved—they're coming from very poor neighborhoods, they bring disarray from home, hunger at home, and those factors affect everyone else," he continued in a PBS TV interview.
The Nation Magazine cites a recent Education Law Center and Rutgers Graduate School of Education report that exposes the tremendous inequality in educational opportunities of elementary school students within wealthy and poor school districts and states. It highlights Professor Putnam’s central thesis; by worsening the chances of success of lower-income children, already hindered living in poor neighborhoods within dysfunctional family structures, it hurts all Americans.

Putnam cites the findings of Clive Belfield, an associate professor of economics at Queens College, City University of New York: “The aggregate lifetime burden of failure to face the woes of poor youth is $1.59 trillion for taxpayers and $4.75 trillion for the larger society in lost earnings, lower economic growth and lower tax revenue beyond direct costs in welfare.”

An inadequately educated public diminishes the chances democracy itself will survive, as well.

Harlan Green © 2018

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Thursday, August 30, 2018

What is Really Fair Trade?

Popular Economics Weekly

China is our trading partner with the largest deficit; $506 billion in exports to the US vs. $130 billion in imports from US for a -$376 billion trade deficit in 2017. Canada is the 2nd largest partner with American consumers buying $300 billion in imports from Canada vs. $282 billion in exports for a -$18 billion trade deficit, according to the latest U.S. Census Bureau data.

Mexico is the third largest partner, with a -$71 billion trade deficit in exports vs. imports. The only partners with which the US has a trade surplus of exports over imports are Brazil and The Netherlands, ranked 12th and 13th, respectively, of the top 15 US trading partners.

The culprit is American consumers that now account for almost 70 percent of economic activity, versus 60 percent in the early 1980s, according to Bank of America’s Merrill Lynch analysts.

Consumers spend almost as much as they save, thanks in part to historically low interest rates that make it easy to borrow. The personal savings rate is now 6.7 percent and inflation is ticking above 2 percent, the Fed’s preferred inflation rate, so look for more interest rate hikes in coming months.

Why is President Trump picking a trade war with two of our top three trading partners that accounted for 29 percent of our trading volume in 2017? Is there a better way than a trade war to cure the deficit problem that doesn’t threaten to elevate prices further to an already escalating inflation rate?

Attempting to correct those imbalances is the major reason President Trump launched tariff wars with our largest trading partners. But he crippled himself at the same time by withdrawing from the 12-member Trans-Pacific Partnership—called TPP—at the beginning of his administration. Though it wasn’t perfect (didn’t boost US job formation), the trade alliance lowered tariffs on thousands of goods and gave US the power to oppose China’s unfair trade practices.

Obama economic advisor Austun Goolsbee tweeted recently:
“E.g. TPP cut tariffs on 18,000 us products—to zero for $90b of US autos & $35b of IT, big cuts for US beef, pork, dairy, poultry, forced fairness for US service exports, established free intl movement of data, killed regulatory barriers to us export, limited state owned enterprises.
“TPP had strongest labor rules of any agreement ever (ban forced labor, child labor, discrimination, required freedom to unionize, minimum wage, hour limits, wkr safety) & the strongest enviro (ship pollution, ozone chem, illegal fishing, illegal logging, wildlife trafficking)movement of data, killed regulatory barriers to US export, limited state owned enterprises. And Mexico and Canada signed TPP so Trump’s nafta “deal” is demonstrably worse for the US than what Canada and Mexico already agreed to,” said Professor Goolsbee.”
The trade deficit has been with US since the 1970s, when roaring inflation and several recessions meant consumers wanted cheaper-foreign-made goods over those made in the USA, due in part to several Arab oil embargos that drove up oil prices and caused long lines at gas stations due to gasoline shortages.

On the macro (national) economic level, the US made it easy for American multi-national corporations to build their factories overseas with anti-labor policies that suppressed union collective bargaining and US wages, in their quest to expand international trade by opening US borders via lower import tariffs.

So a greater fair trade world would require major policy changes to correct the trade imbalances, needless to say. American consumers would pay more for Made in USA products and not always seek discounted foreign goods, for starters, if their incomes improved. They would then pay more taxes, increasing government revenues, which would lessen demand for massive federal government borrowing to cover the huge annual federal budget deficit that is projected to reach $1.5 trillion in 10 years.

Really fair trade is understanding basic economics—which would require fairer labor policies.

