Friday, October 18, 2019

Slower Retail Sales Hint at Lower Q3 Growth

Popular Economics Weekly

U.S. retail sales that mirror consumer spending, which powers some two-thirds of U.S. GDP growth, fell for the first time in seven months in September, raising fears that a slowdown in the American manufacturing sector could be starting to bleed into the consumer side of the economy.

The Commerce Department said Wednesday that retail sales dropped 0.3 percent last month as households slashed spending on building materials, online purchases and especially automobiles. The decline was the first since February.

Retail sales have increased 2.3 percent year-over-year, which is not a good number, as can be seen in the above graph dating from 2015. It averaged closer to 4 percent from 2010 to 2015, before falling to its current level.

And manufacturing has been hurting this year, as manufacturing production fell 0.5 percent, in the Fed’s latest Industrial Production report, after rising 0.6 percent in August due to a strike at General Motors. U.S. industrial output overall dropped 0.4 percent from a month earlier in September 2019.  

That was the sharpest decline in industrial output since April. For the third quarter as a whole, industrial production rose at an annual rate of 1.2 percent following declines of about 2 percent in both the first and the second quarters, per the below graph, with brown bars in graph showing negative growth.

Hence economic growth is looking weaker for the third quarter, with GDP growth now forecast at just 1.5 percent, according to a projection by CNBC and Moody’s Analytics.
“Weak consumer spending and inventory data caused economists responding to the Rapid Update tracker to lower their collective GDP projections by one-tenth of a percentage point to 1.5 percent, the lowest level yet for Q3,” said CNBC.
Consumers must keep spending more than they are saving to keep this economic afloat, in other words. The University of Michigan sentiment survey says consumers are optimistic on that score.

Econoday commented that last Friday’s U of Michigan survey bounced sharply higher in October, to a much stronger-than-expected 96.0 that easily exceeds Econoday's consensus range.
“The assessment of current conditions is the strong point in October's report, up nearly 5 points to 113.4 in what is a positive indication for consumer spending this month. Expectations are also higher, up 1.4 points to 84.8 and together with the jump in current conditions, suggest that the impeachment inquiry of President Trump is not having a significant impact on the consumer. In fact, the report notes that the ongoing GM strike was mentioned by respondents nearly twice as much as the impeachment.”
The GM strike has reportedly been settled, but the trade wars haven’t, so it remains to be seen whether consumers can remain this optimistic about their future.

Harlan Green © 2019

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Tuesday, October 15, 2019

Nobel Prize in Economics Breaks New Ground

Popular Economics Weekly

STOCKHOLM (AP) — The 2019 Nobel Prize in Economic Sciences has been awarded Monday to Abhijit Banerjee, Esther Duflo and Michael Kremer “for their experimental approach to alleviating global poverty.”

It was ground-breaking for several reasons. Firstly, the Nobel committee is recognizing that the field of economics is finally becoming more science than social science by championing empirical field research, rather than purely academic research that was conducted mostly in ivory towers with mathematical formulas.

For instance, Prof George Akerlof, one of three that won the 2001 Nobel Prize, was the first of several so-called behavioral economists to win for his research on how individuals actually make financial decisions. He proved that humans don’t always act rationally in their best interests without institutional safeguards, such as Lemon Laws that prevent faulty used car sellers from putting new car dealers out of business.

Though the proof was done with mathematical formulas, it began the ongoing divorce from what was originally called Political Economics. What else to call it when one major branch of microeconomics was under the assumption that investors and wage earners actually acted in their own best interests in a level playing field without government oversight, yet never was validated with actual results?

The lines had been drawn between conservatives that advocated Adam Smith’s pronouncement that free, mostly unregulated markets with low taxation would remain healthy of their own accord and were the best way to maximize prosperity for all; with the Keynesian, New Deal economics of progressives that wanted governments to discipline capital markets for their excesses.

These opposing viewpoints on how human beings made financial decisions were based more on political choices than actual scientific research on financial behavior until research in other fields, such as psychology were brought into economics.

Hence this new approach is called ‘experimental’, because it prioritized actual field work using scientific methods to improve the lives of the poorest in developing countries. What did they discover?

“The Laureates’ research findings,” said the Nobel Prize announcement, “– and those of the researchers following in their footsteps – have dramatically improved our ability to fight poverty in practice. As a direct result of one of their studies, more than five million Indian children have benefitted from effective programmes of remedial tutoring in schools. Another example is the heavy subsidies for preventive healthcare that have been introduced in many countries,” (that made preventative healthcare accessible to the poor).

It looks like this is becoming a worldwide movement to alleviate poverty and income inequality in developed countries as well, such as the U.S. of A. that has been lagging other developed (and underdeveloped) countries in improving the lives of our poorest citizens—thanks in large part to Big Business’s proclivity to maximize profits over every other corporate goal.

One example of this trend: JP Morgan Chase CEO Jamie Dimond announced in August a Statement on the Purpose of a Corporation by the Business Roundtable, a group of almost 200 large businesses, in which they “share a fundamental commitment to all of our Stakeholders”.
“While each of our individual companies serves its own corporate purpose,” said Dimond, “we share a fundamental commitment to all of our stakeholders. We commit to:
  • · Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
  • · Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
  • · Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
  • · Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
  • · Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
It remains to be seen if corporate behavior--that is in large part responsible for the record income inequality we see with the globalization of market forces--actually changes. But this award shines a light on what can happen when the Economic Sciences begin to follow the rules of scientific discovery, rather than the Political Economic verities of old.

Harlan Green © 2019

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Thursday, October 10, 2019

Donald Trump'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 three 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 the 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 will Americans will tolerate such reptilian behavior?

Harlan Green © 2019

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Wednesday, October 9, 2019

U.S. Growth is Slowing!

Financial FAQs

Late Monday, the U.S. blacklisted 28 Chinese companies because of their alleged role in human-rights violations against Muslim minorities ahead of the high-level discussions which will be led by China Vice Premier Liu He on Thursday.

Bloomberg also reported the Trump administration is moving ahead with discussions around possible restrictions on capital flows into China, with a particular focus on investments made by U.S. government pension funds.

These unilateral actions by the Trump administration will be enough to bring on a mild recession sometime next year. Why? Because attempting to isolate the 2nd largest, or largest economy in the world—depending on which economic measure is used—can only harm international trade on which U.S. and world economic growth depends these days.

Manufacturing activity is already contracting, signaling that it is in a recession. The service sector will take longer to see the effects of the U.S. decoupling from China and international trade in general from the various trade wars because services are less dependent on foreign trade.

