Popular Economics Weekly

Where is the Housing Bottom?

2012-02-10T07:21:00.000-08:00

The Mortgage Corner

The housing bottom is really a function of incomes, jobs, and inventory of houses for sale. All three indicators are favorable for housing sales to pick up this year. But prices have to bottom first. The main price indicators are the monthly S&P Case-Shiller and FHFA price indexes that supervise Fannie and Freddie telling their direction. Another indicator that tells us when housing markets are improving is weekly mortgage application totals put out by the Mortgage Bankers Association.

Graph: Calculated Risk

Mortgage applications increased 23.1 percent from one week earlier (last week’s results included an adjustment for New Years Day), according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 13, 2012.

“Interest rates dropped last week due to continuing anxieties regarding the fragile economic situation in Europe,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “With mortgage rates reaching new lows, refinance volume jumped and MBA’s refinance index reached its highest level in the last six months. Purchase activity also increased as buyers returned to the market after the holiday season.”

Graph: Calculated Risk

The Refinance Index increased 26.4 percent from the previous week to its highest level since August 8, 2011. The seasonally adjusted Purchase Index increased 10.3 percent from one week earlier to its highest level since December 12, 2011.

And builder confidence in the market for newly built, single-family homes continued to climb for a fourth consecutive month in January, rising four points to 25 on the latest NAHB/Wells Fargo Housing Market Index (HMI). This is the highest level the index has attained since June of 2007.

"Builder confidence has now risen four months in a row, with the latest uptick being universally represented across every index component and region," noted Bob Nielsen, chairman of the National Association of Home Builders (NAHB). "This good news comes on the heels of several months of gains in single-family housing starts and sales, and is yet another indication of the gradual but steady improvement that is beginning to take hold in an increasing number of housing markets nationwide -- and that has been shown by our Improving Markets Index. Policymakers must now take every precaution to avoid derailing this nascent recovery."

Privately-owned housing starts in December were at a seasonally adjusted annual rate of 657,000. This is 4.1 percent below the revised November estimate of 685,000, but is 24.9 percent (±18.3%) above the December 2010 rate of 526,000.

Graph: Calculated Risk

But Single-family starts increased 4.4 percent to 470,000 in December - the highest level in 2011, and the highest since the expiration of the tax credit. This should give a boost to 2012 growth.

Another upside surprise was signs of increased employment. Momentum is building in the labor market. Payroll jobs in January advanced 243,000 after jumping 203,000 in December (originally 200,000) and rising 157,000 in November (prior estimate up 100,000). The net revisions for November and December were up 60,000.

Graph: Econoday

As for some time, says Econoday, private payrolls outstripped the total, increasing 257,000 in January, following a gain of 220,000 in December. So we are seeing a reason for the jump in builder confidence.

Existing-home sales might also pick up, because of the fire-sale prices. Total housing inventory at the end of November fell 5.8 percent to 2.58 million existing homes available for sale, which represents a 7.0-month supply at the current sales pace, down from a 7.7-month supply in October.

Graph: Calculated Risk

We know that it’s the combination of a better jobs market and even increased household formation that increases the demand for housing. Demand is increasing in spite of some 4 million homes somewhere in the foreclosure process. Maybe a key is that the younger, echo boomer generation is creating more households. Household formation has fallen drastically since 2007, so maybe this is the year when it will return to historical levels.

Why the Surprising Jobs Report?

2012-02-08T07:49:00.000-08:00

Financial FAQs

Why so much surprise in January’s employment report that added 243,000 payroll jobs and dropped the unemployment rate to 8.3 percent? The U.S. has now added an average of 183,000 jobs a month in the past five months, while both the manufacturing and service sectors have been expanding for 30 months, since August 2009. You would think that would be grounds for some optimism this year, but it hasn’t cheered up many, including the Federal Reserve.

Economists and pundits, in particular, seem to have been blinded by everything from the euro’s demise, to slower growth in emerging countries, to an overheating of the Chinese economy had been used to tone down predictions for 2012 growth. Even the Fed’s forecasts have been downgraded, though Fed Chairman Bernanke did say the jobs market “had improved modestly” in his latest congressional testimony.

Graph: CBPP

Some of the surprise was due to a pickup in both residential and non-residential construction, as real estate seems to slowly recovering, in part because of extremely affordable housing prices. Construction employment has added 52,000 jobs over just the past 2 months.

A total of 257,000 jobs were added in the private sector minus 14,000 public sector job losses. And Marketwatch reported that employment rose by an incredible 631,000 in January in the Household survey (that includes the self-employed) after adjusting for the effects of updating the population count. That’s the biggest increase since late 2007. Over the past six months, employment as measured by the household survey has increased by 1.98 million, the biggest increase in more than six years.

But there’s more to the story. The steady stream of irrationally pessimistic stories has until now reinforced the belief that our institutions had failed—from government to financial markets, and the private sector business in general that laid off more than 8 million workers from 2008-10.