Harlan Green © 2018

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

Sunday, August 26, 2018

Labor Productivity is the Golden Fleece

Financial FAQs

Rising labor productivity is the golden fleece of economic growth, the pot of gold at the end of the rainbow, because major economists maintain it is really the only way workers can raise their standard of living. This means raising incomes above the inflation rate, which is where average household incomes have been stuck since the end of the Great Recession.

The sheep’s fleece was an ancient Greek method of extracting gold from flowing streams.  The heavier gold flakes would stick to the fleece, hence the Greek myth of Jason bringing home the Golden Fleece came to signify the accumulation of wealth and power.

For that reason it’s good news that labor productivity seems finally to be recovering. Workers’ output rose at a very hot 4.8 percent rate in the second quarter, up from an already solid 2.6 percent rate in the first quarter. Hours worked rose at a 1.9 percent rate vs. the first quarter's 2.6 percent.

But we don’t see its benefits being passed on to wage and salary earners. Wages have stagnated and income inequality increased because workers’ productivity hadn’t risen substantially since 2010, as the graph shows; when benefits from ARRA, the $831 billion American Recovery and Reinvestment Act enacted during the first year of President Obama’s administration, petered out. It was much too inadequate to help restore states’ and consumers’ personal wealth from the worst recession since the Great Depression.
“Obama officials and Congress clearly made a big mistake early in the recession by focusing more intently on saving banks — and, thus, bankers and investors — and much less on directly helping families facing foreclosures and layoffs,” says a recent NY Times Op-ed. “Later in the recovery, the decision by Republican leaders in Congress to oppose every Obama proposal prevented the government from doing much to help people regain what they had lost or to heat up the tepid recovery with infrastructure spending and other stimulus measures.”
More government public sector aid was necessary, in other words, because the private sector was recovering from their losses and had little money to invest.
And “Government puts a lot of money into basic research, whereas businesses tend to fund late-stage development that can be quickly commercialized,” says MarketWatch’s Rex Nutting. “However, federal funding for research hasn’t kept pace with the growth in the economy; in the past 10 years, federal R&D investments have risen just 0.3 percent per year after adjusting for inflation.”

A major reason for the rise in productivity at the moment has to be that companies are investing more in new plants and equipment; in part because of the Republican tax cut in corporations’ nominal tax rate, but also because there is a huge deficit in skilled workers that has required businesses to invest more heavily in technologies that replace those missing workers. There are now about one million more job openings than jobs being created each month.

So workers aren't really benefiting from the productivity increase, as nominal compensation fell to a 2.0 percent rate from 3.7 percent in the first quarter, according to Econoday. When adjusting for inflation, real compensation rose 0.3 percent and was little changed from the first quarter's 0.2 percent rate.
Why?? Firstly, many more low-paying service sector jobs are being created than manufacturing jobs; which have been shipped overseas by corporations where wage and benefit costs are a fraction of Americans’. It is a major reason President Trump has initiated tariff increases in the hope foreign manufactures become less competitive in a bid to bring home some of those manufacturing jobs.

But that may or may not succeed, as a burgeoning trade war with higher tariffs would probably raise prices and inflation to a level that would nullify any benefits from more domestic jobs. Nobel economist Paul Krugman has said that it could eliminate 8 to 9 million jobs from companies that would shrink as a result of the increased tariffs, due to foreign businesses looking elsewhere for cheaper products not affected by the tariffs.

Increasing the national minimum wage from $7.25/hour last set in the 2009 would definitely help the lower wage sector, which Big Business has been resisting. Workers are producing more than ever, at present. But that doesn’t mean their standard of living will rise because of it, unless employers pass on more of the productivity increase to their employees

Harlan Green © 2018

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Tuesday, August 21, 2018

WHere Goes the Housing Market From Here?

The Mortgage Corner

We definitely have a housing shortage. Housing construction is unable to keep up with the demand for single-family homes, in particular. Year-on-year, starts are down 1.4 percent with completions, at a 1.188 million rate, down 0.8 percent and homes not started, at 175,000, up 23.2 percent, nationally. The lack of available construction labor and high costs for lumber, which are tied in part to tariffs, are negative factors, say Realtors and home builders.
“Given the chronic lack of affordable housing and rapidly escalating home prices, it is worrisome that on a per capita basis, the country is producing new single-family housing stock at a rate that is similar to the trough of a typical recession,” Sam Khater, chief economist at Freddie Mac, told Reuters.
This is not good news for entry-level homebuyers looking to buy affordable homes, needless to say. Even though mortgage rates are still at post-recession (historic) lows, with the 30-year conforming mortgage rate stuck at 4.0 percent for a one point origination fee among the most competitive California lenders.