And last week Trump also said he would add a 10 percent tariff in September to the remaining $300 billion in Chinese imports that had previously been excluded from earlier U.S. duties. China retaliated by suspending purchases of American farm crops and letting the value of its currency fall, effectively making Chinese goods cheaper to buy and negating some of the damage from U.S. tariffs.

The Chinese imports being taxed are consumer goods, such as TVs, computers, wash machines that American consumers buy.

The result? Both the Producer Price Index for wholesale goods (red line in graph), and probably the upcoming Consumer Price Index (dark blue line) shows where we are heading.

Wholesale prices in the PPI index are falling because of declining demand for unfinished goods, which are the raw material for finished products. The increase in wholesale inflation over the past 12 months slid to 1.4 percent from 1.8 percent, marking the lowest level in almost three years.
“Similarly, a more closely followed measure that strips out volatile food, energy and trade-margin costs was flat in September. The increase in the so-called core PPI over the past year dropped to 1.7 percent from 1.9 percent,” according to MarketWatch.
Another sign of declining demand is the 10-year Treasury yield declining to 1.55 percent; also recession territory, as investors flee stocks to the safe haven of U.S. Treasury securities.

It means the Fed will probably continue to lower their interest rates in an attempt to boost spending, which could keep consumers in the game for a while longer, but at a lower level of consumption as they save more of their earnings. 

Hence there is the possibility of a mild recession next year when consumers begin to realize that current U.S. economic policies only interested in punishing China, rather than negotiating a beneficial outcome in good faith, will harm American consumers as well.

Harlan Green © 2019

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Monday, October 7, 2019

How Much Has US Economy Slowed?

Financial FAQs

It’s a difficult question to answer. The ISM’s non-manufacturing Indexes still show growth, which is two-thirds of economic activity, but we are close to that edge of no growth at all.
The NMI® registered 52.6 percent, which is 3.8 percentage points below the August reading of 56.4 percent,” reports Anthony Nieves, Chair of the Institute for Supply Management. “This represents continued growth in the non-manufacturing sector, at a slower rate. The Non-Manufacturing Business Activity Index decreased to 55.2 percent, 6.3 percentage points lower than the August reading of 61.5 percent, reflecting growth for the 122nd consecutive month. The New Orders Index registered 53.7 percent; 6.6 percentage points lower than the reading of 60.3 percent in August. The Employment Index decreased 2.7 percentage points in September to 50.4 percent from the August reading of 53.1 percent. The respondents are mostly concerned about tariffs, labor resources and the direction of the economy,” said Nieves.
 We know the US economy is slowing, and the manufacturing activity is already contracting—the first of the four indicators that are used to call a recession—per the ISM’s Manufacturing Diffusion Index.

And last week’s Associated Data Processing survey came in at 135,000 jobs created, which is a slight downward trend. Just 8,000 jobs were added to the goods-producing sector, whereas 127,000 jobs were added to the service-providing sector, according to ADP.

ADP private payroll survey is usually within 50,000 of the US Bureau of Labor Statistics monthly survey coming out tomorrow, which isn’t much help in predicting the BLS unemployment report.
So there you have it. Employment growth has leveled off. i.e., is no longer increasing. Tomorrow’s report may also show more weakness in job creation.

The 10-year Treasury yield also slipped back into the 1.5 percent range, a sign that there is little demand for credit. Interest rates this low are also a sign of pessimism about future growth, which can be self-fulfilling.

I believe our economy will continue to barely grow, and so avoid an outright recession; at least until next year’s presidential election, when the trade wars might or might not be finally resolved. That seems to be the consensus.

Harlan Green © 2019

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Saturday, October 5, 2019

Lowest Unemployment Rate In 50 Years

Popular Economics Weekly

The unemployment rate dropped to a 50-year low, and there are still 6 million jobs available. Private payrolls expanded by 114,000 after an upwardly revised 122,000 advance the prior month, according to a Labor Department report Friday that missed the median estimate of economists for a 130,000 gain. Total nonfarm payrolls climbed a below-forecast 136,000.

This is the slowest pace of job growth in four months, as businesses grew more cautious about hiring, but employment gains for August and July were revised up by a combined 45,000. Such are the vagaries of a fast-changing, but still robust jobs market.

With manufacturing activity weak, most hiring in September was concentrated in the services sector. Education and health care providers filled 40,000 positions. Government added 22,000 workers in 
September, but only 1,000 of the jobs were due to federal hiring for the 2020 Census. Economists had expected a much bigger increase in census workers. Job growth has slowed from 223,000 per month in 2018 to 158,000 over the last three months.

Trump’s trade war has had the biggest impact on the manufacturing sector, which contracted for the second straight month (losing 2,000 jobs), and featured the biggest pullback in export activity since the depths of the 2009 crisis, according to economist Steven Rattner.
Foreign trade and exports, the biggest drivers of manufacturing activity, are slowing grinding to a halt, in other words.

And the WTO has just ok’ed $7.5 billion in tariffs on European exports to the US, in part because of EU government subsidies to their airplane manufacturer Airbus, but also French wines and other products considered to be government subsidized.

Washington plans to impose a 10 percent tariff on aircraft imported from Europe and apply a 25 percent import tax on other agricultural and industrial items on October 18, the Office of the US Trade Representative said in a statement.
However, "If the US decides to impose WTO authorized countermeasures, it will be pushing the EU into a situation where we will have no other option than do the same," European Commissioner for Trade Cecilia Malmstrom said in a statement.
This will further reduce world trade and economic growth, as the EU accounts for 25 percent of US exports, needless to say.

It’s a vicious circle of tit-for-tat retaliation that can only worsen the upcoming recession—which doesn’t look much like a recession at the moment—but stay tuned to what ultimately happens with China, as I’ve been saying.

Harlan Green © 2019

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Wednesday, October 2, 2019

Higher Home Sales Mean What?

The Mortgage Corner

"Sales of new single‐family houses in August 2019 were at a seasonally adjusted annual rate of 713,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.1 percent above the revised July rate of 666,000 and is 18.0 percent above the August 2018 estimate of 604,000. "
A robust housing market could mitigate what is increasingly looking like a looming manufacturing recession due to the ongoing and increasingly contentious trade wars.

Another housing market indicator was also positive, per the National Association of Realtors (NAR). 