The bad news had been drowning out the good news, in other words, had reinforced the stories we all hear in the media and elsewhere that tended to emphasize the negative in any report, in spite of the now 2 years of steady job and overall expansion of economic growth since the June 2009 end of the Great Recession .

Graph: Calculated Risk

This is what Robert Shiller and George Akerlof discussed in Animal Spirits, How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, which further develops famous economist John Maynard Keynes’ thesis that animal spirits, or emotions, drive most financial decisions. It was as much the negative news that permeated the air waves as anything that drove down consumer confidence to it record lows, in other words, and caused consumers and businesses to stop spending.

And we can measure the degree of confidence at any time in the economy, mainly via the two major confidence surveys of the Conference Board and University of Michigan. Confidence plunged to record lows in June, 2009 at the actual end of the recession, but are now returning to more normal levels.

Graph: Inside Debt

This was reinforced by faulty government statistics that said, for instance, there were no payroll jobs created last August—zip, zero—when in fact later revisions added 103,000 jobs in August, and additional jobs in later months.

Small business hiring has been part of the reason for increased employment, in part because of the Obama Administration’s freeing of $32 billion in SBA financing last year. And small business accounts for 70 percent of new jobs. Bank lending has increased 5 percent in the last half of 2011, according to NPR radio’s All Things Considered news program. In fact, stimulus spending over the past year may have contributed at least 1 percent to current growth, says the Center for Budget Priorities and Policies.

Also pushing growth has been large jumps in both manufacturing and service sector activity, via the ISM Purchasing Management surveys. A gigantic surge in employment and almost an equally dramatic surge in new orders headline a very strong ISM non-manufacturing report where the headline composite index jumped to 56.8, well beyond Econoday's consensus for 53.3 and a strong 3.6 points above December's upwardly revised 53.0.

Graph: Econoday

New orders jumped nearly 5 points to a 59.4 level that indicates strong monthly growth and points to acceleration in general activity in the months ahead. But the employment index is the eye catcher, up 8 points to 57.4 for by far the strongest reading of the recovery. This index has been lagging improvement in employment data from the government -- but not any more.

Graph: Econoday

Moderate and steady growth is the indication from the ISM manufacturing report where readings pretty much match those of December, said Econoday. The January composite index rose to 54.1, safely over 50 to indicate monthly expansion and 1 point over December to indicate a slightly faster rate of expansion (prior revised). A key highlight of the report is the new orders index which rose nearly 3 points to 57.6 to indicate a little bit more than just a moderate rate of monthly expansion. In another positive, backlog orders increased 4.5 points to show a build at 52.5.

Even builder confidence in the market for newly built, single-family homes continued to climb for a fourth consecutive month in January, rising four points to 25 on the latest NAHB/Wells Fargo Housing Market Index (HMI). This is the highest level the index has attained since June of 2007, and is why construction spending jumped 1.5 percent in December and has increased some 7 percent in one year.

"Builder confidence has now risen four months in a row, with the latest uptick being universally represented across every index component and region," noted Bob Nielsen, chairman of the National Association of Home Builders (NAHB). "This good news comes on the heels of several months of gains in single-family housing starts and sales, and is yet another indication of the gradual but steady improvement that is beginning to take hold in an increasing number of housing markets nationwide -- and that has been shown by our Improving Markets Index. Policymakers must now take every precaution to avoid derailing this nascent recovery."

So we don’t have to be pessimistic anymore. Rising confidence levels lifts all boats, as the saying goes.

Corporate Austerity Not the Answer in 2012

2012-02-03T07:53:00.000-08:00

Popular Economics Weekly

Why so much gloom and tentativeness about U.S. economic growth when all the indicators are looking up for 2012? For instance, the Conference Board’s Index of Leading Economic Indicators again showed positive growth ahead. It rose 0.4 percent with 7 of its 10 indicators positive.

And the Q4 ‘advance’ estimate of GDP growth was 2.8 percent, almost double Q3. Equipment and software, which includes autos and exports, was the largest component. It would be even higher if corporation would use more of their cash hoard for job creation, rather than speculative investments and excessive executive compensation.

Graph: Econoday

Could it be because of the euro’s problems? “This somewhat positive outlook for a strengthening domestic economy would seem to be at odds with a global economy that is losing some steam,” said Ken Goldstein, a Conference Board economist. “Looking ahead, the big question remains whether cooling conditions elsewhere will limit domestic growth or, conversely, growth in the U.S. will lend some economic support to the rest of the globe.”

But JP Morgan’s President Jamie Dimon said even the damage from a default of Greek debt would be “negligible”, in a CNBC interview at the Davos, Switzerland economic summit. So what’s the problem? The austerity (meaning deficit) hawks have their hands around the throats of European commerce. Why? In the mistaken belief that more stimulus spending will increase debt without actually causing more growth.

But Professor Robert Shiller, co-author of Animal Spirits with Nobelist George Akerlof, calls it debt delusion. When the private sector, including households, becomes over indebted, they begin to save more and spend less. But if governments do it at the same time, it causes a downward spiral towards deflation and recession or depression. This comes from the belief of fiscal conservatives that public borrowing takes money away from private users.

