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

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Monday, July 16, 2018

Inflation on the Rise

The Mortgage Corner

Inflation is finally rising enough to bite into consumers’ paychecks. It is also a sign that economic growth is increasing at least temporarily, as consumers borrow more to buy more. But the bottom 50 percent of income earners have seen no real average annual income growth since 1980, which means at least one-half of all consumers have to eventually stop buying and start paying back those loans as interest rates rise as well.

Retail inflation is up 2.9 percent annually, which has to begin to hurt the heavily indebted consumer, as I said. But enthusiasm over the full employment numbers and job availability are keeping consumers buying for the moment. It is because there are more available job openings than jobs being created at the moment—almost 1 million, a huge gap —which is why more workers are quitting their current jobs, reports the Labor Department’s JOLTS survey.

The rising so-called Quits rate is big news because it means workers are moving to better job opportunities; a sign of rising incomes as well. Americans quit their jobs in May at the fastest rate since 2001, showing that employees feel so good about the economy they are willing to leave one company for another.

Job openings slipped back but still remain very abundant, at 6.638 million in May vs. an upward revised and record 6.840 million in April. Openings are up 16.7 percent compared to May last year and are far above hiring, at 5.754 million in May for comparatively distant 4.9 percent year-on-year gain.

But watch out, the University of Michigan consumer sentiment index fell in July to a reading of 97.1, below June’s level of 98.2, which is an indication that the trade war bombast is beginning to worry consumers. That’s the lowest level since January. Prices are on the rise, yet interest rates haven’t yet followed.

Why? Part of the reason is that longer-term interest rates are stuck at a very low level, while the Fed is pushing up short term rates, so there is little difference between the 2 and 10-year Treasury yield, a sign that many bond investors don’t trust the predictions for higher growth. It’s a flight-to-quality syndrome when investors flock to a safe haven from future uncertainty with lower, but safer yielding investments, such as government-guaranteed sovereign bonds.

So we are seeing a growing unease in investors and consumers about the future, with consumers’ personal savings rate barely above zero (2.8 percent), with no cushion to fall back on should there be either a market crash, or full-blown trade war that lifts prices for everyone, or an actual war.

Harlan Green © 2018

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Thursday, July 12, 2018


We are announcing a new blog series—ANSWERING THE KENNEDYS CALL. It will report on what is being done today to address the problems that deal with record income inequality, immigration and civil rights, environment protection, and the rebuilding of local communities both at home and abroad that we cover in a forthcoming book, ANSWERING the KENNEDYS CALL: Inspiring Lessons in Public Service and Community Building from the Sixties for the Future.

It is a book about the cultural and social revolution of the Sixties carried forward by newer generations that is healing our broken communities and a dysfunctional government.  The Sixties created many of the benefits we enjoy today—environmental protection, civil rights for minorities, scientific research that brought us moon landings, the Internet, modern commerce, and a greater openness to other peoples and countries. 

By portraying the history of community development via the experiences of the Sixties’ generations, and practices of M. Scott Peck, Cesar Chavez and sociologist Robert Putnam in community organizing, we will show we have never really left that hopeful spirit that is creating new forms of a healthy, functioning, participatory democracy.

The efforts of those generations in making the world a better place is finding a response among younger generations today in countering the rampant pessimism and sense of limited possibilities prevalent in much of our society, due in large part to the economic uncertainty and successive recessions that have impoverished a majority of Americans since the 1980s.

President Obama is now mounting a campaign with a similar goal to inspire our youth to a life of service; and the youth he talks about are my target audience:
“The only folks who are going to be able to solve that problem are going to be young people, the next generation,” said President Obama. “And I have been encouraged everywhere I go in the United States, but also everywhere around the world to see how sharp and astute and tolerant and thoughtful and entrepreneurial our young people are. A lot more sophisticated than I was at their age. And so the question then becomes what are the ways in which we can create pathways for them to take leadership, for them to get involved?”
We begin with this recent headline from the United Farmworkers Union: Salinas, Calif.-based D’Arrigo Bros. of California has just signed a new contract with the United Farm Workers union that will cover more than 1,500 farm workers, according to this press release from The Packer, “the fresh fruit and vegetable industry's leading source for news, information and analysis.”

The agreement provides family medical, dental and vision benefits for the farm workers that will be paid for by D’Arrigo. Health insurance will be provided by the Robert F. Kennedy Medical Plan, a plan established in 1968 specifically for farm workers and their families.
“Both parties have come to a new era of a working relationship and realize the agricultural workers need to be taken care of,” President John D’Arrigo said in the release. “That investment will hopefully translate into people wanting to work here the whole season,”
Employees also receive hourly and productivity pay increases. The incentive and box pay rate will increase by 3 percent in the first year, 3 percent in the second year and 2.5 percent in the third year. Workers will also receive six paid holidays a year, and loaders and machine operators who use their personal vehicles will be paid 50 cents per mile for travel time.

“To be willing to put that much investment in their employees really demonstrates the value that John D’Arrigo is placing on his employees,” UFW president Arturo Rodriguez said in the release.

Why the realization from a major Salinas, California grower that union workers are important to his business? There is a growing scarcity of seasonal farmworkers due to the ICE sweeps and “zero tolerance policy” of the Trump administration that is decimating America’s agricultural industry. Growers are beginning to look to the UFW to supply those seasonal workers that labor contractors formally provided, but were mainly undocumented workers.

It took the first-term election of California’s Democratic Governor Jerry Brown in 1975 to give farmworkers bargaining rights with his enactment of the California Agricultural Labor Relations Act that legalized the union organization of farmworkers.

Today’s suppression of employee bargaining rights is little different, even though there is a National Labor Relations Board to enforce union collective bargaining rights. The problem is 28 so-called right-to-work states under Republican control allow private sector nonunion employees off the dues hook who work in a job that benefits from union bargaining.