The Pending Home Sales Index,, a forward-looking indicator based on contract signings, climbed 1.6 percent to 107.3 in August, reversing the prior month’s decrease. Year-over-year contract signings jumped 2.5 percent. An index of 100 is equal to the average level of contract activity.
“It is very encouraging that buyers are responding to exceptionally low interest rates,” said Lawrence Yun, NAR chief economist. “The notable sales slump in the West region over recent years appears to be over. Rising demand will re-accelerate home price appreciation in the absence of more supply.”
This is while the Institute for Supply Management’s manufacturing index fell to 47.8 percent last month from 49.1 percent, marking the lowest level since June 2009, when the Great Recession ended.

“Comments from the panel reflect a continuing decrease in business confidence,” said the report, “…The New Export Orders Index continued to contract strongly, a negative impact on the New Orders Index. Consumption (measured by the Production and Employment indexes) contracted at faster rates, again primarily driven by a lack of demand, contributing negative numbers (a combined 3.3-percentage point decrease) to the PMI® calculation.”
The decline in exports was due to a overall decline in foreign trade. A most recent example of the hurt from that decline was the closing of a Louisiana steel mill because it couldn’t pay for the rising costs of imported scrap steel that it made into finished steel projects, due to the 25 percent tariff (tax) on imported steel.

It remains to be seen whether other business sectors are beginning to contract, as well. Consumer spending, for example, is on the downward trend, rising just 0.1 percent in August, and 2.3 percent annually, approximately one-half of its 4.8 percent growth rate through the first two quarters, according to the last Q2 GDP estimate. It was the lowest spending in six months, and doesn’t augur well for the rest of the year.

And the latest U-turns in Chinese trade negotiations are coming from Trump’s proposal to limit Chinese company listings on U.S. stock exchanges, which is just one more reason for the increasing uncertainties about future growth.

So I keep wondering how much longer can a healthy housing market and low interest rates keep consumers happily consuming?

Harlan Green © 2019

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Tuesday, October 1, 2019

Who’s Willing to predict Q3 GDP?

Financial FAQs

We will be lucky to stay at 2 percent growth in this third quarter ending in September. So say a survey of economists, with a PMI Composite FLASH reading of next week’s manufacturing and non-manufacturing surveys flat, consumers spending flat, and consumer sentiment straining to hold onto some semblance of optimism.

Consumer spending is on the downward trend, rising just 0.1 percent in August, and 2.3 percent annually, approximately one-half of its 4.8 percent growth rate through the first two quarters, according to the last Q2 GDP estimate. Its inflation rate remained at 1.8 percent. It was the lowest spending in six months, and doesn’t augur well for the rest of the year.

Why? I mentioned last week that consumers are saving more, spending less out of caution and because a larger percentage live off their savings that yield less with such low interest rates.

But more ominously, the latest U-turns in the Chinese negotiations come from Trump, who is now proposing that at least some of the less transparent Chinese companies be delisted from US stock and bond exchanges. We have no idea at this early stage what that means, since most Chinese companies use the security blanket of being partially owned by the Chinese government to hide their real income and outgo. But it could affect the sales’ volume at least—therefore liquidity?

The latest figures show the economy expanded 2.3 percent in the past year, exactly the same pace of the past 10 years since the Great Recession ended, says MarketWatch economist Rex Nutting. With prospects for even slower growth ahead.
Almost every forecast from professional economists, the Federal Reserve, the Congressional Budget Office, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) — but not the White House! — looks for growth of around 2% per year for the foreseeable future,” said Nutting. “ With the growth in the potential labor force slowing from about 1% per year to about 0.2%, it’ll take some very good productivity numbers just to hit 2%.”

A measure of business conditions in the Chicago region, the Chicago PMI index, contracted for the third time in four months, reflecting ongoing struggles by American manufacturers as well as the two-week-old General Motors workers strike. The Chicago PMI business barometer dropped to 47.1 in September from 50.4 in the prior month, MNI Indicators said Monday. Any reading below 50 indicates worsening conditions.

It is a sign that this week’s manufacturing and non-manufacturing (service sector) activity readings will show more weakness ahead.

Let us hope it won’t further dampen consumer confidence for the holidays.

Harlan Green © 2019

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Friday, September 27, 2019

Q2 GDP Growth Unchanged

Popular Economics Weekly

In the face of declining consumer confidence, but strong consumer and government spending, the third estimate of second quarter GDP growth was unchanged at 2 percent.
The BEA reported the increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, exports, nonresidential fixed investment and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
Consumer spending is increasing at 4.6 percent, while government spending that combines federal, state and local outlays is 4.8 percent higher, while inflation is basically flat for a variety of reasons. The PCE price index increased 2.3 percent, compared with an increase of 0.4 percent in the first quarter. Excluding food and energy prices, the PCE price index increased 1.8 percent, compared with an increase of 1.1 percent.

The ‘other’ shoe to drop was the Conference Board’s consumer confidence index that fell to a three-month low of 125.1 this month from 134.2 in August.

“Consumer confidence declined in September, following a moderate decrease in August,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers were less positive in their assessment of current conditions and their expectations regarding the short-term outlook also weakened. The escalation in trade and tariff tensions in late August appears to have rattled consumers. However, this pattern of uncertainty and volatility has persisted for much of the year and it appears confidence is plateauing. While confidence could continue hovering around current levels for months to come, at some point this continued uncertainty will begin to diminish consumers’ confidence in the expansion.” 
That and other indicators show slowing growth—for instance, consumers are saving more of their incomes. This is one factor holding down inflation that was discussed in earlier columns. Seniors are saving more due to extraordinarily low interest rates on which their fixed incomes are dependent, and perhaps more caution about future growth prospects.

Personal saving was $1.32 trillion in the second quarter, compared with $1.37 trillion in the first quarter. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 8.1 percent in the second quarter, compared with 8.5 percent in the first quarter.

Wholesale inflation has fallen from its high in 2018 as the Trump tax cut stimulus has worn off, though the increase in the core rate of wholesale inflation over the past 12 months rose slightly to 1.9 percent in August from 1.7 percent. Economists prefer core inflation readings because food, gas and trade margins can swing sharply from month to month and mask underlying price trends.

I said last week that six in 10 Americans now say a recession is likely in the next year and as many are concerned about higher prices because of the trade war with China, helping to knock six points off President Donald Trump’s job approval rating in the latest ABC News/Washington Post poll.

This is putting downward pressure on prices, as such fears reduce the demand for goods and services in general. Ratings of the U.S. economy overall, 56 percent positive, are down from 65 percent last fall in this poll, produced for ABC by Langer Research Associates.

Most ominously, 60 percent see a recession as very or somewhat likely in the next year. That’s within sight of the 69 percent who said so in November 2007, one month before the onset of the Great Recession.