That, however, isn’t the case, because the private sector has plenty of funds, but is hoarding them (some $2 trillion in cash to date), rather than creating more jobs. So if governments are also hoarding their monies—in the form of trade or currency surpluses, as is happening in most of Europe today, then the bottom falls out of the economy. I.e., if no one is buying and everyone is saving, then no business gets done. This should be self-evident, because such a truth has been known since the Great Depression and New Deal that established our modern safety net, and ultimately put so many people back to work.

What underlies that truth is that Great Depressions and Great Recessions only happen when there is a wrenching transformation of whole economies. It was transformation of a mostly rural economy to manufacturing in the 1920s that brought on the Great Depression, and now it is wholesale migration of manufacturing jobs overseas and transformation to the Information Age, when little needs to be manufactured in the U.S.

Rutgers Econ Professor James Livingston has explained this transformation best in recent papers and articles. The great wealth shift away from wage earners-consumers to corporate profits began during the Great Depression, according to Livingston: “The underlying cause of that economic disaster (the Great Depression of 1929-33, 1937-38) was a fundamental shift of income shares away from wages/consumption to corporate profits that produced a tidal wave of surplus capital that could not be profitably invested in goods production—and, in fact, was not invested in good production…and that, on the other hand, produced the tidal wave of surplus capital which produced the stock market bubble of the late-1920s.”

And in a recent New York Times Op-ed, It’s Consumer Spending, Stupid, Livingston expands on the reasons for our current prolonged malaise:

“As an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth.”

This, to put it mildly, explodes that rationale used by Wall Street and corporations to justify not passing on more of their profits to consumers—80 percent of which are wage and salary earners. The reasoning being that it is their profits that drive growth.

Professor Livingston says, “Economists will tell you that private business investment causes growth because it pays for the new plant or equipment that creates jobs, improves labor productivity and increases workers’ incomes. As a result, you’ll hear politicians insisting that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth.”

Not so, says Livingston, “But history shows that this is wrong. Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.

“In other words, over the course of the last century, net business investment atrophied while G.D.P. per capita increased spectacularly. And the source of that growth? Increased consumer spending, coupled with and amplified by government outlays.”

Much has been written already about the record profits of both financial and non-financial corporations that have drained consumption, and that is the main reason why average real household incomes have actually declined over the past 30 years. In fact, corporate profits today are highest in history as a percentage of GDP.

Graph: Trading Economics

And this could be actually endangering economic growth by causing rampant market speculation, rather than productive investments, say many pundits, including Professor Livingston: “So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”

How to cure the record income inequality that has resulted from so much power going to Wall Street and the corporations? Let us return to the income tax brackets that brought on so much prosperity to the middle class during the 1960s and 1970s. What were they?

The maximum bracket has fluctuated from 91 percent for those earning more than $400,000 in 1960, to the current low of 35 percent for those earning more than $379,150 today. And this has coincided with the astronomical increase in both household and government debt.

So it should be a no-brainer, if we want to see American growth restored to historical levels. Higher taxes have meant more growth, because public revenues are invested in growth-inducing infrastructure, better public safety, and upward mobility inducing education, for starters. Whereas lower taxes mean higher debts, with less growth and more speculative risk-taking to show for it. Why history is so easily forgotten may be a question only psychologists can answer.

Fair Play Benefits All of Us

2012-01-30T14:50:00.000-08:00

The Popular Economics Weekly

The idea of fair play may be the key issue in 2012—with the Presidential campaign and economic growth. How so? Both political parties are jockeying to portray their message as fair—Democrats want to restore the middle class, and Republicans still believe the wealthiest are already paying their fair share of taxes. So they maintain any tax increases at all will harm growth prospects.

And President Obama’s message in his 2012 State of the Union speech was even more encompassing. He said “A return to the American values of fair play and shared responsibility will help us protect our people and our economy. But it should also guide us as we look to pay down our debt and invest in our future.”

So President Obama also believes the issue of fair play could dominate this election year. But how will it protect our economy and pay down our debt? Obama wasn’t clear on this, but past history and economic research tells us why. Simply put, the more equal distribution of wealth even up through the 1990s when the maximum tax brackets for income, capital gains, and even dividends’ taxes were higher, produced a thriving middle class so that overall economic growth was higher that it is today with a vastly reduced middle class.

And fair play is in the news. Andrew Kohut’s most recent New York Times Op-ed highlighted a recent poll which “found that 66 percent of Americans believed there were “very strong” or “strong” conflicts between the rich and the poor — an increase of 19 percentage points since 2009”. And, “they care about policies that give everyone a fair shot — a distinction that candidates in both parties should understand as they head into the 2012 campaigns’.

“An awareness of economic inequality is not new,” says Kohut. “Pew surveys going back to 1987 have found an average of 75 percent of the American public thinking that the “rich are getting richer and the poor are getting poorer.” As far back as 1941, 60 percent of respondents told the Gallup poll that there was too much power in the hands of a few rich people and large corporations in the United States.”