Some new-home projects are seeing construction delays due to those cost concerns, according to the National Association of Home Builders. The NAHB also notes the number of single-family units that are authorized but have not started is up 25 percent since July 2017.
And we have the aforementioned tariff wars raising the price of building materials—Canadian lumber in particular. “Supply-side challenges, including increases in material prices and chronic labor shortages, are affecting affordability in many markets,” says Robert Dietz, the NAHB’s chief economist. “However, consumer demand remains strong, due to a growing economy and job market and favorable demographics.”
Showing much less weakness are permits, up 1.5 percent in the month to 1.311 million. Year-on-year, permits are up 4.2 percent with strength centered where it should be and that's single-family homes where permits are up a very solid 6.4 percent. Multi-family permits are up 0.2 percent year-on-year, reflecting the rise in renters that can’t afford to buy.

What can be done to ease what is fast becoming a housing crisis? The tariff wars with Canada and the EU are definitely not in our national security interest, as housing inflation is already a problem. But there is also a construction workers shortage in this fully employed economy. Many of those workers are recently-arrived immigrants being deported by the Trump administration, rather than offered a path to citizenship; which is also harming agriculture.

The national median existing-home value is now $217,300, an increase of 8.3 percent on the year and 8.4 percent above the bubble-era peak. In 21 of the nation’s 35 largest markets, the median home value is now at an all-time high reports Zillow, the housing information specialist.

And continuing a years-long trend, says Zillow, the number of U.S. homes for sale in June fell 4.8 percent to 1.2 million, the 41st month in a row of annual inventory declines. Inventory of homes in the top value tier dropped 5.4 percent, while the number of homes for sale in the bottom value tier fell 3.6 percent.

Even though homeownership is rising from its Great Recession trough, the share of people renting their home, rather than owning it, has also increased in all 50 of the largest cities in the country between 2006 and 2016, reports Zillow.   Renter households now represent the majority in 29 of those 50 cities — back in 2006 at the start of the housing crisis, only 16 had renter-household majorities.

So we are seeing the inevitable result of the busted housing bubble, when as many as one million excess homes were built. But even more damage was done during the succeeding recovery, when policies were not instigated to cure the loss of incomes that resulted from the loss of jobs and homes.

It will require many more public-funded programs to cure the housing shortage, including affordable housing tax breaks, remedy of the massive infrastructure deficit, and tax cuts and spending programs (such as on health care and education) that benefit the middle and working classes, rather than Wall Street and the corporations.

Harlan Green © 2018

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Friday, August 17, 2018

Are Interest Rates Dangerously Low?

Popular Economics Weekly

Why should historically low interest rates be a problem, you say?  Doesn’t that help consumer demand by enabling consumers to buy more by borrowing more cheaply, and economic growth by encouraging companies to create more jobs?  Not when rates have remained low for such an extended period.

Interest rates are far too low this late in the recovery from the Great Recession. It isn’t only because the Treasury Yield Curve slope has been steadily declining since 2014 that measures the difference between the 10-year and 2-year Treasury bond yields, as we said last week.

The Benchmark 10-year Treasury yield itself hasn’t risen above 3 percent in at least one year. It was this low for sustained periods during the Great Recession, when it dipped below 2 percent. But it shouldn’t be as low today (2.85 percent at this writing). In fact, interest rates haven’t recovered from the Great Recession. It normally ranges from 4 to 5 percent during prosperous times when there is a greater demand for money—e.g., from 2000 to 2008—as the FRED graph shows.

It signals a significant weakness in aggregate demand for goods and services; which is the sum of demand by consumers, investors, government spending and net exports, (and somewhat mirrors the weak 2 percent GDP growth since then). This could means we are dangerously close to another recession, if economic shocks such as the Turkish Lira plunge, or a full-fledged trade war occurs.

Consumer spending is perking along above 3 percent only because of excessive borrowing due to the low interest rates, rather than rising incomes, so it won’t be sustainable. And capital spending is half of what it should be with the stimulus from the Republican tax cuts and $1.3 trillion in additional federal spending.

Exports—another component of aggregate demand—is momentarily rising, but it could be a one-time surge in orders to escape rising costs from the trade war. And there is always the threat of cuts to government entitlement programs like food stamps, Medicare and Medicaid, which increases costs of many low and middle-income consumers.