Harlan Green © 2019

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Thursday, September 19, 2019

Rising Home Sales Signal Stronger Growth

The Mortgage Corner

It looks like home sales are are defying expectations of an economic slowdown, as both existing and pending home sales are rising. Pending sales measure contracts scheduled to close in 30-60 days, which is a sign that home sales should continue to rise for the rest of this year.

Total existing-home sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.3 percent from July to a seasonally adjusted annual rate of 5.49 million in August. Overall sales are up 2.6 percent from a year ago (5.35 million in August 2018), said the NAR.

It is the second consecutive monthly increase, which is unusual this late in the selling year.  Since housing is usually a leading indicator of economic trends, this could be a good sign for continued economic growth.
Lawrence Yun, NAR’s chief economist, attributed the increase in sales to falling mortgage rates. “As expected, buyers are finding it hard to resist the current rates,” he said. “The desire to take advantage of these promising conditions is leading more buyers to the market.”
The median existing-home price for all housing types in August was $278,200, up 4.7 percent from August 2018 ($265,600). August’s price increase marks the 90th straight month of year-over-year gains.
“Sales are up, but inventory numbers remain low and are thereby pushing up home prices,” said Yun. “Homebuilders need to ramp up new housing, as the failure to increase construction will put home prices in danger of increasing at a faster pace than income.”
Builders seem to be answering his call, as privately‐owned housing starts in August were at a seasonally adjusted annual rate of 1,364,000. This is 12.3 percent above the revised July estimate of 1,215,000 and is 6.6 percent above the August 2018 rate of 1,279,000 for the strongest residential construction activity in 12 years.

The report from the Commerce Department on Wednesday also showed permits for future home construction rose to levels last seen in 2007. It added to upbeat data on retail sales that have pointed to an economy that is continuing to grow moderately rather than flirting with a recession as has been flagged by financial markets, said Reuters.

There is still strong demand for new housing, in other words. Builder confidence in the market for newly-built single-family homes rose one point to 68 in September from an upwardly revised August reading of 67, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released on Tuesday. Sentiment levels have held in the mid- to upper 60s since May and September’s reading matches the highest level since last October.
“Solid household formations and attractive mortgage rates are contributing to a positive builder outlook,” said National Association of Home Builders’ (NAHB) Chief Economist Robert Dietz. “However, builders are expressing growing concerns regarding uncertainty stemming from the trade dispute with China. NAHB’s Home Building Geography Index indicates that the slowdown in the manufacturing sector is holding back home construction in some parts of the nation, although there is growth in rural and exurban areas.”
And we mustn’t forget mortgage rates have remained low, with 30-year conforming fixed rates still as low as 3.25 percent, and super-conforming fixed @ 3.375 percent for a one-point origination fee in California. However, there are hints that such rates may begin to rise with the Treasury bond rally slowing. The yield of 10-year benchmark Treasury bonds has increased 30 basis points in just one week.

In fact, the demand for housings still exceeds supply some 10 years after the housing bubble bust, with existing-home inventories back down to a 4-month supply; which is a sign the housing market hasn’t fully recovered from the ensuing Great Recession.

The Fed lowered its Fed Funds rate another 0.25 percent, which dropped the Prime Rate to 4.75 percent. This will encourage consumers to continue spending, in other words, with slightly reduced confidence in future growth and jobs. So it seems smart to buy a home while interest rates remain low and consumer remain confident into the holidays.

Harlan Green © 2019

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Tuesday, September 17, 2019

Why Make America Small Again?

Popular Economics Weekly

Why make America small again is the question Americans should be asking President Donald Trump whose immigration policies are designed to do just that. He would reduce immigration flows by 50 percent, if he and his conservative supporters have their way.

The result would be stagnating economic growth because of the simple fact that immigrants are the main driver of population growth, due to the low birth rates of native-born Americans.

The U.S. birth rate is 1.8 births per woman, down from 3.65 in 1960, according to the World Bank. Demographers consider 2.1 births per woman as the rate needed to replace the existing population.

Economic 101 theory states that population growth is one-half of the equation for Gross Domestic Product growth (It’s population growth + productivity = GDP growth). Without adequate population growth, U.S. economic growth would stagnate, as it has in Europe and Japan.

In fact, the Japanese population has been shrinking for decades, which has resulted in a record government debt of some 200 percent of GDP. How else can the Japanese invest in their future but use their government to print money, when its own population contributes a shrinking amount to tax revenues?

And a 2017 report from the National Academies of Sciences, Engineering, and Medicine found immigration “has an overall positive impact on the long-run economic growth in the U.S.”

The best evidence of low native-born birth rates is that over the next five decades, the U.S. immigrant population of 45 million is projected to grow to a record 78 million. The growth rate of 74 percent will be more than double that for the U.S.-born population (30 percent), according to the PEW Study.

Then what does President Trump really believe would make “American Great Again,” if he restricts immigrant inflows, which would reduce U.S. population growth rates by more than half?

He and his supporters labor under a very ancient assumption (not based on fact) that resources are limited in a zero-sum game where one can only gain when others lose a share of income or wealth, or influence, or stature.

That was the mentality of the concentration camp that Nobel Prize-winner Eli Wiesal portrayed so graphically in Night, his description of conditions in Nazi death camps as a child.

It is unfortunately a picture that exists today, in which we are imprisoned in a world of declining resources. It also happens to be the mentality of fossil fuel interests that attempt to protect their limited and declining resources—and wealth that are the financial supporters of the Republican Party (such as the Koch Brothers).

They want to protect their very limited resources, whereas renewable energy offers the promise of unlimited energy resources, as does the Information Age and the Internet. This is a world that requires fewer restrictions of people and information across country borders.

American can only be small again in the Trump-Koch Brothers world of the last century, a world that seemed to have limited resources. There’s no part of America that would prosper with 14-foot-high border walls, or trade barriers, or immigration restrictions that are based on win-lose fallacies.

Such walls can only exist for those that still believe they are imprisoned in a past that no longer exists, or has any basis in fact.

Harlan Green © 2019

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Monday, September 16, 2019

Retail Sales Rising Again

Popular Economics Weekly

Retail sales were strong in August from motor vehicle sales, mainly. On a monthly basis, retail sales increased 0.4 percent from July to August (seasonally adjusted), and sales were up 4.1 percent from August 2018, but there was no gain if auto sales are excluded.

We can say this is good news for maintaining some economic growth this year with manufacturing declining and no end in sight for the trade wars.  But how long can consumers flush with cash from rising incomes continue to spend? 

