Q4 Growth Misses 3 Percent

Popular Economics Weekly

Consumers and businesses powered the economy to a 2.6 percent rate of gross domestic product growth in the final three months of 2017, according to the Commerce Department. But declining inventories and a wider trade deficit kept the U.S. from hitting the 3 percent mark for the third quarter in a row for the first time in 13 years. 

Graph: BEA

Q4 growth did not reach 3 percent as many pundits had hoped because producers produced less, depleting inventories. And imports grew faster than exports, because consumers are buying more, as more consumers are working in this full employment economy. Both numbers subtract from GDP growth, however.

On the plus side, consumer spending accelerated to a 3.8 percent annual pace of growth, the fastest pace in almost two years. Americans spent more on new cars and trucks, clothing and health care, among other things.

Businesses also invested more, after a long drought in capital expenditures. They increased spending on equipment by 11.4 percent, while investment in new housing jumped 11.6 percent. Inventories fell because companies slowed production in the fourth quarter. The value of unsold goods, or inventories, fell by $29.3 billion.

Imports rose 13.9 percent, while exports grew just 6.9 percent, and imports subtract from growth. That cut 1.1 percentage points off fourth-quarter GDP, and there is still very little inflation. The annual rate of inflation, measured by the PCE index is climbing; it rose to 2.8 percent, the highest pace since 2011. But the core PCE without more volatile food and energy prices rose at a slower 1.9 percent clip.

What does this mean? There is more room to grow, if consumers continue to spend as they have been, and businesses continue to invest in new plants and equipment, as they have in 2017, because more investment will increase worker productivity.

And economic growth needs higher productivity plus a growing population. Yet developed countries such as the US have slowing population growth, so robots, AI and other tech innovations have to replace the declining worker population. Republicans’ tax cuts should aid the corporate investment in more robots, which is good. But their wish to cut government spending is bad, because government is historically a 20 percent contributor to economic activity—and growth.

That’s because governments maintain our roads, bridges, energy grid, educational system, clean air and water; R&D for space exploration, Internet and airports—the list goes on and on. And government expenditures have been reduced since 2011, due to misplaced austerity measures in the US and Europe in particular.

This is a major reason GDP growth both here and in Europe has averaged just 2 percent since the end of the Great Recession. Corporations have garnered record profits over this time, but hoarded those profits, or returned them to their CEOs and stockholders, but not their employees.

That has to change for real economic growth to continue. Raising minimum wages in some states will help, but lower taxes don’t help with such a huge national debt and another $1.5 trillion being added over ten years in the new tax bill. Real wage growth has been declining for years, as collective bargaining and workers’ rights have been curtailed in the name of greater corporate profits.
We can hope GDP growth will continue, if paying down the national debt doesn’t become a priority.

The US dollar’s value has already declined 10 percent against other currencies, and the reason is not clear. But any further decline could motivate other countries to decide that investment in the US may not be a good idea; since much of our national debt is financed by other countries.

It is not a good idea to ignore what could happen to the $trillions in Treasury securities we have sold to the Chinese, in particular, that have financed that debt. Because it could suddenly become much more expensive to finance, should foreign governments and private entities no longer have confidence in the US economy.

Harlan Green © 2018

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

Existing-Home Inventory Lowest in 18 years

The Mortgage Corner

There aren’t enough home to sell. Sales of previously-owned homes tumbled in December as an ongoing inventory crunch became more worrisome with few homes to sell in parts of the country. Existing-home sales were down 3.6 percent for the month, though they were up 1.1 percent from a year ago, according to the National Association of Realtors. The NAR said November’s selling pace was revised down to 5.78 million.

The housing market performed remarkably well for the U.S. economy in 2017, said Lawrence Yun, NAR chief economist.

“Existing sales concluded the year on a softer note, but they were guided higher these last 12 months by a multi-year streak of exceptional job growth, which ignited buyer demand,” said Yun. “At the same time, market conditions were far from perfect. New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace.”

Graph: Econoday

There are two major reasons for the lack of inventory. Homebuyers are rushing to close deals before interest rates rise further. The 30-year conforming fixed rate is now 3.75 percent for a one point origination fee and climbing, with its maximum single-unit amount raised to $453,100 this January.
And there is a labor shortage with many workers having left the construction industry during the Great Recession, which is slowing the construction of new homes. The lack of inventory has also been driving up home prices, putting many first-time homebuyers out of the market.