So we could be teetering on the edge of an economic slowdown, no matter what the pundits are saying about full employment and the latest 4.1 percent GDP 2nd quarter growth, with excessive government and private debt providing little cushion for support should geopolitical and financial problems worsen.

However, there is a caveat to this dismal scenario. It may not be a recession for all Americans. Household debt — including mortgages, credit cards, auto loans, student loans and other credit — grew for the 16th consecutive quarter in the April-to-June period, rising by 0.6%, or $82 billion, to $13.29 trillion, the New York Fed reported Tuesday.

That’s because the recovery has really benefited just the top 10 percent income-earners, who have been able to pay down their debts. With personal disposable incomes at a $15.46 trillion annual rate in the quarter, the debt-to-income ratio dipped to 86 percent. That’s the lowest, by a tiny amount, since the fourth quarter of 2002. At the height of the credit bubble in 2008, debts topped at 116 percent of disposable income.

And we have government debt approaching 100 percent of GDP by 2020, according to the watchdog Congressional Budget Office. The sad denouement of this scenario could be that another downturn will hurt those most dependent on the federal government for protection, as has happened in the past.

Harlan Green © 2018

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Friday, August 10, 2018

Why Aren't Wages Growing Faster?

Popular Economics Weekly

Graph: FRED

Interest rates are far too low for this late in the recovery from the Great Recession. We know this because the Treasury Yield Curve has been falling that measures the difference between the 10-year and 2-year Treasury bond yields. The difference is just 1 percent, when it has been around 2 percent during other prosperous times, as the FRED graph shows. It last was this low just before the last 2 recessions (gray columns in graph).

Why are interest rates still low? The simplest answer is there isn’t sufficient demand for what is being produced that would cause more borrowing, thus causing interest rates to rise. And though the Republican tax cuts have juiced profits of corporations and their stock holders, it hasn’t boosted the wages of ordinary consumers that power two-thirds of economic activity.

Consumers’ personal incomes are rising at the inflation rate on average, which means they don’t have sufficient income or savings that would cause them to increase their spending habits. It’s a difficult and maybe counter-intuitive concept. If prices are rising as fast as incomes, then consumers are also playing catchup in what they need to maintain their standard of living.

That is why economists worry that such low long term interest rates in particular could be a sign of another incipient recession. Banks cannot lend as much when their profit on loans is the difference between their cost of money and what they can lend at longer-term loan rates (such as mortgages and installment loans). So it means a shrinkage in the available credit.

The good news is that job openings are still soaring in the Labor Department’s JOLTS Report, which should boost wages. It is a survey of available jobs, vs. how many jobs have been created in June.
There were 6.662 million in June vs. an upwardly revised 6.659 million in May, reports the BLS.

Year-on-year, the number of job openings was up 8.8 percent. The number of hires remained well below job openings at 5.651 million in June, down from May's 5.747 million, while separations, which includes quits, layoffs and discharges, rose to 5.502 million from 5.419 million.

That means there were more than 1 million jobs that remained unfilled, which has to put more pressure on employers to boost wages. So will inflation behave enough to allow an increase in real wages, which should be rising above the rate of inflation this late in the recovery from the Great Recession?

That has been the problem since the 1970s, really. The Fed wants to keep inflation low, so it raises interest rates whenever there is a sign that workers’ wages are rising faster than inflation. But this puts a damper on consumer spending, which in turn keeps economic growth in the 2-3 percent range, which isn’t enough to either pay down personal or government debts.

And social security trustees calculate the $3 trillion social security trust fund will be depleted by 1934, which would mean taxes must be raised to maintain current benefits before then. Does anything believe Congress will allow said benefits to shrink, with voting seniors just daring them to cut their benefits?

It’s much easier for the Fed to allow inflation to rise above its 2 percent target range before raising their interest rates to allow faster wage growth, which in turn boosts tax revenues. The social security trustees use a mid-range GDP growth rate of approximately 2.6 percent to calculate longevity of the SS trust fund.

GDP growth has averaged 3.5 percent since the 1930s, including the Great Depression. Why have inflation hawks at the Federal Reserve so slowed growth since the 1970s by boosting interest rates at the slightest hint of higher inflation, which in turn has kept GDP growth below its long-range potential?

The real answer is that pro-business, pro-corporate administrations since 1980 have severely limited collective bargaining and other pro-labor laws in the name of globalization, thus limiting wage growth.