The retail sails boost comes from falling interest rates, as the Fed is scheduled to drop their overnight rate 0.25 percent for a second time this year. It controls the rate on most consumer loans. But should interest rates be pushed down further to keep consumers in the game that are the sole engine of growth these days?

Avi Tiomkin in a very prescient Barron’s article, believes interest rates should be rising and governments spending more, if we want to prevent another Great Recession.
“The primary cause of the deflationary process of the past decade is expansionary monetary policy and ultralow (and negative) interest rates,” he said. “In modern times, monetary policy has been the main instrument used to fight recessions, including the Great Recession that followed the financial crisis of 2008. Central banks lowered rates and infused capital into the markets, but this strategy has exhausted its usefulness and should no longer be applied.”
The result has been near-zero or negative interest rates that exist in many EU countries and Japan, which not only fail to contribute to healthy economic activity but are also causing “omnipresent damages,” said Tiomkin.

The EU and Japan are examples of what happens when interest rates turn negative as their populations age and spend less. This suppresses the overall demand for goods and services. Seniors spend less and save more because of their static savings/pensions when they retire. Lower interest rates lower incomes, in their case, causing them to save more to maintain their income level.

Another way to describe “the deflationary process of the past decade” is the austerity policies initiated after the Great Recession that cut government spending across the board while cutting taxes. It ended up benefitting the one percent, but no one else.

In fact, it led to a second mini-recession in the EU, whereas the U.S. dodged a second recession bullet with the ARRA—The American Reconstruction and Recovery Act of 2010 that momentarily boosted growth with an initial $787 billion put into economic growth that kept many states solvent and boosted infrastructure spending.

But not in the EU, as Germany and the Nordic countries cut back on their spending while penalizing Greece and other heavily-indebted southern EU members for their spending excesses.  So Europe became infected with “austerity mania” rather than formulating a modern Marshall Plan to speed a recovery because of what Nobel economist Paul Krugman described as the “confidence fairy” at the time.

In 2011, the Nobel laureate economist Paul Krugman characterised conservative discourse on budget deficits in terms of “bond vigilantes” and the “confidence fairy.” Unless governments cut their deficits, the bond vigilantes will put the screws to them by forcing up interest rates. But if they do cut, the “confidence fairy” will reward them by stimulating private spending more than the cuts depress it.

However, “Econ 101 said that slashing spending in a depressed economy was a terrible idea,” said Krugman.

Following several years and nearly four trillion euros ($4.4 trillion) of monetary expansion, and negative interest rates, Europe now finds itself on the verge of a recession and a potential political crisis, says Tiomkin. “Persistent deflation, economic weakness, and inequality fomented by a low-rate regime invariably lead to political and social extremism.”

To stem and reverse these trends, governments, led by the U.S., the European Union, and the United Kingdom, must increase spending aggressively in the next few years to spur growth, directing outlays to infrastructure and public services, defense, domestic security, and more.

This prescription for our aging economics has been recommended by other economic giants such as former Harvard President Larry Summers, and Nobelist Joe Stiglitz, who have been lamented the stagnated thinking prevailing among current policymakers.

Old and supposedly sacrosanct budget-deficit ratios—limiting budget deficits to 3% of gross domestic product, for instance—must be ignored, said Tiomkin. They are archaic and detrimental in light of today’s reality.

It took such government programs to recover from the Great Depression and World War II. How else should we behave after the Greatest Recession, since the Great Depression?

Even consumers have limits on what they can spend to keep this recovery alive.

Harlan Green © 2019

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Wednesday, September 11, 2019

JOLTS Survey Reports Increase in Hiring

Financial FAQs

This Calculated Risk graph for the Labor Department’s Job Openings and Labor Turnover Survey says (almost) all of it. The yellow line signifying job openings is still soaring far above hires (blue line); so much so that there were still 1.2 million job openings left unfilled in July, the last month surveyed.

Yes, the U.S. economy is so big that there were 5.95 million hires, an increase of 237,000 jobs, and 5.8 million separations that were for a variety of reasons. Many of the separations were voluntary because those employees probably found better jobs.

It’s important to note that the blue columns in the graph show that Quits, or the number of voluntary separations, have been rising since 2010 and are at post-recession highs. Quits are up 3 percent in just the last 12 months.

So we are seeing a very strong job market with that substantial gap between 7.2 million job openings and 5.8 million hires. Hires are still increasing in this 11th year of the recovery from the 2017-19 Great Recession. I.e., there are no signs of weakening job growth that could mean a contraction.

Another jobs indicator showed strength as well. The NFIB Small Business Optimism Index, fell 1.6 points to 103.1, remaining within the top 15 percent of readings, per Calculated Risk, which is important because small businesses create some 80 percent of new jobs.

However, the NFIB reported job creation picked up in August, with an average addition of 0.19 workers per firm compared to 0.12 in July. The problem is finding qualified workers is becoming more and more difficult with a record 27 percent reporting finding qualified workers as their number one problem (up 1 point).
“If the widely discussed slowdown occurs, a significant contributor will be the unavailability of labor–hard to call that a “recession” when job openings still exceed job searchers,” said the NFIB.
A further caveat to continued job growth was the Challenger, Gray & Christmas staffing report, which said U.S.-based employers ramped up the pace of downsizing in August, as companies announced plans to cut 53,480 jobs from their payrolls. This is up 37.7 percent from July’s total of 38,845, according to the latest report on job cuts released Thursday.
“Employers are beginning to feel the effects of the trade war and imposed tariffs by the U.S. and China. In fact, trade difficulties were cited as the reason for over 10,000 job cuts in August," said Andrew Challenger, Vice President of Challenger, Gray & Christmas, Inc.
July was a good month for job formation, in other words, as well as the August unemployment report that showed 130,000 new payroll jobs. However, optimism is slipping among the small business owners that are saying they don’t expect better business conditions and real sales volumes in the coming months.

Harlan Green © 2019

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Monday, September 9, 2019

Weaker Employment Report in August

Popular Economics Weekly

The economy adding just 130,000 new jobs in August, marking the smallest increase in three months and offering more evidence that hiring has slowed amid a broadening trade dispute with China that’s disrupted the U.S. and global economies, is the ‘lede’ story this Friday.

There were also downward revisions to the last 2 months, the BLS said. The change in total nonfarm payroll employment for June was revised down by 15,000 from +193,000 to +178,000, and the change for July was revised down by 5,000 from +164,000 to +159,000.

The weak job total is from more than the trade wars.  Though wages and salaries are rising, it’s not as much as in earlier recoveries, when average wages rose closer to 4 percent.  But the Fed has been so proactive in preventing any sign of inflation that it boosted interest rates too soon in December, which slowed both consumer buying and investing that depend on lower short term rates.