And just recently the US Supreme Court overturned a 40-year precedent in Janus v. AFSCME that nonunion government workers cannot be forced to pay fees to public sector unions if they chose not to belong to them. Those fees, approved by the court in the 1977 case Abood v. Detroit Board of Education, cover collective bargaining costs such as contract negotiations, but are meant to exclude political advocacy.

SCOTUS’s Chief Justice Alito stated in his majority opinion that taking the side of governments in such labor disputes saves governments money. Really? Justice Alito is admitting that weakening government unions’ ability to collect dues will also weaken employees’ ability to bargain for their pay and benefits.

We don’t buy his argument that he wants to help governments with their finances. He as a good conservative is only interested in downsizing government in any way he (and probably his 4 fellow SCOTUS conservatives) can, which includes downsizing the standard of living of both union and nonunion government employees.

Harlan Green © 2018

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Wednesday, July 11, 2018

Consumers “Another Day Older and Deeper in Debt...”

Popular Economics Weekly

“Ya load sixteen tons, whaddya get, another day older and deeper in debt…”, the famous folksong sung by Burl Ives and Tennessee Ernie Ford describes today’s consumers who are still spending huge amounts of borrowed money at the end of this second longest business cycle since the end of WWII. And it can’t last much longer since consumers’ average incomes have barely risen since the 1970s in real terms.

Consumer borrowing picked up in May, according to the Federal Reserve on Monday. Total consumer credit increased $24.6 billion in May to a seasonally adjusted $3.9 trillion. That’s an annual growth rate of 7.6 percent, which is the fastest credit growth since November.

What are the numbers? Economists has been expecting half that gain; $12.4 billion, according to Econoday. Credit grew a revised $10.3 billion in April, up from the prior estimate of $9.3 billion. When we compare the 7.6 percent annual credit growth rate with consumers’ personal income growth rate of 2.7 percent, we see why consumers have become so indebted.

This borrowing binge cannot last. As noted in the World Inequality Report 2018, in both Europe and the US the top 1 percent of adults earned around 10 percent of national income in 1980. In Europe that has risen today to 12 percent, but in the US it has reached 20 percent. In the same time period in the US annual income earnings for the top 1 percent have risen by 205 percent, while for the top 0.001 percent the figure is 636 percent. By comparison, the average annual wage of the bottom 50 percent has stagnated since 1980.

Interest rates are also on the rise, with the Fed having raised their short term rates (mostly tied to the Prime Rate) 1.75 percent, and making noises about 2 more raises this year. Why? Inflation is growing with the fears of a Trump trade war giving boost to prices in those affected by retaliatory tariffs on imports US companies depend on. The Prime Rate has risen from its bottom of 3.25 percent in 2008 during the Great Recession to 5 percent today—also a 1.75 percent rise.

The wholesale Producer Price Index for final demand of materials that go into finished products rose 0.3 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. On an unadjusted basis, the final demand index moved up 3.4 percent for the 12 months ended in June, the largest 12-month increase since climbing 3.7 percent in November 2011.

Any further raises in either interest rates or inflation could tap out those consumers that are most heavily indebted.

Harlan Green © 2018

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Monday, July 9, 2018

Trumpcare is Killing US!

Financial FAQs
Makes Us
Sick Black T-Shirt Front

It took 4 hours to coax Patricia Okoumou, a Congolese immigrant, down from the Statue of Liberty while wearing a t-shirt that said, “Trumpcare Makes Us Sick.” It was serendipitous timing. She was part of a group wanting the abolition of ICE, but her t-shirt also brought attention to Republican and Trump administration’s efforts to abolish Obamacare, when a just released HHS report states that  Obamacare is doing better than ever for those in most need of health insurance.

President Trump has to be aware that most Americans want to keep Obamacare, even with the latest Republican tax cut bill that also abolishes the Obamacare mandate in 2019 requiring Americans not covered to pay a penalty if they have no health care coverage. The result has been higher premiums for those above the federal poverty level not subsidized by the federal government.

The reason Obamacare is popular with a majority of Americans is that the alternative Trumpcare bills attempted by Republicans last year wouldn’t just make Americans sicker, they will kill more people. Approximately 17,000 people could have died if a House Republican health proposal endorsed by the Trump administration had become law in 2018, who otherwise would have lived. By 2026, the number of people killed by Trumpcare could have grown to approximately 29,000 in that year alone, according to ThinkProgress, progressive think tank.  It is backed up by a CBO estimate that 24 million more Americans could lose health insurance by 2026 under Trumpcare.

Trump’s assertion that he has “gutted” Obamacare in his attempt to sicken and kill more Americans simply isn’t true. In fact, those in most need of health care coverage, those earning less than the federal poverty line, $48,500 for an individual, and $100,400 for a family of four, are doing quite well, according to the latest assessment from the Centers for Medicare and Medicare Services that administers Obamacare.
Overall, according to the figures released by the agency, 10.6 million Americans had signed up for ACA coverage by February and paid their first month’s premium, according to the Los Angeles Times. That was about 3 percent ahead of the 10.3-million enrollment at the same moment in 2017, the agency sai

Unsubsidized customers responded to the challenge of higher premiums by abandoning their health coverage in droves, HHS reported. The trend began in 2017, after Trump’s inauguration. That year, subsidized enrollments fell by about 223,000, or 3 percent. But unsubsidized enrollments fell by 1.3 million, or 20 percent.

This is while subsidized enrollment (those receiving Advanced Premium Tax Credits, or APTC) was 23 percent larger than unsubsidized (non-APTC) in 2014 and 32 percent larger in 2016 — and reached 61 percent in 2017.

Trump’s answer to the premium increases caused by his own policies has been to undercut the law even further by eliminating the consumer protections that make health insurance worth buying. These include requirements that all policies cover essential health benefits such as maternity care, hospitalization and prescription drugs, and opening the marketplace further to short-term junk insurance that carries lower premiums but offers substandard coverage.