“The lack of supply over the past year has been eye-opening and is why, even with strong job creation pushing wages higher, home price gains – at 5.8 percent nationally in 2017 – doubled the pace of income growth and were even swifter in several markets,” said Yun.

Those high-end markets include California, where the median home price now tops $500,000, vs. the new national median price for all housing types at $246,800. So who can afford to live in California these days?

That’s the reason Facebook unveiled plans for the massive new construction project at its Menlo Park, California corporate campus, which is part of Facebook's plans to expand its home base. The 56-acre site, which Facebook bought in 2015 for about $400 million, is located directly across the street from Facebook's headquarters. It will offer 1.6 million square feet of housing, or 1,500 units.

"Facebook is a strong supporter of its local community and consistently recognized as one of the best places in the world to work," said a Facebook spokeswoman. "This project advances both goals, by providing our employees an excellent new housing option within walking distance to campus while investing in new housing opportunities in our local community."

Must any new affordable housing in California and other high cost regions now depend on private corporations? California’s state legislators just passed a bill that would ask voters in November 2018 to approve $4 billion in general obligation bonds to build rental housing for low-income families and fund other existing housing programs. The bond would set aside $1 billion for the state’s veteran home-loan program, which would otherwise run out of money in 2018, according to SF Gate.

But that’s a drop in the bucket for what’s needed to keep up with the state’s population growth. The nonprofit California Housing Partnership estimates that California still needs about 1.5 million more subsidized housing units to meet current demand.

Harlan Green © 2018

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

Shutdown vs. “S***hole” Countries

Popular Economics Weekly

The just ended government shutdown has little to do with 9 million children’s health insurance under the CHIP plan, or extending the Dreamers protection under DACA. It really has to do with President Trump’s insistence on shutting down immigration from non-white countries, as was evident from Trump’s “S***hole” comments that he wanted to limit immigration from African and other non-white countries.

What is so shocking about Trump’s comments is they repeat those of one who he claims not to admire. Adolf Hitler in 1928 openly admired America’s racist policies of that time that excluded non-whites and Jews from immigrating to the U.S.:

“The American Union feels itself to be a Nordic-German state and by no means an international porridge of peoples. This is revealed by its immigration quotas ... Scandinavians … then Englishmen and finally Germans have been accorded the largest contingent,” said Hitler even before the Nazi’s took power.

Specifically, Hitler admired the US Immigration Act of 1924 – also known as the Johnson-Reed Act – “which had erected openly racist barriers to immigration on the basis of a “national quota” system,” according to Yale Law Professor James Whitman.

“It was not until the 1965 US Immigration and Nationality Act that the US began to separate itself from the worst aspects of its racist past. And, as Trump’s presidency makes clear, that past has yet to be permanently overcome,” said Professor Whitman in a Project Syndicate article.

There is a reason why US immigration laws became more open. The US has always suffered from a labor shortage, so that it has been newly arrived immigrants that have filled the labor deficiency.

PEW Research states that More than 41 million immigrants lived in the U.S. as of 2013, more than four times as many as was the case in 1960 and 1970. By comparison, the U.S.-born population is only about 1.6 times the size it was in 1960. Immigrant population growth alone has accounted for 29 percent of U.S. population growth since 2000.

That is the most glaring sign that new workers are needed to maintain economic growth. US population growth cannot keep up with our demand for new workers. There is no other way to fill the 6 million job openings reported each month in the Labor Department’s JOLTS report.

Debate on the current House bill that doesn’t include an extension of the Dreamers’ protections was continued for 3 weeks, in the hopes that a bi-partisan bill keeping open the door for immigrants from what President Trump considers to be “S***hole”, non-white countries will be passed.

So this is important for economic reasons; as well as recognizing that America has always been a land of immigrants; that we keep a flow of qualified immigrants and their families coming from countries that can provide the workforce America has always needed to grow and prosper.

Harlan Green © 2018

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

Immigration and Trump’s “S***Hole” Comment

Popular Economics Weekly

How should we remember Martin Luther King, Jr. on his holiday? That greater equality creates greater prosperity for all; as well as greater peace.