This tends to nip any substantial wage increases in the bud that would really jump-start further economic growth into the 11th year of this record-breaking recovery.

The good news is that Friday’s soft employment figures should keep the Federal Reserve on track to cut interest rates later this month, even after another sharp increase in wages.

Average hourly earnings for all employees on private nonfarm payrolls rose by 11 cents to $28.11, following 9-cent gains in both June and July. Over the past 12 months, average hourly earnings have increased by 3.2 percent, said the Bureau of Labor Statistics (BLS), also.

Longer term interest rates are already plunging and there is speculation that rates might even trend lower, particularly if the Fed continues to lower short term rates. It could boost home sales and prices, as well, if no recession looms due to the other factors (trade war?).

Harvard economics Professor Kenneth Rogoff said recently that it isn’t out of realm of possibility that more Central Banks might introduce negative interest rate yields to prevent another recession as is already the case in the EU and Japan.

Federal Reserve Chairman Jerome Powell said Friday afternoon that the most recent monthly gauge of the U.S. labor market fit into an overall picture of a healthy jobs market and economy.
In a question-and-answer session in Zurich, Powell said the outlook for the economy remains favorable, describing the future as one likely to reflect continued moderate economic expansion.

Then why the downward trend in hiring? Nobel economist Paul Krugman says that Trump’s trade policies are bad for productive business, in particular, which are businesses that must plan for the longer term. That excludes extractive businesses, like oil and coal mining that only think short term; which means until the oil and coal reserves run out.
“Trump’s trade war isn’t just that tariffs raise costs and prices,” said Krugman, “while foreign retaliation is cutting off access to important markets. It is that businesses can’t make plans when policy zigzags in response to the president’s whims.”
The gain in new jobs was even weaker if hiring tied to the upcoming U.S. Census is stripped out. In August, employment in federal government rose, largely reflecting the hiring of temporary workers for the 2020 Census. Private-sector employment was up by 96,000, with notable job gains in health care and financial activities and a job loss in mining.

There are other factors slowing job growth to consider, also. No national infrastructure bill has been passed, when that would be the surest way to jump-start employment in productive businesses. But it means spending government money, and the Trump administration only wants to spend taxpayers’ money on border walls; even attempting to take away some $3.4 billion from the defense budget to do so.

This could just be the beginning of slower job growth, if the trade wars aren’t resolved soon, as I and many others have been saying. But who will resolve them in time to prevent that R word from surfacing, once again?

Harlan Green © 2019

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Thursday, September 5, 2019

Answering the Kennedys’ Call

I recently attended the 10th anniversary of the Goleta Dam Dinner held at Lake Los Carneros, on a dam built long before the City of Goleta, California was formed.

Here in this relatively new and still small city, founded in 2002 and nestled beside its famous neighbor, Santa Barbara, were families of all ages and stages happily celebrating not only their sense of community spirit, but the natural beauty of its surroundings that is a unique blend of mountains and ocean located on the central California coast.

This made me realize how successful was the formation of this new, very livable, California city, where I had been privileged to live and help establish, in spite of the many obstacles to the formation of new governmental entities in recent years.

It was a successful community because of the attention paid to both the environment and safety concerns of its citizens—especially the children.

I know Goleta won’t make the list of The Economist Intelligence Unit’s annual Global Liveability Index that really only pays attention to larger cities, where we don’t see this community spirit and camaraderie.

Vienna was the top city on The Economists’ list, with Australia and Canada each having three cities in its top 10 listing of the better-known cities that made The Economists’ Liveability Index. .
  1. 1. Vienna, Austria
  2. 2. Melbourne, Australia
  3. 3. Sydney, Australia
  4. 4. Osaka, Japan
  5. 5. Calgary, Canada
  6. 6. Vancouver, Canada
  7. 7. Toronto, Canada
  8. 8. Tokyo, Japan
  9. 9. Copenhagen, Denmark
  10. 10. Adelaide, Australia
No U.S. city was in the top 20, with Honolulu ranking highest at No. 22. Atlanta came in 33rd place; Pittsburgh, 34th; and Seattle, 36th. New York was all the way down in the 58th spot, in part because of low scores for infrastructure, stability and possible crime issues.

That could be because it’s easier for the residents of smaller cities to confront city councils with their concerns—at least in the U.S. of A. It has to be why the City of Goleta became one of the 50 safest American cities in 2017, fifteen years after its formation, according to a survey by Safewise, a security firm.

What then does “liveability” mean? The Economist is a UK Magazine, which might serve as a bias for a more European civic viewpoint, perhaps. But the issue of safety is certainly at the forefront of making any community livable—especially for children.

And the rising tide of violence in American cities—so much so that in 1992 U.S. Surgeon General Everett Koop declared violence a public health emergency—means the situation in American cities hasn’t improved.
And now even more so when U.S. Surgeon General Vivek Murthy was fired by President Trump in 2017 after he spoke against gun violence, calling it a public health issue that needs public investment, and stood in support of the victims in Orlando, Florida, where one of the worst mass shootings in American history had just occurred.

It also has much to do with so-called Smart Urban Planning. Architect Suzanne Lennard, and Psychiatrist Henry L. Lennard have written extensively on what makes communities livable in books such as The Forgotten Child (2000, Gondolier Press, Carmel, CA).

Children are safest where there are neighborhood adults with ‘eyes on the streets’ that watch over them, as in many densely-packed European cities with their public squares. Children are also safer where streets are designed and neighborhoods zoned to allow children to roam and explore, rather than be dependent on the auto to transport them to school, for instance, as is the case in many poorly-planned American suburbs.

Such concerns were incorporated into the City of Goleta—that made it such a close-knit, ‘liveable’ community, in my opinion. It was also why attending the Goleta Dam Dinner’s 10th anniversary was such a special event.

Harlan Green © 2019

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Tuesday, September 3, 2019

What Happens When % Rates Go Even Lower?

The Mortgage Corner

The NAR’s pending home sales index was softer than expected in July, thereby reversing nearly all of its June increase.  That left the index with a slight YOY decline of 0.3 percent.  Those results probably mean at least part of the July rebound in existing home sales will be reversed in August, though any drop in August resales may be milder than the July decline in the pending index, says market observer ICAP, a Reuters subsidiary.

Interest rates are down and they may go even lower, if no recession looms due to other factors (trade war?). Harvard economics Professor Kenneth Rogoff said recently that it isn’t out of realm of possibility that more Central Banks might introduce negative interest rate yields to prevent another recession as is already the case in the EU and Japan.