In fact, fair play is a very important part of consumer and business confidence, say economists Robert Shiller and Nobelist George Akerlof in Animal Spirits, How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, which further develops famous economist John Maynard Keynes’ thesis that animal spirits, or emotions, drive most financial decisions. And we can measure the degree of confidence at any time in the economy, mainly via the two major sentiment surveys of the Conference Board and University of Michigan.

Graph: Inside Debt

What is most obvious from the survey data is that consumer and investment spending rises and falls with confidence levels. For instance, retail sales sank to negative levels from 2008-2010, at the same time as both confidence surveys. And we know that consumer spending makes up almost 70 percent of economic activity, with 50 percent of it coming from retail sales.

Graph: Econoday

What is their confidence based on? Akerlof and Shiller list 5 elements, of which fair play may be the most important:

The cornerstone of our theory is confidence and the feedback mechanism between it and the economy that amplify disturbances.
The setting of wages and prices depends largely on concerns about fairness.
We acknowledge the temptation toward corrupt and antisocial behavior and their role in the economy.
Money illusion is another cornerstone of our theory. The public is confused by inflation or deflation and does not reason through its effects.
Finally, our sense of reality, of who we are and what we are doing, is intertwined with the story of our lives and of the lives of others. The aggregate of such stories is a national or international story, which itself plays an important role in the economy.

Akerlof and Shiller’s Animal Spirits therefore develops Keynes’ thesis further. A major part of any business decision is whether the public has confidence in and trusts the economic conditions that determine whether they should spend or save, invest in expansion or lay off workers.

In other words, when the playing field is not perceived as fair, then the public retreats to inaction. “If this is what we mean by confidence, then we immediately see why, if it varies over time, that it plays a major role in the business cycle,” say Akerlof and Shiller.

President Obama was talking not only about the huge decline in income inequality over the past 30 years, and un-progressive tax code that allowed countless tax loopholes and benefits for those individuals and industries that needed them the least, but the loss of opportunity and social mobility that has put the U.S. near the bottom of all developed countries in quality of life factors, according to Richard Wilkinson, a leading authority on the effects of inequality.

And we know a more progressive tax structure means more economic growth and increased tax revenues. President Clinton proved this with his combination of reduced government spending and higher maximum tax brackets that caused 4 consecutive years of budget surpluses.

Whereas the Republican’s sense of fair play doesn’t play well with most Americans, according to the Pew survey. “Just 11 percent of Americans say they are bothered by the amount they pay, while 57 percent of respondents say they are bothered by what they believe are unfairly low amounts paid by the wealthy.”

Then why is it Republicans in particular continue to oppose any government help to boost economic growth? It could be what Robert Frank calls cognitive illusion, in a recent Sunday New York Times Economic View article. Their wealthy supporters believe higher taxation means they will lose out on the things they value most, and which go to the highest bidders—waterfront properties, precious jewels or art, etc.

“But a tax increase is different,” says Frank. “It affects all participants in the bidding for positional (i.e., luxury) goods. And because it leaves everyone with less to spend, it has essentially no effect on the outcomes of those contests. The same paintings and the same marina slips end up in the same hands as before.” So there is no reason for the 1 percent not to enjoy the benefits of fair play, as well. “…higher spending on many forms of public consumption would produce clear gains in satisfaction for the wealthy,” says Frank. “It’s reasonable to assume, for example. That driving on well-maintained roads is safer and less stressful than driving on pothole-ridden ones.”

Such Pessimism is Unwarranted—Who Should Rescue Housing?

2012-01-20T09:07:00.000-08:00

The Popular Economics Weekly

Why is it so many pundits—and some economists—continue to be pessimistic about 2012 growth? Business and Wall Street economists in particular are predicting just 2 percent GDP growth for all of 2012, according to a recent CNBC report.

Why such pessimism? The reason cited is that “the improving data masks unsustainable fundamentals — an unusual drop in the savings rate, a jump in auto purchases due mainly to a recovery from Japan’s natural disasters last spring, and a surge in inventories”.

Firstly, there is not an “unusual” drop in the savings rate (which is really dependent on household incomes, let us not forget). It is slightly under 4 percent, and had dropped to 1 percent during the bubble years of early 2000, before rising to 6 percent during the Great Recession. Consumers are just beginning to spend again after paying down their debts for the past 3 years (2009-11), in other words. And consumer spending makes up 70 percent of economic activity.

Graph: Calculated Risk

This is while the “jump’ in auto purchases just brings it back to more historical levels of 13-14 million sold, but not to the bubble years of 16 million. And there is no surge in inventories. They are still at historically low levels, as businesses are still overly cautious because aggregate demand for their products and services is still weak.

Graph: Econoday

So business inventories are anything but surging. Inventories rose 0.3 percent in November as did business sales, keeping the stock-to-sales ratio unchanged for a fifth straight month at a lean 1.27, said Econoday.