We are not even mentioning Trump’s efforts to abolish the exemption for existing illnesses, and take away the federal payments meant to subsidize states’ Medicaid programs, which will result in even higher health insurance premiums for everyone.

Who are President Trump and his Republican synchophants really killing with their heartlessness?  Those now above the poverty line—the increasing number of unsubsidized in the middle class.  And they can and will vote, on what has become the number one issue for voters in November.

A new Pew Research Center survey reports 60 percent of Americans say the government should be responsible for ensuring health care coverage for all Americans, compared with 38 percent who say this should not be the government’s responsibility. The share saying it is the government’s responsibility has increased from 51 percent last year and now stands at its highest point in nearly a decade.

So, Trump and your Republican supporters of big business, please go right ahead and keep up your efforts to repeal and replace Obamacare if you want to become irrelevant.  Voters in November will know what this means.

Harlan Green © 2018

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Saturday, July 7, 2018

June Employment Robust For How Long?

The Mortgage Corner

More workers are being hired in manufacturing and professional services in June’s unemployment report. But this is before the trade war now taking hold with at least 5 allies and trading partners.
Washington's 25 percent duties on Chinese imports went into effect at midnight EDT and affected products such as water boilers, X-ray machine components, airplane tires and various other industrial parts. China immediately retaliated with tariffs on its $34 billion list of goods issued last month, including soybeans, pork and electric vehicles.

We know that manufacturing will also be hurt by the tariffs on imported steel and aluminum that go into the finished products the US exports, so the 36,000 new hires in manufacturing may be a temporary blip as manufacturers attempt to get ahead of already occurring price rises.
Even more hurt will be put on Midwestern farmers, as China, the EU, Canada, and maybe even Mexico will be targeting their produce with higher tariffs in response to Trump’s levies.

A sharp rise in the number of unemployed actively looking for a job, to 6.564 million from 6.065 million in May, lifted the unemployment rate 2 tenths to 4.0 percent from 3.8 percent in May, and also lifted the participation rate 2 tenths to 62.9 percent.

It’s because for the first time in nearly 20 years of existing records,  the number of job openings in April at 6.698 million in the Labor Department’s JOLTS report exceeded the number of unemployed actively looking for work, at 6.346 million. It suggests employers are having a hard time finding people to fill the jobs. That is the understatement of the year.

The gap between openings and hires in the JOLTS report was 1.120 million, the second largest on record next only to March's 1.147 million. It also gives a picture of why employers are having finally to raise their workers’ pay.
The Bureau of Labor Statistics reported “The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in June at 4.7 million. 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."
But add the 1.5 million that want to work but haven’t worked in the past 26 weeks, and we still have a decent labor pool to draw from. It all adds up to 7.8 percent that are the “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force,” per the BLS.
So is the June jobs report just an attempt to get ahead of the inevitable jump in prices and job losses that a trade war causes? Such a war has to seriously hurt all business, not just US businesses.

Harlan Green © 2018

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Thursday, July 5, 2018

What are Corporations Doing With Their Tax Cut?

Popular Economics Weekly

Economists are predicting second quarter GDP growth of as much as 3.8 percent, up from 2.2 percent in Q1 2018. But it may be a one-time surge, as all indications are the massive 2017corporate tax cut that lowered their nominal tax rate from 35 to 21 percent won’t create any more jobs than are normal in a fully-employed economy by investing, say, in more production capacity (i.e., in capital expenditures).

Instead, corporations are returning their one-time windfall of up to $300 billion to the stockholders, part of their already $2.1 trillion cash hoard that corporations haven’t been able to find a use for. So stock buybacks are the preferred use of their cash, or more M&A acquisitions like the AT&T purchase of Time Warner.

Graph: FRED

This isn’t helping the ordinary tax payer, as Medicare and Medicaid spending cuts of up to $1 trillion over the next ten years had to be enacted to pay for the corporate windfall and consequent addition of $1.5 trillion to the national debt. Federal tax revenues are plunging in consequence, as shown in the FRED Graph.

It isn’t boosting the stock market very much, either; just keeping the DOW and S&P indexes from falling further after the first-quarter selloff, with a 1.6 percent S&P 500 decline in the first quarter offset by a 3 percent gain in the second quarter, reports CNBC, leaving the index barely up about 1.4 percent for the year.
“Stocks right now are hanging by a thread, boosted by a bonanza of corporate buying unrivaled in market history and held back by a burst in investor selling that also has set a new record,” said CNBC.
Companies announced $433.6 billion in share repurchases during the period, nearly doubling the previous record of $242.1 billion in the first quarter, according to market research firm TrimTabs, per CNBC.

At the same time, investors dumped $23.7 billion in stock market-focused funds in June, also a new record. For the full quarter, the brutal June brought global net equity outflows to $20.2 billion, the worst performance since the third quarter of 2016, just before the presidential election. The selling is particularly acute in mutual funds, which saw $52.9 billion in outflows during the quarter and are typically more the purview of the retail side.

Why the selloff in stocks? Much of it has to do with the misinformation campaign of Trump officials, who literally maintain the opposite of reality. The Republican’s tax cut orthodoxy has always maintained that tax cuts create more jobs—that repatriating some $300B in overseas’ profits will be spent at home. But that’s only when corporations choose to invest in future growth, as I said, rather than enriching their CEOs and stockholders with higher dividends, or M&As that usually dilute shareholder equity,.

The national debt is on track to approach 100 percent of gross domestic product (GDP) by 2028, said the nonpartisan CBO, which analyzes legislation for Congress. That amount is far greater than the debt in any year since just after World War II when it was 120 percent of GDP, which paid for WWII.

The numbers don’t lie. Tax revenues are in fact declining, which means those tax cuts aren’t paying for themselves. It also means a larger share of the tax revenue pie will have to be spent on interest payments, and therefore less on the programs that benefit most Americans—on healthcare, education, R&D, environmental protection, workplace protection, and poverty programs like food stamps—anything that would boost the standard of living for those living on the edge.