That’s why such policies are called trickle-down economics. Very little of the national wealth created since then has trickled down to the 80 percent that are the real wage earners.

Harlan Green © 2018

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Wednesday, August 8, 2018

Slower July Jobs Growth Worrisome

Popular Economics Weekly

Total nonfarm payroll employment rose by 157,000 in July, and the unemployment rate edged down to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, in manufacturing, and in health care and social assistance.
A 157,000 rise in nonfarm payrolls for July is at the low end of Econoday's consensus range but is still healthy growth that is strong enough to absorb new entrants into the labor market. And revisions showed a net 59,000 gain with June revised up to 248,000 and May higher at 268,000 in what were two very strong months for job growth.

So the jury is out on when this fully employed economy will begin to slow down. The stock and bond markets are predicting another six months of growth, even with the trade war uncertainties. Trump seems to be holding off on bringing down the hammer of additional Chinese tariffs of $200B, and says he will work in concert with the EU on bringing China to the fair trade table.
The payroll increases were led by temporary help services which rose 28,000 in a very strong gain that indicates employers, stacked up with orders and backlogs, “are scrambling to meet demand,” says Econoday. “Construction payrolls also standout with a strong 19,000 gain in the latest indication of strength in this sector. Manufacturing payrolls rose 37,000 to more than double Econoday's consensus with trade & transportation, reflecting strong activity in the supply chain, up 15,000. Weakness in payrolls comes from mining, down 4,000 after a long series of gains, and also government payrolls which fell 13,000 to nearly reverse the prior month's 14,000 jump.”

Another caveat to continued growth is a slowing of activity in the service industries, at the lowest level in 11 months. ISM’s Non-manufacturing Composite Index reported both new orders, down more than 5 points to 57.0, and backlog orders, down 5 points to 51.5, show softening. Export orders in this report, at 58.0, remain very strong but are down 2.5 points.

Overall business activity also slowed, down nearly 7.5 points to 56.5 with delivery times showing less stress. Input prices remain highly elevated at 63.4, up nearly 3 points in the month, said the ISM.

But there is still the threat of higher auto tariffs, and Midwest farmers are being hurt by higher agricultural tariffs aimed at Trump country, so we can see that a sharp acceleration in inflation might unsettle both the job and financial markets.

Higher inflation and interest rates, in other words, should tell us whether the rising import and export prices will hurt jobs and company earnings in coming months.

Harlan Green © 2018

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Wednesday, August 1, 2018

The Rebuilding of Local Communities!


Where does the rebuilding of local communities that creates a sense of healthy community itself really happen? At the local level, whether it be in neighborhoods, towns, or cities. It is everywhere residents find a reason to band together.

And it is an answer to the fragmentation of local communities caused by the loss of so many blue collar jobs due to the Digital Revolution and Globalization of the workforce that has internationalized commerce so that corporations ignore national borders in their search for cheaper labor and new markets.

This has meant that towns, cities and states have had to look inward to heal their broken communities in order to provide citizens with the necessary means to grow and prosper.
National Night Out is one such community-building effort that has become a nation-wide movement.

It is an annual community-building campaign that promotes public safety-community partnerships and neighborhood camaraderie. National Night Out enhances the relationship between neighbors and public safety and fosters that sense of community.

It is“… a chance to bring neighborhoods together with the men and women who protect them. The safety of our communities depends on both law enforcement and the neighbors they serve. National Night Out enhances that cooperation,” says Vice President Joe Biden.

Millions of neighbors take part in National Night Out across thousands of communities for one night each year.

What is its history? National Night Out has been celebrated since 1984 and is sponsored by the National Association of Town Watch in the United States and Canada. NATW introduced National Night Out in August of 1984 through an already established network of law enforcement agencies, neighborhood watch groups, civic groups, state and regional crime prevention associations and volunteers across the nation. The first annual National Night Out involved 2.5 million neighbors across 400 communities in 23 states. However, the event soon grew to a celebration beyond just front porch vigils.

Neighborhoods across the nation began to host block parties, festivals, parades, cookouts and various other community events with safety demonstrations, seminars, youth events, visits from emergency personnel, exhibits and much, much more. Today, 38 million neighbors in 16 thousand communities across the nation take part in National Night Out.

My home town of Redwood City, California is one such city participating in National Night Out. Here are some of the programs designed to foster a sense of belonging to a viable community and city:

“National Night Out is an annual community-building campaign that promotes public safety-community partnerships and neighborhood camaraderie. National Night Out enhances the relationship between neighbors and public safety and fosters Redwood City's sense of community."

