Tuesday, November 12, 2019

The Historical Decline in US Growth

The Mortgage Corner

Nonfarm business sector labor productivity decreased 0.3 percent in the third quarter of 2019, first decline in 5 years, the U.S. Bureau of Labor Statistics reported, as output increased 2.1 percent and hours worked increased 2.4 percent…From the third quarter of 2018 to the third quarter of 2019, productivity increased 1.4 percent, reflecting a 2.3-percent increase in output and a 0.9-percent increase in hours worked.

This almost arcane statistic followed by professional economists is one of two major reasons US economic growth has slowed to a crawl, as seen in the graphs. Individual workers are no longer producing as much per worker as they did through 2000, even with a fully employed economy and the introduction of modern technologies that boost production.

Another reason is declining population growth, as American mothers no longer produce enough replacement babies. A main contributor to the falling population growth rate is the decreasing fertility rate. The fertility rate has fallen from 3.7 in the 1960s to 1.9 today, when 2.1 births per mother is the natural replacement rate, leading to a lower increase in the US population (excess of births over deaths).

In fact, the national birth rate (12/1,000) still remains higher than the national death rate (8/1,000), which means more people are being born in the U.S. each year than are passing away. Additionally, the arrival of immigrants with larger families, has kept the U.S. population steadily increasing, albeit slowly.

I suggest that lower fertility is just the tip of the melting economic iceberg, because populations also increase with new immigrants. So we shouldn’t be cutting back on immigration quotas as the current administration is doing—to some 700,000 last year from the 1.3-1.4 million per year in recent decades.

And combined policy missteps—such as spending less on capital investments that would increase labor productivity and not introducing policies that would enhance birth rates; also better health care, family leave, more liberal vacation and sick leave policies are a start—as European countries have been doing.

This has kept U.S. GDP growth averaging 2 percent since the Great Recession, but no higher. EU countries have declining birth rates, unfortunately, which has knocked down EU GDP growth rates to around one percent.

But they also have greater longevity and better healthcare outcomes than the U.S., which is ranked 37th in health outcomes by the World Health Organization. As in example, French residents now live an average 4 years longer than Americans, says Nobel economist Paul Krugman in a recent NYTimes Op-ed. “Why? Universal healthcare and policies that mitigate extreme inequality are the most likely explanations.”

There is much more that can be done to boost economic growth and income equality, in other words. Fixing schools would boost educational levels, switching to alternative energy sources would inject $trillions into new technologies and bring down pollution costs, fixing our infrastructure would boost productivity immediately by cutting down on commute times and lost work hours, and better enforcement of environmental regulations would decrease healthcare expenses as well as job losses due to ill health.

The list goes on and on. Maybe we do need a Green New Deal to make all this happen?

Harlan Green © 2019

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

Wednesday, November 6, 2019

Do We Want to Save the Planet?

Answering the Kennedys’ Call

President Trump just announced the U.S. will withdraw in one year from the Paris Accord of almost 200 countries that have agreed to significantly limit Greenhouse Gas (GHG) Emissions.

This happened within a day of a report from the Alliance of World Scientists endorsed by more than 11,000 scientists that says the world is facing a climate emergency.
“Scientists have a moral obligation to clearly warn humanity of any catastrophic threat and to “tell it like it is.” On the basis of this obligation and the graphical indicators presented below, we declare, with more than 11,000 scientist signatories from around the world, clearly and unequivocally that planet Earth is facing a climate emergency.”
Is it a coincidence Trump announced the withdrawal from the Paris Accord on the same day satellite data shows that last month was the warmest October on record ?

I think not. Trump’s announcement took the headlines, thereby preempting the far more important climate news to back pages. The withdrawal is to take effect one day after the 2020 Presidential election.

His administration is full of lobbyists and former executives of the fossil fuel industry in what will ultimately prove to be a vain attempt to further enrich themselves in the face of looming environmental disasters.
The total of 11,253 scientists from 153 countries affirm that” if we do not act or respond to the impacts of climate change by reducing our carbon emissions, reducing our livestock production, reducing our land clearing and fossil fuel consumption, the impacts will likely be more severe than we've experienced to date," said lead author Dr Thomas Newsome, from the University of Sydney.
In fact, "That could mean there are areas on Earth that are not inhabitable by people," said the report.