Harlan Green © 2018

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Tuesday, June 26, 2018

Trade Wars Kill Future Growth—Part II

Popular Economics Weekly

The sad reality is that in initiating trade wars with allies and opponents alike, President Trump could be bringing on the next Great Recession. Because breaking up trade alliances with our allies means less leverage in any negotiations with, say, China. For instance, our (former?) allies can now sell their products to the remaining 11 Asian members of the Trans-Pacific Partnership (TPP) that the US abandoned immediately after Trump took office, or China can sell to them rather than US.

The European Union would also be free to sell its products to others rather than suffer the tariffs Trump is levying on them. And Canada will also purchase more from them, replacing many of the products formally bought from US companies.

Nobel economist Paul Krugman is considered one of the most knowledgeable about foreign trade. He won the Nobel Prize for formulating just why countries and regions trade with each other, and trade protectionism died out after WWII.

It’s called the theory of comparative advantage, because more benefit if those that produce things most efficiently (the cheapest) get to export them to countries that can’t produce them so cheaply, and the modern trading system was formed.

China manufacturers are capturing more of the solar panel market because it can make them cheaply. Canada’s lumber prices are cheaper, so it exports lumber to the U.S. The National Association of Realtors reports that tariffs on Canadian lumber imports is already raising the cost of construction on an average-priced American home $9,000 at a time when fewer Americans can afford a home.
“The U.S. currently exports about 12 percent of GDP, says Professor Krugman. “Not all of that is domestic value added, because some components are imported. But there’s still a lot of the economy, maybe 9 or 10 percent, engaged in production for foreign markets. And if we have the kind of trade war I’ve been envisaging, something like 70 percent of that part of the economy – say, 9 or 10 million workers – will have to start doing something else. And there would be a multiplier effect on many communities now built around export industries, which would lose service jobs too.”

Krugman also believes if this becomes a prolonged trade war, “we’re talking about a really big rollback of world trade. Figure 1 shows world trade (exports plus imports) as a share of world GDP back to 1950; a 70 percent reduction would bring us roughly back to 1950s levels. If Trump is really taking us into a trade war, the global economy is going to get a lot less global.”
Does anyone realize what 1950 levels of trade would mean in today’s world? That’s before the baby boomers became consumers with the huge increase in demand for consumer goods. Modern day consumers would now be competing for less than half the number of imported products, which means soaring prices, which leads to higher inflation and interest rates, which are the sign of an overheating economy.

And this is happening just when Trump’s avowed goal is to bring back more manufacturing jobs that mostly depend on exports to other countries. It’s a solvable conundrum. The loss of manufacturing jobs because of foreign tariffs on US goods could cancel out whatever benefits protectionism would garner for American steelworkers, or auto manufacturers.

And where will the trade war hurt first? Tariffs on exports like Kentucky Bourbon, Wisconsin dairy products, Iowa pork, and soybeans were the first to be raised by the EU and China, because they come from Trump territory.

It’s much better to work with our allies than attempt to bully them.

Harlan Green © 2018

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Friday, June 22, 2018

Trade Wars Not Good For Future Growth Either

Popular Economics Weekly

The Conference Board Leading Economic Index® (LEI)for the U.S. increased 0.2 percent in May to 109.5 (2016 = 100), following a 0.4 percent increase in April, and a 0.4 percent increase in March.

This monthly announcement of the LEI is a good predictor of future economic growth because it reports on 12 items that measure trends on everything from interest rates, to housing permits, to stock prices, and hours in the work week. It is slowing, surely not a coincidence with the talk of a worldwide trade war.
“While May’s increase in the U.S. LEI was slower than in recent months, the improvements in a majority of its components offset the declines in leading indicators of labor markets and residential construction,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The U.S. LEI still points to solid growth but the current trend, which is moderating, indicates that economic activity is not likely to accelerate.”
That’s because raising tariffs on imported goods and services is raising taxes, which Republicans aren’t supposed to do, and all reputable economists agree slows growth.

Here’s another reason why it not good to raise taxes on imported goods. Firstly, some 80 percent of what consumers buy is imported. And consumers overall incomes haven’t been rising at all in 2017 when inflation is subtracted from the total.

Marketwatch economist Rex Nutting reports that although GDP growth in Q2 could be as high as 4.5 percent, 2014 was a much better year when average nominal wages were rising 1.3 percent above the inflation rate. And that is really what determines consumers’ demand for goods and services.

With consumers already skating on thin ice with their finances; so much so that their personal savings rate has sunk to a decade low 2.3 percent; raising taxes could well bring us to a tipping point. Let’s not forget a recession starts when economic activity has peaked, and can go no higher, and starts an inevitable decline.

Another economic indicator just out is the IHS Markit US Manufacturing PMI, which fell to 54.6 in June from 56.4 in May, well below market expectations of 56.5. The reading pointed to the slowest expansion in factory activity in 7 months, preliminary estimates showed. New work rose the least since September, partly reflecting a slight drop in export sales.

Was the drop in exports because of the tariff wars? The Great Recession began in December 2017 with the US still at full employment. Job losses didn’t accelerate until it dawned on the public in mid-2008 that Wall Street and the banks were in big trouble.

The unemployment rate fluctuated wildly, from a low of 4.7 percent in 2008 to a peak of 10.1 percent in 2009, after the U.S. housing bubble burst and Wall Street saw collapses unlike those seen since the Great Depression in the 1930s.

Future economic growth seems to be trending downward, so the effects of this trade war will loom sooner or later.

Harlan Green © 2018

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Thursday, June 21, 2018

Housing Construction Booming For How Long With a Trade War?