But lower interest rates also boost the value of housing, increasing the demand for housing because more borrowers become eligible to buy; unless builders are able to increase production. But that isn’t certain with the 25 percent increase in the Canadian lumber tariff, which has increased construction costs $8,000, according to estimates, and the severe construction labor shortage.

The Guardian reports Jyske Bank, Denmark’s third largest, has begun offering borrowers a 10-year deal at -0.5 percent, while another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0 percent and a 30-year mortgage at 0.5 percent.
There’s also another effect of lower rates. Barron’s economist Matthew Klein states the precipitous drop in interest rates “should have a big impact on refinancing activity. U.S. households owe roughly $9.4 trillion in mortgage debt, and a bit more than half of that takes the form of conventional home loans that conform to standards set by Fannie Mae and Freddie Mac. More than 90 percent of those 30-year mortgages have an interest rate above the current market rate.”
Not all will choose to refinance, of course. Black Knight, a mortgage research firm, calculates about 10 million mortgages would be candidates for refinancing, based on today’s market rate (3.6 percent), interest rates on existing mortgages (at least 4.25 percent), credit score (above 720), and loan-to-value ratios (below 80 percent).

Should market rates drop to 3.4 percent, Klein quotes Black Knight estimates that the number of potential refinancing candidates would jump to 13 million. Mortgage rates of 3 percent, which would represent a sharp decline from current levels, would translate into 20 million refi candidates.

This is now looking like a real possibility. We know what happened the last time there was a precipitous drop in interest rates; the housing bubble. Rates had dropped sharply after the 2001 recession, and then Fed Chair Alan Greenspan labored to keep interest rates too far below existing inflation rates to finance the War on Terror that frittered away 4 years of budget surpluses inherited by GW Bush.

It led to double-digit home price increases for several years, hence the housing bubble; which in turn led to immense overbuilding and the liar-loans pushed by lenders to sell as many homes as possible.

Today the biggest difference is that we don’t have inflation rates of 3-5 percent that existed in the early 2000s, therefore not as much fuel to boost housing prices. Values are currently on the down trend and in the 3 percent range, per the Case-Shiller Index as we speak.
“The economic impact would be noticeable under any of these scenarios,” says Klein. “According to Freddie Mac, households that refinanced in April through June, when mortgage rates averaged 4%, already have saved about $140 each month, or roughly $1,700 a year. For perspective, the typical U.S. homeowner with a mortgage spends $5,000 per year on groceries. Evercore estimates that the average borrower could save about $4,560 annually by refinancing into a new mortgage at 3.5%.”
Lower interest rates could give a big boost to the longest economic recovery on record, putting more money in consumers’ pockets, should the downward interest rate spiral that Professor Rogoff predicts become a reality. It could also create another housing bubble; take your pick!

Harlan Green © 2019

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Friday, August 30, 2019

Q2 GDP Growth Slowing—What Else?

Popular Economics Weekly

The 2nd estimate of second quarter Real Gross Domestic Growth slowed to 2 percent, from 3.1 percent in January. It looks like growth is slowing to the average rate that has prevailed since the end of the Great Recession.

Consumers are reacting to the slowdown in the U. of Michigan sentiment survey of 600 telephone respondents, which was well below expectations and the lowest reading since October 2016. The expectations component also fell more than 10 points in the month with the current conditions component down more than 5 points.
“The report cites consumer apprehension over rising tariffs which, for this phone sample, were spontaneously mentioned by 1/3 of the respondents” said Econoday.
There have been other signs of slower growth as well. The Economist reports US Steel announced earlier in August it would lay off 200 workers in Michigan. Sales of camper vans dropped by 23 percent in the 12 months ending in July, threatening the livelihoods of thousands of workers in Indiana, where many are made. Factory workers are not the only ones on edge. Lowes, a retailer, recently said it would slash thousands of jobs. Halliburton, an oil-services firm, is cutting too.

Why the slowdown now? Consumers are still spending (brown line), as the BEA’s Disposal Personal Income graph shows—but it’s a lot more than they are earning (blue line).

This means they could stop spending if any more shocks occur, such as the possibility that China might wait until after the 2020 election to make a deal.  Exports and residential investments also declined from Q1.

Manufacturing is the mainstay of exports. Employment in durable-goods manufacturing peaked in June 2006, about a year and a half before the onset of recession. This year has been another brutal one for industry. An index of purchasing managers’ activity registered a decline in August.

Since last December manufacturing output has fallen by 1.5 percent. Hours worked—considered to be a leading economic indicator—are declining. Some of this is also linked to President Donald Trump’s trade wars, which have hurt manufacturers worldwide.

Last Friday China said it would  increase existing tariffs from 5 percent to 10 percent on more than 5,000 U.S. products, including soybeans, oil and aircraft. A 25 percent duty on American-made cars would also be reinstituted. The value of these products is estimated by the Chinese Commerce Ministry to total around $75 billion.

Trump responded after financial markets closed by saying he would raise current U.S. tariffs. A 10 percent duty on $300 billion in Chinese goods will be raised to 15 percent in September while a 25 percent tariff on $250 billion in imports would be increased to 30 percent in October.

And on Wednesday, MarketWatch’s Robert Schroeder reported a coalition of 161 manufacturers, farmers, retailers, natural gas and oil companies as well as other business groups, as well as other business groups, sent a letter asking Trump to postpone tariff rate increases on Chinese goods slated to take effect this year.

Does that look like they are near to making a deal?

Harlan Green © 2019

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Wednesday, August 28, 2019

Budget Deficits and the Laffer Curve

Financial FAQs

There is an economic theory of sorts that helps us to understand why our political parties can’t agree on how to grow an economy that benefits most Americans. It’s called the Laffer Curve, reputedly first drawn on a napkin by doctoral student Arthur Laffer in a meeting with Dick Cheney, President Ford’s Chief-of-Staff in the 1970s.

Laffer basically claimed that raising taxes was harmful to economic growth, and his pretty picture convinced conservatives who didn’t like taxes of any kind. His ‘claim’ isn’t true, though it had always been behind conservatives’ call to shrink government spending by cutting taxes. It was the higher maximum tax rates of the 1950s and 60s that enabled the US to build our Interstate highway system and land on the moon, for starters.

But cutting taxes just to enrich certain income brackets, without cutting comparable spending has always resulted in burgeoning deficits, as conservatives certainly know, even if they won’t admit it.