How so? Because it is already happening. We know great swaths of North Africa and the Middle East have experienced mass population exoduses from an increasing frequency of droughts that are causing outright civil wars (Syria), and anti-immigrant xenophobia in many countries.

BBC News summarized the report’s recommendations:
  • · Energy: Politicians should impose carbon fees high enough to discourage the use of fossil fuels, they should end subsidies to fossil fuel companies and implement massive conservation practices while also replacing oil and gas with renewables.
  • · Short-lived pollutants: These include methane, hydrofluorocarbons and soot - the researchers say that limiting these has the potential to cut the short-term warming trend by 50% over the next few decades.
  • · Nature: Stop land clearing, restore forests, grasslands and mangroves which would all help to sequester CO2.
  • · Food: A big dietary shift is needed say researchers so that people eat mostly plants and consumer fewer animal products. Reducing food waste is also seen as critical.
  • · Economy: Convert the economy's reliance on carbon fuels - and change away from growing the world's gross domestic product and pursuing affluence.
  • · Population: The world needs to stabilise the global population which is growing by around 200,000 a day.
But there’s more. It can cause irreparable economic damage that results in geopolitical unrest; even wars, as countries compete for limited resources. The U.S. Pentagon has been warning of this outcome for years, because it has labeled climate change a direct threat to our national security.

A summary of its latest January, 2018 report to congress showed that it was also harming military preparedness in future conflicts, so much so, that a US News & World Report in a 2017 report said,
 “During his confirmation process for the post as secretary of defense this spring, Gen. James Mattis wrote in the question/response period: "Climate change can be a driver of instability and the Department of Defense must pay attention to potential adverse impacts generated by this phenomenon."
From shifting temperatures to desertification, environmental changes have the potential to significantly affect the movement of populations, the availability of resources and the stability of governments. The results can be famine, drought, disease and a rise in global conflict.

Then the question must be asked: Why on earth is the Trump administration denying climate change and withdrawing from the Paris Accord when we now know it is causing  the suffering of millions, and is a threat to our national security?

Harlan Green © 2019

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

Tuesday, November 5, 2019

Irrational Exuberance Is Back!

Financial FAQs

Fed Chairman Alan Greenspan said in a memorable 1996 speech, “…how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

He was then talking about the penchant for investors to act irrationally in ignoring very high stock valuations accompanying very low interest rates that could show a stock market, and maybe the overall economy, about to enter a down cycle.

Does that sound familiar? We have today the S&P index of 500 top stocks with a price-to-earning ration above 18—i.e., it’s price is 18 times annual earnings, after expenses (EBITDA---earnings before interest, taxes, depreciation, and amortization) when the historical long-term P/E earnings ratio is 15, according to Nobel economist Robert Shiller in his 2000 best-seller, Irrational Exuberance; and which increases the odds of a recession.

For instance, the irrational behavior that Greenspan was warning about in 1996 wasn’t manifested until the Dot-com bubble bust of 2000 and following 2001 recession, when the P/E ratio reached 44 times earnings. In other words, stock prices were way out of whack with earnings that had been declining—so much so that stock prices had flattened and corporations were barely issuing any dividends at all—a sign that their earnings were depressed.

And what depresses an economy more than depressed corporate earnings, which then depress job formation, consumer incomes, and overall economic growth?

Professor Shiller gave the 100-year history of stock market P/Es in his book. The last time it had reached great heights was in 1929, and the beginning of the Great Depression.

So irrational exuberance is something to worry about when looking at stock valuations. We are in similar, but not identical circumstances today. The S&P P/E ratio is 18, according to Forbes Magazine.
“On a cautionary note related to the earnings skid,” says Forbes, “the S&P 500’s price-to-earnings ratio has been on the rise and now stands near 18 times projected earnings over the next 12 months. That’s way above the 14 level where we started the year, and it exceeds the long-term average of around 16. Remember, it’s harder to grow the “P” side of that equation when the “E” side is on the decline.”
Why such irrational exuberance today, after past history tells us what happens when investors act irrationally in the face of reality?
Professor Shiller explains it thusly: “(President) Trump has for decades touted a glamorous narrative of his life by “surrounding himself with apparently adoring beautiful women, and maintaining the appearance of vast influence,” Shiller said in a recent op-ed in Britain’s the Guardian newspaper. “The end of confidence in Trump’s narrative is likely to be associated with a recession,” Shiller warned.
Shiller goes much deeper into human behavior in Irrational Exuberance. Human beings have a natural inclination to listen to hearsay and word-of-mouth stories when they make financial decisions, such as buying a home, or stocks. This is in part because of the complexity of modern financial markets, but also because such research is difficult and requires some expertise.