The Mortgage Corner

How is it possible the 10-year Treasury yield has fallen back to 2.88 percent, and the 30-year fixed conforming rate is again 4.0 percent for 1 origination point in California? It’s all because the Trump trade wars that are supposed to be “easy to win” have alarmed financial markets so much that investors are fleeing back to the safe haven of Treasury bonds. Really? Why should this bother financial markets when trading partners reciprocate with higher import taxes of their own on American-made goods?

That’s right, a tariff is a tax on goods made or bought by Americans, whether it’s exports or imports. So much for the Republican’s promise of no new taxes, which even Republican orthodoxy says raises prices and reduces demand for those goods and services.

The housing market doesn’t seem to mind, at the moment. Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,350,000, said the US Census Bureau today. This is 5.0 percent above the revised April estimate of 1,286,000 and is 20.3 percent above the May 2017 rate of 1,122,000. Single-family housing starts in May were at a rate of 936,000; this is 3.9 percent above the revised April figure of 901,000. The May rate for units in buildings with five units or more was 404,000.

The gain for completions is entirely centered in the key single-family category, up 11.0 percent to 890,000 to offset a 13.8 percent decline for multi-units.The May reading of 1.35 million is the number of housing units builders would begin if they kept this pace for the next 12 months, said the NAHB press release. Within this overall number, single-family starts rose 3.9 percent to 936,000 – the second highest reading since the Great Recession. Meanwhile, the multifamily sector -- which includes apartment buildings and condos -- rose 7.5 percent to 414,000 units.
"Ongoing job creation, positive demographics and tight existing home inventory should spur more single-family production in the months ahead," said NAHB Chief Economist Robert Dietz. "However, the softening of single-family permits is consistent with our reports showing that builders are concerned over mounting construction costs, including the highly elevated prices of softwood lumber."
And that leads us back to Trump’s problem with “easy to win” trade wars. The NAHB leadership just met with Commerce Secretary Wilbur Ross to discuss the growing problem of escalating lumber prices that are being exacerbated by tariffs on Canadian lumber imports into the U.S.
"Today, we discussed with Secretary Ross our mutual concern that lumber prices have risen sharply higher than the tariff rate would indicate,” said NAHB Chair Randy Noel, “and this is hurting housing affordability in markets across the nation. Rising lumber prices have increased the price of an average single-family home by nearly $9,000 and added more than $3,000 to the price of the average multifamily unit.”
I wonder who is promising that prices in the free market are predictable when a trade war is initiated? It is the height of folly to promise beneficial results when past history has said trade wars harm almost everyone involved.
Harlan Green © 2018

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Monday, June 18, 2018

Boom Times with Rising Retail Sales, Inflation

The Mortgage Corner

Retail sales jumped 0.8 percent in May which easily tops economists’ estimates. And the results include an upward revision to April which now stands at a 0.4 percent gain, according to Econoday. It is in part due to rising inflation, as the retail Consumer Price Index also jumped and retail sales make no corrections for inflation.

This illustrates just what a booming economy should look like after many years of low or no inflation since the end of the Great Recession. Consumers increased their demand for goods and services because they felt more prosperous, and also see prices rising or about to rise. It’s not abnormal to see 4 to 5 percent retail inflation when an economy is booming—something that hasn’t been the case for any stretch since the end of the Great Recession.

“The retail report shows balanced gains including a 1.3 percent jump at restaurants and a 0.5 percent increase for motor vehicles, both pointing to rising discretionary demand. Building materials,” said Econoday, “which have been soft, surged 2.4 percent in what will be a plus for residential investment. Department stores have been very weak but have now put together back-to-back gains of 1.5 percent in May and 0.7 percent in April. Clothing stores, at 1.3 and 1.2 percent, have likewise bounced back with sizable gains the last two months.”

Graph: Econoday

Year-on-year consumer prices are up 2.8 percent, and core inflation without gas and energy fluctuations is up 2.2 percent. The overall culprit was rising gas prices, as a barrel of oil is now in the mid-$60 price range. Gasoline jumped 1.7 percent in the month outside of which most other readings are modest-to-moderate. Rent rose 0.3 percent in the month as did owners' equivalent rent while medical care, outside of a spike for related commodities and hospital services, remains largely flat.

There are other factors that cause prices to rise faster, such as plentiful jobs, and consumer confidence, which has been soaring for a year. The Conference Board’s Consumer Confidence Index came in at a very strong 128.0 in May which is just below expectations but up from a downward revised 125.6 in April. 

Significantly more consumers say jobs are currently plentiful, at 42.4 percent vs April's 38.2 percent, and about the same say they are hard to get, at 15.8 vs 15.5 percent. Expectations also moved higher, up 1.3 points to 105.6 with sizably more, at 19.7 percent vs April's 18.6 percent, seeing more jobs opening up in the next six months, reports the Conference Board.
“Consumer confidence increased in May after a modest decline in April,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions increased to a 17-year high (March 2001, 167.5), suggesting that the level of economic growth in Q2 is likely to have improved from Q1. Consumers’ short-term expectations improved modestly, suggesting that the pace of growth over the coming months is not likely to gain any significant momentum. Overall, confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term.”
This is the picture of a booming economy, with all cylinders firing. But inflation is rising sharply and a trade war will create even more inflation. So what happens with the Fed and interest rates, if inflation continues to rise? The Fed Governors are saying at least 2 more rates hikes may be necessary, if inflation continues to rise more than moderately.

Harlan Green © 2018

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Wednesday, June 13, 2018

The Price of Incompetence in Foreign Policy and Trade

Financial FAQs

The Trump administration’s foreign policy is becoming obvious after the Singapore Summit with North Korea—Make Russia, N Korea, China (and almost every other authoritarian government in the world) Great Again at the expense of America and its closest allies and friends.

The Singapore Summit showed more of Trump’s naiveté on foreign policy with the 8-point communique that gave Kim Jong Un what he wanted—U.S. recognition of the legitimacy of his regime and promise by President Trump of some kind of security blanket (including possible withdrawal of American troops from S Korea) with no concessions of his own that hadn’t already been agreed to with South Korea in April—such as N Korea’s many-times stated intention to de-nuclearize the Korean peninsula in some way.