Join your Redwood City neighborhood this year on August 7 to celebrate National Night Out!
Centennial - Mezes Park, 6-8 p.m.
Eagle Hill - Block Party at Quartz and St. Francis St., 5-8 p.m.
Friendly Acres - Barbeque at Andrew Spinas Park, 6-8 p.m. Fun and games for children and families.
Redwood Shores/Sandpiper Lagoon HOA - Block Party at Avocet Dr. and Waterside Circle from 5:30 - 7:30 p.m. Redwood City Police and Fire departments will attend. Light food and drinks will be provided. Please park in guest parking only or walk to the area.
Redwood Village - Join your neighbors for food, ice cream, classic cars, and a jumper on Flynn St. (off Greenwood), from 6-8 p.m.
Roosevelt - Gather at the Sheltered BBQ Area at Red Morton Park (by the Bocce Ball Court, behind the Community Activities Building) from 6 - 8 p.m. Come tie-dye t-shirts and participate in a dessert contest. 
Woodside Plaza - Gather at Maddux Park from 5 - 8 p.m. for corn hole, ladder golf, and a bake-off competition. Redwood City Police and Fire departments will attend with cars and trucks. RCPD will provide fingerprinting kits. Kona Hawaiian Ice Truck will stop by from 6 - 7 p.m. At 8 p.m. Maddux movie night will follow with a showing of The Princess Bride.
Go here to learn more.

What could be more enjoyable on a summer evening that coming together with others to celebrate your own community’s well-being.

Harlan Green © 2018

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Thursday, July 26, 2018

Housing Market Slows

The Mortgage Corner

Existing-home sales decreased for the third straight month in June, as declines in the South and West exceeded sales gains in the Northeast and Midwest, reports the National Association of Realtors. The ongoing supply and demand imbalance helped push June’s median sales price to an existing-home new all-time high.
“Total existing-home sales, https://www.nar.realtor/existing-home-sales, said the NAR, “which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, decreased 0.6 percent to a seasonally adjusted annual rate of 5.38 million in June from a downwardly revised 5.41 million in May. With last month’s decline, sales are now 2.2 percent below a year ago.

Pending home sales that measure future sales also decreased modestly in May and have fallen on an annualized basis for the fifth straight month, according to the NAR. This seems to show a slowing of demand for housing, though the Realtors' economist Yun believes it’s more due to lack of supply, and fewer entry-level homes available.

Lawrence Yun, NAR chief economist, said closings inched backwards in June and fell on an annual basis for the fourth straight month. “There continues to be a mismatch since the spring between the growing levels of homebuyer demand in most of the country in relation to the actual pace of home sales, which are declining,” he said.
“The root cause is without a doubt the severe housing shortage that is not releasing its grip on the nation’s housing market. What is for sale in most areas is going under contract very fast and in many cases, has multiple offers. This dynamic is keeping home price growth elevated, pricing out would-be buyers and ultimately slowing sales.”
Why do we still have a housing shortage 9 years after the Great Recession? For the first half of 2018, a steady job market and a shortage of existing homes for sale has bolstered housing starts, said the Commerce Department. New home construction has climbed 7.8 per cent year-to-date.

And homebuilders are also relatively confident that the expansion will continue. The National Association of Home Builders/Wells Fargo builder sentiment index declined slightly to a reading of 68 in June, but any reading above 50 signals growth.

So another ‘root cause’ has to be affordability, as prices continue to climb. The report was mixed good news, as prices continue to rise, up 4.5 percent for the median to $276,900, while buyers saw a 4.3 percent rise in the number of homes on the market, at 1.950 million relative to sales, a gain to 4.3 months from 4.1 months.

It was thought new-home sales would give a boost to housing, but even new- homes sales are slower in June. The Calculated Risk graph shows new-home sales lagging historically from other recoveries, when sales reached 800,000 units annually.
“Sales of new single-family houses in June 2018 were at a seasonally adjusted annual rate of 631,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 5.3 percent below the revised May rate of 666,000, but is 2.4 percent above the June 2017 estimate of 616,000."
The sales slowdown has to be from after-effects of the Great Recession, what was also the Great Housing Bust when so many homeowners lost their home and life-savings. It’s a combination of lenders being much more cautious and consumers earning much less these days. For instance, first-time buyers totaled just 31 percent of existing homebuyers, vs. the 40 percent long term average.