It is understandable that businesses have just been through the greatest recession since the Great Depression—which lasted 10 years, and took a world war to cure. But there are many more tools to stimulate growth since then. And we know what stimulates growth—government spending; including for the safety nets (social security, unemployment benefits, Medicare), and investments in infrastructure and research—in order that consumers can continue to spend and businesses invest.

Most economists have to know this, so there has to be another reason for their pessimism. Banks in particular are lobbying for more Federal Reserve, as in QE3, to boost the housing market. "Obama Administration officials have come to realize that the ongoing dysfunction in the mortgage market is a key impediment to sustained expansion," Vincent Reinhart, chief U.S. economist at Morgan Stanley, said in the CNBC article.

"Their problem is that there is no chance of coming to terms with the Congress to fix the mess," Reinhart added. "The result is that the administration is moving toward mortgage modification, but not decisively. Purchasing MBS is a way that the Fed can support that movement and signal the seriousness of the enterprise."

But Congress isn’t the only reason for housing’s problem. The Obama Administration is still not serious about either their HAMP or HARP II loan modification programs. They had set aside some $11 trillion from the ARRA legislation back in 2009 that hasn’t been spent! Why? We are not sure, but know Treasury Secretary Tim Geithner is a great friend of banks. Neither he, nor the Office of Thrift Management (OTC) that overseas banks are requiring the banks and loan servicers modify eligible mortgages on their books, when the Executive Branch, has the power to do so.

So the banks and Wall Street have come begging to the Federal Reserve once again to provide stimulus by buying up to as much as $1trillion more of mortgage-backed securities. But why not first get rid of the excess inventory of bad mortgages and foreclosed properties banks are holding on their books? There have been several suggestions on how to do this, including by the Fed in a recently published White Paper to Congress: “The U.S. Housing Market Current Conditions and Policy Considerations”. That is, there are other solutions. But even with the huge TARP bailout and growing profits, banks and Wall Street still want government to continue to pick up their tab.

Existing-home sales have just jumped, by the way, which bodes well for housing in 2012. The latest monthly data shows total existing-home sales rose 5.0 percent to a seasonally adjusted annual rate of 4.61 million in December from a downwardly revised 4.39 million in November, and are 3.6 percent higher than the 4.45 million-unit level in December 2010.

Graph: Econoday

Total housing inventory at the end of December dropped 9.2 percent to 2.38 million existing homes available for sale, which represents a 6.2-month supply at the current sales pace, down from a 7.2-month supply in November. Home sales are now back to a 1998 sales’ level, before the housing bubble took off. Maybe that is where it will be for some time to come. That means Banks and Wall Street need to get over their hangover from the housing binge they profited so well from.

Mortgage Applications-Builder Optimism Rising

2012-01-19T07:56:00.000-08:00

The Mortgage Corner

Are homebuyers and borrowers finally realizing that mortgage rates might not fall much further? We are seeing a huge jump in both mortgage and builder activity, and much of the most recent interest rate drop has been because of Europe’s solvency problems, which could reverse once the uncertainty is resolved. This is in spite of still restrictive underwriting standards by the likes of Fannie Mae and Freddie.

“Interest rates dropped last week due to continuing anxieties regarding the fragile economic situation in Europe,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “With mortgage rates reaching new lows, refinance volume jumped and MBA’s refinance index reached its highest level in the last six months. Purchase activity also increased as buyers returned to the market after the holiday season.”

"Builder confidence has now risen four months in a row, with the latest uptick being universally represented across every index component and region," noted Bob Nielsen, chairman of the National Association of Home Builders (NAHB). "This good news comes on the heels of several months of gains in single-family housing starts and sales, and is yet another indication of the gradual but steady improvement that is beginning to take hold in an increasing number of housing markets nationwide -- and that has been shown by our Improving Markets Index. Policymakers must now take every precaution to avoid derailing this nascent recovery."

Graph: Calculated Risk

But Single-family starts increased 4.4 percent to 470,000 in December - the highest level in 2011, and the highest since the expiration of the tax credit. This should give a boost to 2012 growth.

Another upside surprise was signs of increased employment. For the week ending January 14, the advance figure for seasonally adjusted initial claims was 352,000, a decrease of 50,000 from the previous week's revised figure of 402,000. This was the largest plunge in jobless claims in 3 years. The 4-week moving average was 379,000, a decrease of 3,500 from the previous week's revised average of 382,500.

So we are seeing a reason for the jump in builder confidence rising four points to 25 on the NAHB/Wells Fargo Housing Market Index (HMI), as we have said.

Graph: Calculated Risk

Smart Government Creates Better Growth

2012-01-18T11:25:00.000-08:00

Financial FAQs

It is smart government that creates better economic growth, not smaller government, per se. Smart government means effective government that finances and regulates what the private sector can’t or won’t. So that doesn’t mean downsizing government for its own sake, since the private sector can’t regulate itself, and won’t finance what it doesn’t believe will be profitable.

A recent New York Times’ Op-ed by Paul Krugman talks about what it doesn’t take to run a government—specifically whether owning a private equity firm or being a corporate CEO qualifies one to be President of US. Well, Herbert Hoover and perhaps GW Bush were the last 2 Presidents who were business executives, and the policies of both caused the largest economic downturns in our history.