President Trump’s S***Hole comments were meant as a signal to his neo-nazi supporters that he wanted to exclude as many non-whites from immigrating to America as he could, and encourage more from European countries like Norway.

This means he isn’t interested in stronger economic growth over the longer term, since much of the economic growth today can be attributed to non-whites and women, according to an excellent column by the Conversable Economist, Tim Taylor, commemorating MLK Jr.’s holiday.

Graph: Conversible Economist

Non-whites and women have been contributing a larger share to our economic growth than White men since at least 1960 in high-skill occupations. Before then, many labored in the lower-skilled, unnoticed occupations that weren’t always included in growth statistics.

Professor Taylor quotes a policy brief from the Stanford Institute for Economic Policy Research cited by Peter Klenow. The percentage of White men in the high-skilled occupations of Doctors, Lawyers and Managers, “defined as lawyers, doctors, engineers, scientists, architects, mathematicians, executives/managers,” has fallen substantially, while that of Black men, White and Black women has soared. The number of White women entering these professions has tripled, Black men quadrupled, and Black women grown eight times from 1960 to 2008.

The result? Klenow estimates that economic growth increased by 15-20 percent due to these minorities entering the higher-skilled occupation, just from the fact that their numbers increased as a share of the overall profession, while the percentage of White men has fallen by approximately one-third.

It also highlights another important fact. Economic growth depends on population growth plus labor productivity. And annual labor productivity has declined approximately 50 percent since 2007, as has U.S. population growth. So the only way to boost economic growth from its current 2 percent range is to increase the working age population via immigration.

The lesson therefore is that we need greater diversity in our workforce, not less as President Trump and his racist supporters want, since our birth rates are declining; a valuable lesson to remember on Martin Luther King, Jr. Day.

Harlan Green © 2018

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

Why Raise Interest Rates Now?

Financial FAQs

The Federal Reserve is warning about the consequences of the just passed tax reform bill, which includes adding some $1.5 trillion to the federal debt in ten years. New York Fed President William Dudley says it will put too much money into the economy (via drop in corporate tax rate to 21 percent, and maximum personal rate to 37 percent), which will boost inflation to unacceptable levels. Dudley said the U.S. central bank may have to “press harder on the brakes” at some point over the next few years, increasing the risk of a hard landing for the economy, because of the new tax bill.

Once again, we are seeing what the Fed might do to stop this economic expansion, just as Fed Chair Greenspan did in 2007 by raising the Fed’s rates 16 times to stop the GW Bush expansion (and housing bubble) that led to the Great Recession.

Greenspan’s actions raised interest rates too fast on all the so-called liar loans with negative amortization, and put house payments out of range for the less qualified; many of whom had never owned a home, or had to admit their real incomes; which led to the busted housing bubble.

The Fed could make the same mistake in the current growth cycle with retail sales booming and very little inflation. The Fed has been too occupied with inflation since the wild inflation years of 1970, when they should be more concerned about maintaining adequate economic growth, which has been averaging just 2.1 percent since the end of the Great Recession.

Graph: Econoday

Retail sales rose 4.2 percent in 2017, with very little inflation even on the horizon. Retail sales rise 5 to 6 percent when the economy is growing for everyone, but inflation rates are also higher—in the 3 to 5 percent range historically. This is because the Fed is most sensitive to rising wages and salaries that make up two-thirds of product costs as an indicator of future inflation, as it did in the seventies.

By wanting to hold inflation to a 2 percent target, the Fed since the 1970s has been more concerned with tamping down household incomes, which is not the way to enable households to better themselves financially and move up the socio-economic ladder, as was possible prior to the 1970s.

Graph: Econoday

The Consumer Price Index, our best measure of retail prices, is still holding at 2 percent as it has for several years. But the core CPI index without food and energy prices plunged to 0 percent inflation in 2015 as the graph shows, and been slow to return to the 2 percent range. That’s hardly a sign of incipient inflation, but rather a sign of insufficient demand for goods and services, which in turn means household incomes are not rising fast enough to stay ahead of inflation, since consumers support two-thirds of all economic activity in the U.S. economy.