Household incomes have been stagnant since the 1980s after inflation, and both incomes and net worth have actually declined since the Great Recession, so we are seeing the results in the housing market, as the costs of home-building continue to climb with inflation.

For example, the just enacted Canadian lumber tariffs are adding $9,000 on average to building costs, according to the National Association of Home Builders. "Not only are consumers and builders concerned about the current lumber tariffs, but also the next round of proposed tariffs on a number of goods and services," said NAHB Chair Randy Noel.

In fact, there has not been a concerted effort to boost consumers’ incomes at all since the Great Recession. Rather, the effort has been to suppress wages, with more states restricting collective bargaining rights of both union and non-union employees. There are now 28 right-to-work states that restrict the amount of dues unions can collect, and even the Supreme Court has just rescinded a 40-year old precedent that allowed public employee unions to collect dues from non-union members that enjoy the same benefits.

Do we need any more reasons to understand the slowdown in home buying?

Harlan Green © 2018

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Tuesday, July 24, 2018


In a new Economic Policy Institute report entitled The New Gilded Age, income inequality has risen in every state since the 1970s, and in most states it has continued to grow in the post–Great Recession era.

Why should we care? The most dire economic consequences of income inequality are recessions, including the Great Depression when inequality was as high as it is now. And since 1980, such inequality has resulted in 5 recessions, including the Great Recession.

Are there more on the horizon in this ninth year of this long-in-the-tooth recovery from the Great Recession? The Economic Policy Institute map shows the income disparities in the U.S. today. In Alaska the top 1 percent earns 12.7 times the 99 percent, whereas New York has the highest multiple, at 44.4 percent.

From 2009 to 2015, the incomes of the top 1 percent grew faster than the incomes of the bottom 99 percent in 43 states and the District of Columbia. The top 1 percent captured half or more of all income growth in nine states. In 2015, a family in the top 1 percent nationally received, on average, 26.3 times as much income as a family in the bottom 99 percent.

Today, the top 1 percent has garnered 24 percent of national income once again, as happened in 1928 just prior to the Great Depression, and which today is $1.3m. The 99 percent rest of us have an average annual income of $50,000 per year. And now we have to worry that the current geopolitical uncertainties—a Trump trade war, breaking up of western treaties (TPP, NAFTA, NATO), global warming that is causing mass migrations, the threats of more terrorism, or ongoing regional military conflicts—could plunge us into another recession or worse.

There is a way out of this mess, other than another recession or war. We could shift the balance of power to those that want to rebalance the income equation by rescinding those tax cuts that only benefit the 1 percent longer term.

Or, we could shift more spending away from the military’s $600B budget that just increases the likelihood of war to badly needed infrastructure improvements, boosting educational opportunities of the disenfranchised blue collar workers, or more R&D to create the next generation of innovators and entrepreneurs.

There are countless ways we can use those revenues, in other words, that would benefit 99 percent of Americans, instead of the 1 percent.

Harlan Green © 2018

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

Monday, July 23, 2018

Is US Economic Self-Destruction Imminent?

Financial FAQs

The International Monetary Fund has just warned that President Trump’s trade wars could cost the world’s economies some $430B in lost growth. The Washington-based organisation said the current threats made by the US and its trading partners risked lowering global growth by as much as 0.5 percent by 2020 in worldwide Gross National Product.

And NYU economist Nouriel Roubini has now jumped on the critics’ bandwagon contra the Trump tariffs with his contention that trade wars will cause rising inflation and economic uncertainty at the wrong time.
Last year was a time of ideal growth conditions, but this year? “The combination of strong growth, low inflation, and easy money implied that market volatility was low,” said Professor Roubini about 2017. “And with the yields on government bonds also very low, investors’ animal spirits were running high, boosting the price of many risky assets…Many commentators even argued that the decade of the “new mediocre” and “secular stagnation” was giving way to a new “goldilocks” phase of steady, stronger growth.”

But this year, says Roubini, for the first time in a decade the biggest risks are now stagflationary (slower growth and higher inflation). “These risks include the negative supply shock that could come from a trade war; higher oil prices, owing to politically motivated supply constraints; and inflationary domestic policies in the U.S.”

It is while President Trump has abandoned the Trans Pacific Partnership with 11 other Asian countries and Australia (who are forming their own trade partnership), and is attempting to bust up our trade alliances with the EU, Canada, and Mexico.