Why? Because they subscribed to ideologies rather than the reality they were facing. Hoover reacted to the 1929 Black Friday market crash by tightening credit to protect the creditors, thus causing record deflation, when he should have loosened credit to counteract the plunging prices. JM Keynes hadn’t published his theories until 1936 that said a Great Depression was like wartime—emergency spending measures were the only way to lift production during such tough times.

Whereas GW Bush believed in Trickle-down economics. He reacted to 4 years of budget surpluses under President Clinton by believing (as did Fed Chairman Greenspan) all those tax monies should be returned to the private sector—mostly by giving tax breaks to the richest—since “Deficits don’t matter”. Instead everyone’s income fell except that of the top 10 percent, causing the huge borrowing binge that burst the housing bubble.

Both business Presidents came from the private sector, which meant they had little idea of how to make government work. The fallacy was in believing it was up to the private sector alone to bring back growth. But growth doesn’t happen by itself. Not when the private sector becomes overextended and over indebted, which is the cause of all recessions and depressions, really.

Economists know it is oversupply that drives down prices and so profits, causing debt defaults on the most highly leveraged. This is why we have business cycles and is no fault of government, which doesn’t produce anything. In fact, economic downturns occur fairly regularly, as anyone can check on the National Bureau of Economic Research website, www.nber.org. It is how to climb out of those holes that is hardest for business types to know.

Modern history since the Great Depression tells us in fact government is not the problem. It doesn’t rob from anyone, but instead finances the most important segments of our economy. Besides defense it finances education, future research and development, public services, and environmental and financial regulation—that private sector business won’t. It’s too risky for private businesses, and doesn’t give them immediate returns. How does one calculate the profit from use of our public highways and bridges, for instance? Yet without those services the private sector cannot function.

So what about the huge government debt amassed since 2000? In fact, it isn’t the dollar amount that matters, but what it is as a percentage of GDP. We had no problem with running the deficit up to 121.7 percent of GDP in World War II, even though most of the ‘goods’ went up in smoke, rather than back into the economy. Firstly, it generated jobs for everyone, including women. And secondly, it modernized our industrial base that enabled U.S. to grow out of such debt until it fell to 40 percent of GDP in 1980, while giving the post-WWII U.S. economic superiority over those economies devastated by war.

The deficit only began to grow again under President Reagan, who coined the term, “Government is the problem”. Why? Because as his Budget Secretary David Stockman explained, cutting taxes didn’t reduce deficits, because it reduced the revenue needed to pay for the tax cuts. It was only when President Clinton restored the pre-Reagan tax rates and reduced government spending that we had 4 consecutive years of budget surpluses. In fact, what was left of the WWII debt—some $1.2trillion—would have been paid off if GW Bush had elected to continue his policies rather than borrow more money.

Graph: Wikipedia

Christina Romer, former White House Chief Economist, explained the effects of government stimulus spending in a recent New York Times Sunday Op-ed . A historian of the Great Depression, her thesis is that without the various stimulus programs, such as Obama’s 2009 ARRA $800 billion stimulus spending, we would still be in a deflationary recession.

Furthermore, “In place of the tepid budget agreement now in place,” said Dr. Romer, “we could pass a bold plan with more short-run spending increases and tax cuts, coupled with much more serious, phased-in deficit reduction. By necessity, the plan would tackle entitlement reform and gradually raise tax revenue. This would be the World War II approach to our problems.”

Then what is smart government? It’s been proven time and again that just returning $$ to the private sector during deep recessions doesn’t spur growth, because they don’t spend it. Two examples are the current cash hoarding by corporations of more than $2 trillion, while paying outsize incomes to their executives, and banks keeping almost all of their reserves with the Fed rather than lending their excess cash out to spur growth.

Why do they continue to hoard? The private sector really doesn’t like much risk, contrary to assertions by free marketers who trumpet that entrepreneurs must lead the way for any recovery, if only there was less regulation! In fact, there are very few successful entrepreneurs, because the failure rate of entrepreneurs is very high. The track record of venture capital tells us so. Even the track record of Presidential candidate Mitt Romney’s Bain Capital is mixed at best. Private Equity Firm Bain Capital may have actually eliminated more jobs than it created, when the record is looked at closely.

More Jobs Key to 2012 Growth

2012-01-12T16:54:00.000-08:00

Popular Economics Weekly

How do we know what to look for in 2012? We should not be looking at the headlines, which tend to trumpet totally conflicting news. But more accurate information is available—usually several months later.

For instance, jobs’ formation was much better than initially reported from August onward by the Bureau of Labor Statistics. And some of the regional activity indicators like that of the Philadelphia Federal Reserve that panicked markets have since been revised upward.

The problem? In an attempt to make seasonal adjustments—i.e., tweak the numbers so that they reflect any changes above or below what is normal for that season—the data sometimes subtracts too much from the seasonal variations, making the initial numbers look much worse than they are. The result is, “If the market had known then what it knows now, the drop in the markets in August would have been much milder”. Said a recent Marketwatch article.