The busted housing bubble is the best example of irrational exuberance, when consumers believed that housing prices could never fall, because they hadn’t in modern history—at least since WWII—so they kept elevating housing prices with the aid of so-called liar loans, because interest rates had fallen far below inflation rates at the time.

Inflation was so far above interest rates that there was a zero cost to borrowing mortgages, in particular, since rising inflation devalued loan principal faster than the actual loan payments over a 15 or 30-year mortgage.

This could happen again today, in other words. Although corporate profits are still at record highs, they may have already begun their descent to more historical levels, and maybe even lower, if consumers become disillusioned with the Trump ‘success’ narrative, as Professor Shiller has said.

Harlan Green © 2019

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

Saturday, November 2, 2019

October Employment No Big Deal

Popular Economics Weekly

Total nonfarm payroll employment rose by 128,000 in October, and the unemployment rate was little changed at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in food services and drinking places, social assistance, and financial activities.

But most were not the good-paying jobs that will support a household, or buy a home. Restaurants and bars led the way in hiring by adding 48,000 jobs. Professional jobs rose by 22,000, social-assistance providers added 20,000 jobs, and financial companies increased employment by 16,000.

Payrolls fell by 36,000 in manufacturing that mostly reflected the GM strike, and government employment slipped by 3,000.

Just the 22,000 Professional jobs are considered middle-class, white collar jobs. In fact, most consumers and jobs are stuck with low-paying service sector jobs in retail, warehousing, and even healthcare.

This is a major reason U.S. economic growth is gradually slowing, as many economists reported last week. Hence the uncertainty about an upcoming recession, since consumers are still optimistic about job prospects and flush with earnings from the very low unemployment rate.

But ‘very low’ unemployment has been masking the real problem with this recovery. Wages and salaries have not been rising fast enough, in jobs that support an adequate standard of living, to bring back anything close to boom times again for most Americans.
Why not? We have to look at the history of economic recoveries.

The Obama administration’s one-time American Recovery and Reconstruction Act of 2009 (ARRA) put some $850 billion back into governments to end the Great Recession, which boosted a flurry of infrastructure improvements, and helped to balance some state budgets, but it didn’t even begin to catch up to the $2 trillion plus shortfall in outmoded infrastructure that included not only roads and bridges, but airports, the energy grid, water and sanitation facilities (e.g., Flint, Michigan and Newark, NJ), and a K-12 elementary education system ranked at the bottom in the developed world.

This is what any responsible governance policies should continue to do. The current economic recovery has benefited just the top 10 percent in income-earners, which is the reason for so much discontent among blue collar, working folk.

It was called the New Deal when we had a leader capable of answering the call, as did a President named Roosevelt, who said just prior to his reelection in 1936: "the old enemies of peace: business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism…are unanimous in their hate for me — and I welcome their hatred." 

In fact, President Roosevelt did falter in 1937, when Republican’s won a congressional majority and he agreed to attempt to rebalance the federal budget while the Federal Reserve reduced the money supply as it had in 1930; which helped to precipitate the original downturn. The U.S. economy then dropped back into a second recession, which is why it was called the Great Depression; before Roosevelt reinstituted New Deal spending programs that brought growth back to pre-Great Depression levels.
“The New Deal ushered in a Golden Age for public works, as Washington at last took a leading role in funding infrastructure,” said one study of the New Deal. “The federal government, working hand-in-hand with state and local agencies, financed (and provided relief labor for) a huge array of projects. These emphasized the newest forms of technology and infrastructure, including highways, airports, dams, and electric grids, as well as more traditional public works, such as libraries, schools and parks.”
Those same policies need to be enacted today to bring back this recovery from the Great Recession, and keep it from becoming another Great Depression.

Harlan Green © 2019

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