Although all economies would suffer from further tariff escalations, the US would find itself “as the focus of global retaliation” with a relatively higher share of its exports taxed in global markets. “It is therefore especially vulnerable,” says the IMF.

Trump’s trade wars have escalated from $3.6 million in tariffs first imposed in January against 18 types of Chinese solar panels and washing machines to more than 10,000 products worth some $362 billion, as China, Canada and the European Union has retaliated with their own tariffs, according to the New York Times.

The Guardian says the European commission, the EU’s executive arm, warned the White House recently it would be prepared to use tariffs against as much as $300bn(£228bn) of US products should Donald Trump slap higher taxes on European automotive imports to America. The president had threatened last month to impose tariffs of 20% on imports of cars from the EU after Brussels carried through plans to tax American consumer goods – such as whiskey, cigars and Harley-Davidson motorcycles – in retaliation against US tariffs on European steel and aluminum.

This is not how to practice “The Art of the Deal”, if President Trump ever did know how. His past record of lawsuits, bankruptcies, and links to Mafia figures and Russian Oligarchs belies this. Conflating friends with enemies now pits the whole world against the US in trade matters.

Harlan Green © 2018

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Wednesday, July 18, 2018

Is 4% GDP Growth Real?

Popular Economics Weekly

Many economists, including Trump economic advisor Larry Kudlow, are predicting up to 4 percent economic growth over the next few quarters. Why? Full employment is enticing consumers to buy more, with booming retail sales and consumer confidence.
“Sales at health & personal care stores were unusually strong in June, up 2.2 percent following a series of very strong gains in the 1 percent range,” reports Econoday. “Nonstore retailers, in a sign of e-commerce strength, rose 1.3 percent in June and continue to make ground compared to other components. Gasoline stations, boosted by high gas prices, saw a 1.0 percent rise in June sales following a 3.0 percent spike in May. Building materials, at plus 0.8 percent in June, and furniture store sales, up 0.6 percent, are both positive indications for residential investment.”
The problem with understanding the significance of retail sales is that they aren’t corrected for inflation, and consumer (CPI) inflation is approaching 3 percent, so 6 percent nominal annual retail sales is closer to 3 percent in real sales. And that is probably the high end, as consumers’ real average paychecks are increasing 2.7 percent, so any increase in buying is limited by the amount consumers can borrow with rising interest rates, as I’ve been saying.

Is 4 percent GDP growth possible for the next several quarters, as Kudlow, et. al. are predicting? It depends on how long can this business expansion continues, says Brookings economist Robert Shapiro.
“Trump’s middling record on GDP and investment raises the question of how much longer the current expansion, now just two months shy of entering its tenth year, can last,” says Shapiro. “Developed economies move in business cycles, and so they weaken eventually as a matter of course. That’s where the United States is today. This late in any economic expansion, the pool of available workers for new jobs is modest, most attractive investment opportunities have been taken, and any pent-up consumer demand for large durable purchases has been exhausted.”

In fact, wages are falling after inflation by another measure. According to the Labor Department, median weekly earnings fell 0.6 percent in inflation-adjusted dollars in the second quarter, compared to the same time period of 2017. That’s the third straight quarter where inflation has outpaced wage growth, according to MarketWatch’s Steve Goldstein.

This is an important statistic because real personal income growth is one of the four pillars that measure the onset of a recession. Nonfarm employment, industrial production and real retail sales are the other three pillars. All four indicators must peak for a recession to begin. So far, median weekly earnings show weakness, but the other three still show growth.

A more public sign of recession is when there are two consecutive quarters of GDP decline. So to be clear, weakness is showing in just one of the four legs, and there are predictions of at least two more quarters of positive GDP growth.

But then there is the looming trade war. The International Monetary Fund has just warned that President Trump’s trade wars with everyone could cost the world’s economies some $430B in lost growth. The Washington-based organisation said the current threats made by the US and its trading partners risked lowering global growth by as much as 0.5 percent by 2020, or about $430bn in lost GDP worldwide.

It has escalated from $3.6 million in tariffs first imposed in January against 18 types of Chinese solar panels and washing machines to more than 10,000 products worth some $362 billion, as China, Canada and the European Union have retaliated with their own tariffs, according to the latest New York Times estimate.

And 2020 is the year of our next presidential election. So investors can gamble that President Trump won’t continue to double down on his trade wars, if he wants to be re-elected. But it is a very high-stakes gamble.
Harlan Green © 2018

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