This is after POTUS dissed the G-7 summit, while insulting Canada’s Prime Minister, and suggesting that Russia be re-admitted to the G-7 without atoning for its many sins; such interfering in American and European elections, withdrawing its troops from the Ukraine, and support of Syria’s genocide of its own citizens.

The so-called master of the Art-of-the Deal once again revealed his true weaknesses. He only knows how to deal with those that mirror his own bully mentality. Trump only began to succeed in his real estate empire after Mafia figures and Russian Oligarchs put their laundered funds into his projects.

It’s as if his own limitations prevent him from even understanding western democratic leaders, or the complexities of western democracies, in general. His statement that “winning trade wars is easy” tells us exactly what he doesn’t know. Every trade war in history has been damaging to all sides—such as the Smoot-Hawley Tariff Act of 1930 that worsened the Great Depression with an almost 70 percent reduction of mainly agricultural exports.

The Trump administration is now raising tariffs on steel and aluminum, which risks a full-blown trade war and another stock market crash. We have a very unsteady stock and bond market that is being whipsawed by inconsistent policies and Presidential Tweet rants—in the ninth year of this business cycle. Actually, it’s looking more and more like the end of this prosperity cycle.

Today’s wholesale Producer Price Index already showed the effects of the steel and aluminum tariffs—higher prices for both parts and finished products. Prices for steel mill products surged a monthly 4.3 percent following a 3.2 percent gain in April. Prices for aluminum mill shapes came in at an even hotter 5.0 percent monthly gain that follows April's 1.8 percent climb.

On an unadjusted basis (without seasonal variations), the final demand index moved up 3.1 percent for the 12 months ended in May, said the BLS, the largest 12-month increase since climbing 3.1 percent in January 2012.

And the Federal Reserve today announced they will be raising their short term rates another 0.25 percent, from 1.75 percent to 2 percent, raising the costs of consumer borrowing even higher, which is sure to slow down spending. This is after consumers reported a record first quarter borrowing binge.

The Federal Reserve Bank of New York’s Center for Microeconomic Data just issued its Quarterly Report on Household Debt and Credit, which shows that total household debt increased by $63 billion to $13.21 trillion in the first quarter of 2018. It was the 15th consecutive quarter with an increase, and the total is now $536 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008.

The consumers’ personal savings rate has dropped to 2.8 percent from an already extremely low 3 percent. As Roosevelt Fed Chair Marriner Eccles once said of the Great Depression, “…The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

We are already seeing the inflationary effects of trade wars that President Trump believes are “easy to win”.

Harlan Green © 2018

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Tuesday, June 12, 2018

Record Income Inequality + Trade War = Recession?

Popular Economics Weekly

The Smoot-Hawley Tariff Act, so called, was imposed in 1930 when the Hoover administration raised tariffs on 20,000 foreign, mostly agricultural, imports in an attempt to protect American farmers as we were entering the Great Depression.
Sound familiar? I mean the part about raising tariffs after the heady prosperity of the Roaring

Twenties followed by the Great Depression. Tariffs were raised after the 1929 Black Friday stock market crash, which panicked investors. It was also a time of record income inequality, when the top 10 percent of income earners owned more than 40 percent of our national wealth, as they do today.

The Trump administration is raising tariffs on steel and aluminum after another 9 years of uninterrupted prosperity, which risks a full-blown trade war and another stock market crash. We have a very unsteady stock and bond market that is being whipsawed by inconsistent policies and Presidential Tweet rants—in the ninth year of this business cycle. Actually, it’s looking more and more like the end of this business cycle.

No reputable economist attributes the Great Depression solely to Smoot-Hawley tariffs, or Black Friday, or the record income inequality of that time, but these events certainly exacerbated its affects, as factories and banks folded like dominoes in 1930-32, until Roosevelt enacted the New Deal legislation in his first 100 days that put millions back to work and saved the day.

And economic history teaches us the very interdependent trading world we live in today was set up to reduce the costs of production to levels that would allow consumers to benefit from cheaper prices, and cheaper prices meant a larger consumer market, which now powers two-thirds of economic activity in the U.S.

So what can happen when our trading partners reciprocate by boosting their own tariffs on our exports? The cost of everything goes up—not just everything made from aluminum and steel, but soybeans going to China (if they continue to buy them), and Kentucky whiskey popular in Europe.

It’s a No-win situation for American exporters, in the name of national security. In fact, the Trump trade policies are a clear and present danger to U.S. national security, since by breaking up western alliances in order to make alliances with our adversaries and enemies that seek to undermine western democracies, we are breaking away from the only friends that would protect us in the event of a war, as western democracies have done ever since World War II.

Now we have to live with tax cuts that former Fed Chair Ben Bernanke just warned were done at the wrong time for the wrong reason. Pouring more gasoline on already red-hot markets may cause a larger conflagration, but then markets will burn out that much sooner, as happened with the most recent Great Recession after years of easy money busted the housing bubble.

The economic effect of President Donald Trump's $1.5 trillion tax cut and $300 billion bump in federal spending will wear off in two years and then "in 2020 Wily E. Coyote is going to go off the cliff," according to former Federal Reserve Chairman Ben Bernanke.

The stimulus is coming at "the very wrong moment," Bernanke said during a panel discussion at the American Enterprise Institute, as reported by Bloomberg. "The economy is already at full employment." Congressional Budget Office forecasts have the stimulus lifting economic growth this year to 3.3 percent and then 2.4 percent in 2019. But it slows to 1.8 percent in 2020.

And this was a Republican Fed Chairman appointed by GW Bush with the nickname “Helicopter Ben” for his multiple Quantitative Easing programs that showered money on the U.S. economy in order to prevent the Great Recession from turning into the Great Depression.

