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

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

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

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

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

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

Wednesday, May 2, 2018

When is the Next Recession?

Financial FAQs


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

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

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

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

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

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

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

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

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

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

Harlan Green © 2018

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