So savvy investors should not be reacting to the initial headlines. For instance, the most accurate unemployment picture is given by the Bureau of Labor Statistics JOLTS report, which lags the unemployment report by 2 months. It is a survey of actual job openings/layoffs. It’s latest report is for November, which showed 3.2 million openings, unchanged from October. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in November was 1.0 million higher than in July 2009 (the most recent trough for the series). The number of job openings has increased 30 percent since the end of the recession in June 2009.

Graph: Calculated Risk

Jobs openings declined slightly in November, but the number of job openings (yellow) has generally been trending up, and are up about 7 percent year-over-year compared to November 2010. Quits increased in November, and have mostly been trending up - and quits are now up about 12 percent year-over-year. These are voluntary separations and more quits might indicate some improvement in the labor market. (see light blue columns at bottom of graph for trend for "quits").

Graph: Econoday

The monthly employment report shows significant broad-based improvement. And the unemployment rate dipped to 8.5 percent, as we know. Payroll jobs in December jumped a relatively healthy 200,000 after rising a revised 100,000 in November and increased a revised 112,000 in October. Private payrolls again outstripped the total, gaining 212,000 in December, following increases of 120,000 in November and 134,000 in October.

The Institute for Supply Management (ISM) manufacturing and non-manufacturing (service sector) indexes are the best measure of overall economic activity, and both continue to increase.

Graph: Econoday

The latest gain in the Manufacturing Composite was led by increases in the production and employment indexes. Production jumped to 59.9 from 56.6 in November. Employment rose to 55.1 from 51.8. The boost in employment is likely a vote of confidence by manufacturing management for stronger demand in coming months.

Graph: Econoday

The ISM non-manufacturing Composite Index is not so robust, but still holding above 50 percent, with its overall activity index at 56.2 percent, still a very good number.

And as I said in a recent Mortgage Corner column, construction activity is picking up, which is the part of real estate that influences actual economic growth, since it powers insurance, mortgage, and real estate sales, among other businesses. Only public construction spending hasn’t picked up in 2011, but all other areas of commercial and residential construction have.

Graph: Econoday

So this data tells us there is still a lot of fear to overcome, with many pundits and forecasters expecting the worst—the worst being more of what happened last year—whether it is supply disruptions, Tsunamis, the Middle East, or a euro crisis. We need another year of solid growth, in other words, before the economy becomes strong enough to endure such ‘shocks’.

Will the Fed Rescue Real Estate?

2012-01-06T13:32:00.000-08:00

The Mortgage Corner

How can we thank Federal Reserve Chairman Ben Bernanke for keeping our economy afloat? Not only has the Fed kept interest rates low enough to prevent actual deflation, as has happened to Japan over the past 20 years and shrunk their economy. But the Fed is now proposing commercial banks under its purview take a more proactive position not only by modifying more ‘underwater’ loans on their books, but actually renting out those it has taken back in foreclosure to tenants; including their former owners.

It is currently circulating a White Paper entitled “The U.S. Housing Market Current Conditions and Policy Considerations” that asks both government supervisors—specifically those of GSEs like Fannie Mae, Freddie Mac, FHA and VA—and private mortgage holders to both loosen their overly restrictive underwriting standards, allow more loan modifications, as well rent out the REO properties they hold, until they are able to be sold!

This is medicine that was applied once before—during the Great Depression—by the Roosevelt Administration, under the Home Owner’s Loan Corporation. It sold bonds to bring down interest rates for something like 1 million homeowners, or rented them back to those who had lost their homes, until they could again be sold.

The data currently show that less than half of all lenders are currently offering mortgages to borrowers with FICO scores of 620 with a 10 percent down payment. Yet these loans are within the GSEs purchase parameters, according to the White Paper, which means little risk to the loan originators.

Particularly first-time homebuyers aged 29 to 34-year-olds are affected, with only 9 percent taking out a mortgage from 2009 to 2011, while 17 percent took out mortgages from mid-1999 to mid-2001.

Why the urgency now? “Perhaps one-fourth of the 2 million vacant homes for sale in the second of 2011 were REO properties…and the continued flow of new REO properties—perhaps as high as 1 million properties per year in 2012 and 2013—will continue to weigh on house prices for some time,” said the Fed.

And we know housing prices continue their decline in most areas, according to the S&P Case-Shiller Home Price Index and other indicators. The Case-Shiller 20-city composite is down a seasonally adjusted 0.6 percent in October following a revised 0.7 percent decline in September and a 0.4 percent decline in August.

Graph: Econoday

Individual cities show a decline in Atlanta where monthly rates of adjusted decline have been 4.1 percent, 4.8 percent and 2.9 percent the last three reports. Other weak spots include Minneapolis, Los Angeles, and Chicago as well as Las Vegas and Miami.

So this is a good time for lenders to rent their REO properties, as rents have been rising while national multifamily vacancy rates have plunged. Depending on whether you use U.S. Census Bureau or REIS, Inc. data, the vacancy rate is hovering around 9.8 percent or 5.2 percent, when they were as high as 11.8 percent during the recession.

