US Manufacturing Leads 2018 Growth For How Along?

Popular Economics Weekly

Graph: Econoday

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

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

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

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

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

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

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

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

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

Harlan Green © 2018

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

Housing Sales, Leading Economic Indicators, Higher

The Mortgage Corner

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

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

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

Graph: Econoday

Lawrence Yun, NAR chief economist, says sales were uneven across the country in February but did increase nicely overall. “A big jump in existing sales in the South and West last month helped the housing market recover from a two-month sales slump,” he said. “The very healthy U.S. economy and labor market are creating a sizeable interest in buying a home in early 2018. However, even as seasonal inventory gains helped boost sales last month, home prices – especially in the West – shot up considerably. Affordability continues to be a pressing issue because new and existing housing supply is still severely subpar.”

New-home sales are also surging, up 2.2 percent annually in February reports the Commerce Department, and 9.4 percent in 2017 overall. Inventories are also up to a 5.9-month supply and the median sales price in February was $326,800, nearly 10 percent higher than a year ago.

Graph: Econoday

And, “The U.S. LEI rose again, despite a sharp downturn in stock markets and weakness in housing construction in February,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The LEI points to robust economic growth throughout 2018. Its six-month growth rate has not been this high since the first quarter of 2011. While the Federal Reserve is on track to continue raising its benchmark rate for the rest of the year, the recent weakness in residential construction and stock prices – important leading indicators - should be monitored closely.”

What recent weakness? Single-family starts, which are key to restocking the new home market, rose 2.9 percent to a 902,000 rate which is up 2.9 percent from this time last year.  Director Ozyildirim was really talking about the fears of a trade war with Trump’s tariffs on China and Japan about to be enacted. The administration is exempting Australia, Brazil, S Korea, Great Britain, EU, Mexico and Canada at the moment.

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

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

Harlan Green © 2018

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

POTUS's Reptilian Brain

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

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

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

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

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

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

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

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

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

Harlan Green © 2018

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

A Gangbuster Employment Report

Popular Economics Weekly

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

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

Graph: Marketwatch

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

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

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

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

Graph: Marketwatch

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

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

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

Harlan Green © 2018

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

Where is the Inflation, and Higher Growth?

Financial FAQs

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

Elizabeth Sawhill, a Senior Fellow at Brookings in a New York Times Op-ed, on the heels of February’s almost record 313,000 job creation number, is also saying that higher inflation would be desirable after many years of too low inflation.

“In fact, a high-pressure economy, with wages and prices a little higher than we’ve become used to, might actually do a lot of good for the people who need it most,” said Sawhill. “Working families need a tight labor market — and higher wages — to get ahead. It would be a costly mistake to raise rates too much or too soon.”

I have been saying this for years, as we know that higher growth and higher inflation go hand-in-hand, which in turn boosts wages. The Fed’s preferred PCE and retail CPI indexes have remained below 2 percent since 2008, while the GDP growth rate has also averaged just 2 percent.

Graph: tradingeconomics.com

Why don’t we have higher growth? Because higher GDP growth requires corporate profits reach those that will invest or spend them, including governments, working folk, and corporations have been better at buying back their own stock rather than investing their profits, as I’ve also been saying in past columns. While governments have been living on austerity budgets since the Great Recession.

“We are in the midst of a big fiscal and monetary experiment, says Sawhill. “And as with any experiment, the consequences are unknown. What we do know is that the costs of the Great Recession were enormous — at least $4 trillion in lost income, or about $30,000 per household, according to my calculations. The biggest losses were experienced by those in the bottom and middle portions of the income distribution who lost jobs and saw much of the equity in their homes destroyed.”

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

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

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

Harlan Green © 2018

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

How Bad Is Our Trade Deficit?

Financial FAQs

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

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

Graph: Econoday

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

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

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

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

Harlan Green © 2018

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

The Dangerous Treasury Yield Curve

Popular Economics Weekly

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

Graph: Marketwatch

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

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

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

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

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

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

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

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

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

Harlan Green © 2018

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

Where Have All the Profits Gone?

Popular Economics Weekly

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

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

Graph: Econoday

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

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

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

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

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

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

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

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

The New York Times reported that historically, American companies had paid out profits with a quarterly check, known as a dividend. But after the S.E.C. changed its rule in 1982, companies started using more of their profits to buy their own shares, in the process giving their shareholders a bigger piece of the company.

“Buybacks soon soared,” reported the Times. “That was about 5 percent less than those companies spent on new plants, research and development and other investments. By contrast, 20 years ago, companies spent four times as much on such investments as they did on buybacks.”

And hedge fund managers are still taxed at the lower capital gains tax for carried trades on the 20 percent they earn from any profits their hedge funds earn, rather than at the higher personal income tax rate.

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

Harlan Green © 2018

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