For instance, it purportedly convinced Cheney as GW Bush V.P. that “deficits don’t matter”. Laffer’s claim gave Republicans the cover to lower taxes while increasing spending for President GW Bush’s War on Terror after 9/11, because Laffer asserted it would pay for itself with faster growth. Instead, the Bush tax cuts and increased spending has added a cumulative $4 trillion to the federal debt since then.

A short spurt of growth happened in 2018 after the 2017 Republican tax cut, but GDP growth is settling back to the 2 percent range that has prevailed since the end of the Great Recession. And there is another consequence—an upcoming $1 trillion budget deficit.

Growth had flagged since 2008 because so many Americans weren’t put back to work, as happened during the Great Depression. Spending was erratic amid continual budget wars between the two political parties impeded productive investments, such as in our badly outmoded infrastructure.

One example: more than one-third of America’s 600,000 plus bridges are badly in need of repair; our energy grid is more than 70 years old and subject to power failures; our drinking water systems are becoming health hazards—Flint, Mich and Newark, NJ are the latest examples; and we have a K-12 educational system that ranks near the bottom of developed countries.

The Laffer Curve has really done no one good, except to give conservatives talking points with which to maintain the low tax rates of today that have resulted in record federal debt levels.
“There is a strong correlation between cuts in top tax rates and increases in top 1 percent income shares since 1975,” said economists Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva in a 2011 NBER Working Paper. “But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model.”
The resulting record income inequality from the Laffer Curve inspired tax cuts has finally reached the same level that prevailed in 1928, and we all know what happened next—the Great Depression.

Harlan Green © 2019

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Friday, August 23, 2019

Housing Sales Higher, Interest Rates Plunging

The Mortgage Corner


Total July existing-home sales, that include single-family homes, townhomes, condominiums and co-ops, rose 2.5 percent from June to a seasonally adjusted annual rate of 5.42 million in July, according to the National Association of Realtors (NAR). Overall sales are up 0.6 percent from a year ago (5.39 million in July 2018).

It might be that sharply lower interest rates are reviving the housing market. The 30-year conforming fixed rate is now just 3.25 percent for a one point origination fee, the lowest since the Great Recession. This is bringing back more housing in the affordable range for middle-income buyers, but not yet for first-time, entry-level buyers. And there are predictions that interest rates could go lower.
“Falling mortgage rates are improving housing affordability and nudging buyers into the market,” said Lawrence Yun, NAR’s chief economist. However, he added that the supply of affordable housing is severely low. “The shortage of lower-priced homes have markedly pushed up home prices.”
The Pending Home Sales released earlier,, is a more important indicator of sales’ trend. It is a forward-looking indicator based on contract signings that moved up 2.8 percent to 108.3 in June in the NAR’s pending sales index, from 105.4 in May. Year-over-year contract signings jumped 1.6 percent, snapping a 17-month streak of annual decreases.

Lawrence Yun said the 2.8 percent increase in pending sales can be attributed to the current favorable conditions and predicted the rise is likely the start of a positive trend for home sales.
“Job growth is doing well, the stock market is near an all-time high and home values are consistently increasing. When you combine that with the incredibly low mortgage rates, it is not surprising to now see two straight months of increases,” he said.
Home price appreciation has been much stronger in the lower-price tier compared to homes sold in the upper-price tier, says the NAR, based on the analysis of proprietary deed records data from Black Knight, Inc. and Realtors Property Resource®.
“Homes are selling at a breakneck pace, in less than a month, on average, for existing homes and three months for newly constructed homes,” Yung continued. “Furthermore, homeowners’ equity in real estate has doubled over the past six years to now nearly $16 trillion. But the number of potential buyers exceeds the number of homes available. We need to see sizable growth in inventory, particularly of entry-level homes, to assure wider access to homeownership.”
There is speculation that interest rates might even trend lower, which could continue to boost housing sales, if no recession looms. Harvard economics Professor Kenneth Rogoff said recently that it isn’t out of realm of possibility that more Central Banks might introduce negative interest rate yields, as is already the case in the EU and Japan, to prevent another recession

The Guardian reports that Jyske Bank, Denmark’s third largest, has now begun offering borrowers a 10-year deal at -0.5 percent, while another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0 percent and a 30-year mortgage at 0.5 percent.

We have come a long way from 1981 when the inflation rate reached 14 percent, and 30-year mortgage rate soared to 18 percent, believe it or not. It is very good news for the U.S. housing market—if our economy continues to perform, that is.

Harlan Green © 2019

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Wednesday, August 21, 2019

Will Corporations Become More Responsible?

Popular Economics Weekly

It is a sea change in economic thinking when corporate CEOs that belong to the Business Roundtable sign a Statement of Purpose to consider more than maximizing their profits, when maximizing corporate profits at the expense of their employees, social responsibilities, environment, and the public-at-large has been their reigning mindset until now.

They have just announced a Statement on the Purpose of a Corporation, in which they “share a fundamental commitment to all of our Stakeholders”.
The American dream is alive, but fraying,” said Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. and Chairman of Business Roundtable. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
  • · Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
  • · Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
  • · Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
  • · Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
  • · Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
It was in the 1970s that conservative economist Milton Friedman led the charge against Keynesian economics and government regulation that had rescued America from the Great Depression. The New Deal happened because Americans were willing to try anything to bring back jobs during the Great Depression, for fear that capitalism no longer worked.

A 2016 Forbes article described the Roundtable as comprised of 192 CEOs, and one of the most prominent lobbying groups in Washington, D.C. In 2015, the group spent $19.3 million on lobbying, making it the eighth biggest spender that year, according to the Center for Responsive Politics.

Corporate profits have been on a tear for years, reaching a record share of GDP and Gross National Income in 2018 with the corporate tax cuts. What did they do with those profits? Invested it mainly in buybacks to boost share price and CEO incomes.

The result was has been record income inequality, as many manufacturing and other high-paying jobs were exported overseas via the growth of multinational corporations in the name of globalization. The FRED graph above illustrates the growth of corporate profits (blue line) over wages and salaries (red line), particularly since the last two recessions (gray columns).

But now income inequality and corporate social responsibility is in the headlines with the upcoming presidential campaign. Senators Sanders and Warren have been the loudest in calling out corporate “corruption”, a code word for using their power to enrich Wall Street and their stockholders, rather than Main Street.

Is this scaring Big Business enough to fulfill their commitment to serve Main Street, as it did during the Great Depression? The tide seems to be turning, as it is becoming increasingly evident that the record income inequality is causing corporations to rethink the role of capitalism in creating jobs that make America a better place to work and live.

Harlan Green © 2019

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