One can say the Federal Reserve has been too much in league with Big Business and multi-national corporations since the 1970s; which has kept production costs low and corporate profits at their highest levels in history as a percentage on national income.

This means we have to ‘modernize’ the Fed’s attitude about inflation, if we want to aid household incomes. Fed Governors should allow more inflation before raising interest rates further. Now is the time to be more concerned about the financial health of employees over corporate profits.

Harlan Green © 2018

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

Aren’t Tax Cuts Wonderful?

Popular Economics Weekly

Those were President Trump’s words on the $3.2 trillion in tax cuts enacted by the Republican majority congress before Christmas. “These are the biggest tax cuts in history, even bigger than President Reagan’s.” He’s right that they will be wonderful for corporations, and the highest income earners, but not for most of U.S.

So President Trump will have to show that these cuts continue to create jobs.  He has promised 10 million jobs in the first four years. The numbers are looking good in his first year, the ninth year of this economic recovery from the Great Recession. But one ingredient is lacking; government job creation. Federal government job rolls shrank during Trump’s first 11 months, and history shows that governments have to hire enough to keep up the job numbers, and provide essential services that aid economic growth.

The real problem is tax cuts have never created many jobs. Though accounting for job creation under the various presidential administrations is tricky since business cycles don’t match presidential terms, they provide a superficial look at which tax policies have worked best.

Graph: Calculated Risk

Taxes were raised during President Clinton’s eight years with 20, 966,000 private payroll jobs created. President Reagan comes in second at 14,717,000, but had to raise taxes 11 times to reduce the ballooning deficit caused by the tax cuts. The difference is that Clinton had no recessions during his terms, while Reagan had two during his early years. But taxes were raised in both cases to create more jobs, in part to fund enough government jobs that are needed to create a fully employed economy.

Under Clinton, 1,934,000 public sector jobs (i.e., federal and state) were created, and 1,414,000 under President Reagan, whereas federal jobs declined 14,000 in Trump’s first 11 months, according to the Washington Post.

Graph: Calculated Risk

President Obama actually lost jobs during his first months as president due to the Great Recession, but ended up with 1,937,000 jobs in his first term and 11,756,000 jobs over eight years. And government payrolls actually declined 268,000 during Obama’s eight years due to a number of factors; which was when Republicans took over control of the House in 2010 and cut federal spending when they cared about deficits.

Alas, that is no longer so, as the new tax bill is actually programmed to add $1.5 trillion to the national debt, and President Trump wants to reduce government budgets by 30 percent in 2018.

It will not create the necessary jobs to keep job rolls full and deficits down. Government spending is necessary to fund all the programs that the private cannot or will not, including health care, public infrastructure, education, and R&D that fund future prosperity.

How did we build our highway system, go to the moon, and create the Internet? With government spending. But that was done before 1980 when government became the problem for Republicans and tax cuts the answer.

Now it seems that budget deficits are no longer a problem for Republicans, and President Trump is counting on those 10 million new jobs to justify the tax cuts. He may be off to a good start, but it is the ninth year of this recovery cycle, and the post- World War II record is ten years that included President Clinton’s term.

Harlan Green © 2018

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

What Happens in 2018?

Popular Economics Weekly

The New Year will make some people very wealthy—mainly stockholders, corporate execs, and real estate moguls. And as minimum wages begin to rise this year in many cities and states (but not all), those at the lower income end will also get a boost.

But the middle class? They will be hit hardest by the limit to property tax and mortgage deductions in the new tax bill. And don’t forget the spending cuts to the social programs that will lower incomes of those dependent on Medicare and Medicaid.

However, this is a column about the prospects for higher paying jobs and economic growth. And it looks like upcoming statistics will show the ninth year of solid growth. But that is only if Congress finally enacts an infrastructure bill that would not only boost higher paying jobs, but productivity as well. The hurricane devastations and winter ‘bomb’ cyclones make that an obvious priority.

Just 148,000 new nonfarm payroll jobs were added to payrolls in December, according to the U.S. Bureau Labor Statistics, down from the prior two months’ 232,000 average. But economists believe it was partly due to the extreme winter weather that has essentially snowbound the northern half of the U.S.