The national debt is on track to approach 100 percent of gross domestic product (GDP) by 2028, said the nonpartisan CBO, which analyzes legislation for Congress. “That amount is far greater than the debt in any year since just after World War II,” CBO said, adding that the debt is now about 77 percent of GDP, a measure of the size of the economy.

The Republican tax legislation, passed by Congress without Democratic support, along with a recent bipartisan $1.3 trillion spending package, are expected to drive economic growth faster than initially expected, CBO said.

Now is not the time to shower more money on the U.S. economy that the Congressional Budget office has also said will benefit just the top 10 percent of income earners, and actually reduce wealth and benefits for the rest of US.

Why does this look like 1929 is happening all over again?

Harlan Green © 2018

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Friday, June 8, 2018

JOLTS Report Suggests Workers Holding Out for Higher Pay

Financial FAQs

“For the first time in nearly 20 years of existing records, the number of job openings, at 6.698 million in April, is exceeding the number of unemployed actively looking for work, at 6.346 million in April (subsequently falling in last week's employment report to 6.065 million in May),” said Econoday on Tuesday’s release of the Labor Department’s JOLTS report.

Also, the gap between openings and hires in the JOLTS report, at 1.120 million, is the second largest on record next only to March's 1.147 million, reported Econoday.  It suggests employers are having a hard time finding people to fill the jobs. That is the understatement of the year. There are still 6 million working adults not happy; who are either looking for work or who work part time but want fulltime work, as I reported in the May Unemployment Report.

It means in fact employers will have to pay more to fill those job vacancies. The full name of the JOLTS report is Job Openings and Labor Turnover Survey, which also measures the Quits rate, the percentage of workers voluntarily leaving a job. And that is at the high end in this cycle, which means more are quitting and probably finding better-paying jobs.

Average hourly earnings are still rising just 2.7 percent per year, when they should be in the 3 to 4 percent range at this late stage of the recovery. That’s barely above the Fed’s preferred Personal Consumption Expenditure price inflation figure of 2 percent. Workers’ wages are barely keeping up with rising prices, in other words, hence they are extremely stretched and borrowing more than they are spending.

Hence, the record job openings. Those openings aren’t enticing enough to bring more workers back into the workforce. And that is of major concern; as tax revenues aren’t even close to covering the added federal debt of more than 2.2 trillion over the next 10 years according to the latest analysis of the recent tax cuts.

Consumer spending on consumer goods in April is picking up for a second straight month, pointing to a pickup in the U.S. economy in the spring. Spending jumped 0.6% after a revised 0.5% gain in March, the government said Thursday. But that is at the cost of drawing down their savings to dangerous lows.

Several Wall Street firms upped their GDP forecasts due to the spending uptick, but consumers’ personal savings rate dropped to 2.8 percent, only the third time since 2009 to drop below 3 percent.
Amherst Pierpont Securities raised its estimate of second quarter GDP growth to 4.5 percent from 4.2 percent. Macroeconomic Advisers increased its forecast to 4 percent from 3.6 percent. Barclays also upped its estimate, but it was near the low end of forecasts, raising its Q2 target to 3.3 percent from 3 percent.

GDP has only topped 4 percent three times since the end of the Great Recession in mid-2009; mostly due to the very poor growth in household incomes since its end in mid-2009. Why don’t corporations raise their workers’ wages enough to fill some of those job openings, even with the recent huge tax cut windfall? That’s a story for another time.

But we know what causes recessions, and depressions. Roosevelt’s Fed Chairman Marriner Eccles spelled it out in the 1930s:

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth ... to provide men with buying power. ... Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. ... The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

Harlan Green © 2018

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Saturday, June 2, 2018

Strong May Employment, But Uncertain Future

Popular Economics Weekly

The unemployment rate edged down to 3.8 percent in May, and the number of unemployed persons declined to 6.1 million, reported the Bureau of Labor Statistics this morning. Over the year, the unemployment rate was down by 0.5 percentage point, and the number of unemployed persons declined by 772,000.

This shows a strong economy, but not for long if the Trump administration’s trade war lasts. Because it means our trading partners will retaliate with their own tariffs, boosting costs and lowering the demand for US products.

The manufacturing and construction sectors added 18,000 and 25,000 jobs respectively in May yet have complained they can’t find enough skilled workers. Hourly pay rose by 8 cents, or 0.3 percent to $28.92 an hour in May. As a result, the 12-month increase in wages rose to 2.7 percent after holding at 2.6 percent for three months in a row.

Wages are barely rising, which makes the Fed happy, as wages make up two-thirds of products costs. It means there is very little inflation on the horizon, which should keep interest rates at the low end; another boost to continued growth. But this also means in fact there are still a lot of unemployed workers that are available for work, if wages continue to rise enough that would draw them back into the workforce.

For instance, the number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged at 4.9 million in May. And the number of persons marginally attached to the labor force, at 1.5 million in May, was little different from a year earlier. These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

This jobs picture means we are near full employment, but it looks like the Trump administration’s new trade war with our allies could mean full employment may not last. Canada, Mexico and the European Union have already announced they will retaliate with tariffs of their own on US products.

It means a substantial rise in product costs, and reduction in the demand for American products, as I said. It could therefore cancel out all the benefits to businesses of the recent tax cuts, since Canadian Prime Minister Justin Trudeau said the fallout from US moves would be “more significant” than it realizes. Ottawa will impose billions of dollars of tariffs on steel, aluminum and a wide range of other U.S. goods, including some food and agricultural products.

The EU said it is also planning to hit back with billions of dollars of levies on U.S. exports which could go into effect staring June 20 and launch a case against American measures at the World Trade Organization on Friday. “This is protectionism, pure and simple,” the EU’s top executive, European Commission President Jean-Claude Juncker, said Thursday. “We will defend the Union’s interests, in full compliance with international trade law.”