Everyone needs to see The Day After Tomorrow, a harrowing movie about extreme climate change that brings in a new Ice Age, to understand what can happen if such extreme weather conditions continue.

All else was strong with the unemployment rate holding at 4.1 percent. Job gains were led by the health care, construction and manufacturing sectors. Other industries had smaller gains. The only significant weakness was in the hard-hit retail sector, which shed more than 20,000 jobs.

Graph: Marketwatch

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 December but was down by 639,000 over the year. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or they were unable to find a full-time job.

So this economy is putting people back to work, and could equal the Clinton recovery from 1991 to 2001 before GW Bush cut taxes and swelled the federal deficit once more; that had actually been in surplus for the last 4 years of the Clinton administration.

The lesson we learned then was Clinton had to raise taxes and cut back military spending, the largest portion of the federal budget. But Republicans once again are adding to the deficit and overall debt with their tax cuts.

So the real silliness in 2018 will be one party believing that cutting taxes and social programs will keep the federal debt from growing even larger. Not possible, because over the long term the monstrous federal debt will take even more money out of the economy and growth to pay the interest required to service said debt that could grow to $25 trillion in ten years, according to some projections.

And the Fed will keep raising interest rates at the same time to prepare us for the next recession.

Harlan Green © 2018

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

2017--A Year of Nightmares

Popular Economics Weekly

“For what does it profit a man to gain the whole world and forfeit his soul?” Jesus was to have said to his disciples. This should be the proverb that describes 2017, a year of lost souls.

What does it say about a country that elects a President who shows no sign of having a soul, but only wants profits for himself and his cronies?

Most Americans in 2017 have seen rock-bottom American values such as equality, justice, and tolerance assaulted to bring back a gilded age that profits a few. Instead of draining the DC swamp, President Trump has filled it with a record number of lobbyists; either writing the bills Republicans are pushing through congress, or installing lobbyists in the very government agencies they are tasked to regulate.

The 2017 nightmare began on the election of Donald Trump that will forever be tainted by Russia’s well-documented attempts to tilt the election to Trump and the Republican Party.

George Will, the conservative pundit, gave the best description of Trump’s inabilities in a Washington Post Op-ed: “It is urgent for Americans to think and speak clearly about President Trump’s inability to do either. This seems to be not a mere disinclination but a disability. It is not merely the result of intellectual sloth but of an untrained mind bereft of information and married to stratospheric self-confidence.”

Psychologists and psychotherapists have said more; that Trump is mentally ill, or has an untreatable Narcissistic Personality Disorder, but either way, he lives in a fantastical world of his own making the almost completely ignores the reality that most Americans live.

The nightmare grew when we learned Russia may have been behind many of the dirty tricks, and anti-Hillary chants of “Lock Her Up” made by Trump campaign advisers such as General Flynn. We now know the FBI began its counter-intelligence operation of the Trump campaign in the summer of 2016, when it learned that the Russians had hacked both Republican and Democratic Party emails.

But Russia only weaponized the Democrats’ hacked emails via WikiLeaks, Facebook, and Twitter, not those of the Republicans. Therefore the suspicion has to be that Russia could blackmail one or more Trump campaign operatives into spying for them because Russia didn’t publicize the Republicans’ emails—maybe even President Trump and his family? That is precisely what the FBI’s counter-intelligence investigation wants to determine.

The greatest nightmare of 2017 may be the record income inequity that was exemplified in the just-passed tax cuts that are to be paid for with up to $3 trillion in added federal debt plus spending cuts to Medicare and Medicaid over the next ten years, which impoverish the poorest among US.
Professors Thomas Piketty and Emmanuel Saez were the first to examine 100 years of income tax returns that highlighted the wide swings in income equality. They found that the periods of greatest inequality were just before a major recession, such the as the Great Recession, and the Great Depression itself.

Both were the result of record income inequality. The greatest prosperity was post-WWII, when the modern American middle class was formed due to rapid economic growth and unionization of the workforce.

Graph: CPBB

When will the 2017 nightmare end? Maybe in 2018, if a majority of Americans realize the fantasy world the current administration and congress has created is not theirs; but Americans see a world in which life, liberty and the pursuit of happiness is available to all.

Harlan Green © 2018

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