If the US isn’t bluffing and carries out these tariff hikes on our closest allies—which would endanger rather than increase our national security—then look for a slowing economy and rising unemployment ahead.

Harlan Green © 2018

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Thursday, May 31, 2018

The Price of Incompetence

Popular Economics Weekly

Bullying doesn’t win negotiations, or much else for that matter. Now we have President Trump’s on-again, off-again summit meeting with North Korea after attempting to bully the N. Koreans into giving up their nuclear capability even before the summit negotiations, which were to determine when and how N. Korea was to give up its nuclear capabilities.

Rather than being a sign that Trump really knows the Art of the Deal, it further highlights his incompetence, and that of those around him—particularly National Security Advisor and right wing ideologue John Bolton, who raised the threat of the fate of Libyan ruler Muammar Gaddafi if N. Korea didn’t comply with the demand for immediate surrender of their nuclear weapons; when Gaddafi was deposed precisely because he immediately surrendered his nuclear option without any guarantees of security.

This is after President Trump withdrew from the Iran nuclear treaty; again because of right wing ideologues like the very same John Bolton, which puts Americans in greater danger with the threat that Iran will decide they must develop nuclear weapons to protect themselves, along with long range ICBMs.

The bully mentality has been the path taken by Republicans and the Trump administration ever since they took over two branches of government—maybe all three if you count the five-person conservative majority of what will undoubtedly come to be known as the Gorsuch Supreme Court.

Why doesn’t bullying work? It is a Win-Lose strategy concocted by the Oligarchs that now run and fund the Republican Party. And that is because the few billionaires that support the current extremist wing of the Republican Party—the Koch Brothers, Sheldon Adelson, and Mercer family—won’t be able to carry the day without the grass-roots support that every political party requires.

That is to say, not when Bernie Sanders almost took the Democratic candidacy from Hillary with donations that averaged $27 per person. That is real grass-roots support, and why registered Democrats outnumber Republicans in almost every voting district; the result being Demos will probably take back the US House and possibly Senate come November.

Another example of incompetence is the passage of Repubs most recent tax cuts, which benefit the top 10 percent of income earners, corporations and LLCs, but everyone else loses since their benefits are being cut and an additional $1.5T is being added to the national debt to finance the tax cuts.

This will drive up interest rates further as the federal government must now issue massive new debt to finance the increasing deficit, since tax revenues will decline. We know what happens next, because then Fed Chairman Greenspan had to raise interest rates 16 consecutive times to pay for the ballooning budget deficits caused by the GW Bush tax cuts in 2001-03, which resulted in the Great Recession.

This doesn’t even address repeal of Obamacare’s Individual Mandate—the requirement that everyone pay into the system, even if they don’t want health care coverage. Removing the mandate has insurers in some states forecasting premium increases of as much as 25 percent due to fewer participants, and which the CBO says could put 13 million out of reach of any health care insurance at all by 2027.

No, incompetence never pays, except momentarily for the few that foster or tolerate it, which endangers the rest of US in so many ways.

Harlan Green © 2018

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Monday, May 28, 2018

April Housing Sales Slow

The Mortgage Corner

The above graph says it all. With rising interest rates, housing sales are slowing a bit. Total existing-home sales,, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, decreased 2.5 percent to a seasonally adjusted annual rate of 5.46 million in April from 5.60 million in March. With last month’s decline, sales are now 1.4 percent below a year ago and have fallen year-over-year for two straight months. This is in spite of inventories climbing, and more young adults in their 30’s buying homes.

Total housing inventory at the end of April increased 9.8 percent to 1.80 million existing homes available for sale, but is still 6.3 percent lower than a year ago (1.92 million) and has fallen year-over-year for 35 consecutive months. Unsold inventory is at a 4.0-month supply at the current sales pace (4.2 months a year ago).

Interest rates aren’t rising that much. The 30-year conforming fixed rate actually dropped 1/8th percent to 4.125 percent this week from 4.25 percent for a 1 origination point fee. And so-called Jumbo or High-Balance fixed conforming rates were just 1/8th percent higher than conventional conforming fixed rates for the same fee.

This is while housing costs are still rising. The median existing-home price for all housing types in April was $257,900, up 5.3 percent from April 2017 ($245,000). March’s price increase marks the 74th straight month of year-over-year gains, according to the NAR.
This tends to cause buyers to hesitate. Lawrence Yun, NAR chief economist, says this spring’s staggeringly low inventory levels caused existing sales to slump in April. “The root cause of the underperforming sales activity in much of the country so far this year continues to be the utter lack of available listings on the market to meet the strong demand for buying a home,” he said. “Realtors® say the healthy economy and job market are keeping buyers in the market for now even as they face rising mortgage rates. However, inventory shortages are even worse than in recent years, and home prices keep climbing above what many home shoppers are able to afford.”

Graph: Econoday

New-home sales also slowed, with April sales 15,000 short of the consensus, at a 662,000 annualized rate with revisions pulling down the prior two months by a total of 30,000. Yet compared to the prior report, when sales beat expectations by 64,000 and when upward revisions added 81,000, today's report doesn't reverse what is still an upward sales’ slope for new homes.
"With job growth, rising incomes and overall economic strengthening, we can expect housing demand to continue to grow, particularly among millennials (i.e., in their 30’s) and other newcomers to the market," said NAHB Senior Economist Michael Neal. "However, builders need to manage rising construction costs as well as regulatory hurdles to keep their homes competitively priced."
The details are mixed for new-home sales. Price discounting may be underway as the median fell a very steep 6.9 percent in the month to $312,400 for a year-on-year gain of only 0.4 percent. Relative to sales, which are up 11.6 percent year-on-year, prices look like they have room to climb, says the National Association of Homebuilders. Supply data are also a concern. New homes on the market rose only 2,000 to 300,000 with supply relative to sales also moving only marginally higher, to 5.4 months from 5.3 months.

Harlan Green © 2018

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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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