Graph: Calculated Risk

“…the challenge for policymakers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance,” said the White Paper. “Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions—for example, devising policies that could help facilitate the conversion of foreclosed properties to rental properties—or supporting a housing finance regime that is less restrictive than today’s, while steering clear of the lax standards that emerged during the last decade.”

So there is hope for real estate when the Fed decides it is time to assist housing, after Chairman Bernanke and others in various speeches have highlighted the drag that a devastated real estate market has on overall economic growth. That is to say, it is time for the banks holding all those vacant homes to get them off their books and back into the real economy.

Government Has to Work—or Else

2012-01-05T08:55:00.000-08:00

Financial FAQs

We can no longer afford to listen to those conservatives who believe government is the problem, since there is no viable recovery from the worst recession since the Great Depression without government investment in sectors that will grow our future economy—particularly in education, infrastructure and the Research and Development of new technologies such as jump-started the Internet.

So say more economists, such as Nobelist and former chief World Bank economist Joseph Stiglitz in his most recent Vanity Fair article, “The Book of Jobs” that details how we recover from the Great Recession, and which sectors will prosper and expand. This means a “wrenching transition” of our whole economy, as happened in the 1930s, which means government has to be part of the solution.

“The problem today is the so-called real economy,” says Dr. Stiglitz. “It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.”

And so just as with the Great Depression, government has to be part of the transition. Those who advocate little or no government—such as Libertarian candidate Ron Paul who would abolish just about all government—do not seem to realize it would be a return to the beginning of the Industrial Revolution so well documented by Charles Dickens—when there were no child labor laws, for instance.

Or a return to the Great Depression (really two, back-to-back) that lasted almost 10 years when there was no social security, unemployment insurance, or government investments that modernized the industrial sector for World War II.

“It is important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery,” said Stiglitz. “The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.”

So, surprise-surprise, the Great Recession wasn’t really the fault of anyone in particular but a cascade of events that are driving us hell-bent out of the industrial, blue-collar era of factory jobs into the White Collar Service and Information Age. And we cannot do this without public-sector investments that must ease the transition; otherwise we are doomed for a “much longer long slump than necessary,” in Stiglitz’s words.

It was small government conservatives like Presidents Reagan and GW Bush that had been wasting taxpayers’ monies to pay for foreign wars and tax cuts since 1980, rather than paying down the deficit or even shoring up social security and Medicare. GW Bush wasted 4 consecutive budget surpluses of the Clinton era. And the low interest rates engineered by Fed Chairman Alan Greenspan for that purpose in turn inflated the housing bubble, lending a sense of false prosperity.

The result of such small government policies was the Fed then took away the punch bowl in 2006 and raised interest rates 17 consecutive times that in effect burst the bubble by raising all those teaser and liar loan interest rates too high for borrowers who shouldn’t have qualified for them in the first place. But that only hastened the inevitable rush away from Industrial to the Information Age. Factory jobs and salaries had already begun to decline in the 1970s along with household incomes for most Americans.

“Today we are moving from manufacturing to a service economy,” says Stiglitz. “The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology.”

“What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.”

In other words, we need to put public monies where it will do the most good. Corporate profits today are the highest in history as a percentage of GDP—more than 14 percent—yet their CEOs haven’t been investing it wisely. Most of their profits have been either hoarded, invested overseas, or used to buy back stock to increase the stock options held by corporate executives. It has lined their own pockets, rather than that of their employees and therefore the economy as a whole.

And that is where today’s right and far right wing conservatives want even public monies to flow—into their supporters’ already full pockets—when they won’t allow the Bush tax cuts to expire that have bloated the federal deficit. This will only hasten the decline of America already suffering from record high income inequality, low rates of social mobility, record high violent crime rates, and a government they don’t want to work for the future of all Americans.

Government has to work—or else.

Will Real Estate Recover in 2012?

2012-01-04T09:03:00.000-08:00

The Mortgage Corner

The recovery road may remain bumpy for real estate in 2012 but construction spending continues to increase from low levels of activity, and so housing starts. Much of it is multi-family apartments going to both new households and those who have lost their homes. This should mean replacement of sadly depleted housing inventories, as new construction is not replacing the units taken out of circulation through deterioration or outright destruction.

The total residential stock in the United States is approximately 127 million units – around 75 million owner occupied, some 32 million rentals and 10 million “other” (second / holiday homes etc) – so that conservatively – at least 0.5 percent - or 635,000 units of this stock (depending on age within specific markets) should be replaced annually, said a recent housing study.

Despite the low baseline, activity is stronger than expected as construction spending in November jumped 1.2 percent after slipping 0.2 percent in October (originally up 0.8 percent). The market consensus called for a 0.5 percent increase in November.

Graph: Calculated Risk

The November increase was led by a 2.0 percent gain in private residential outlays, following a 2.3 percent boost in October. Both the single-family and multifamily subcomponents showed strength. Public outlays rebounded 1.7 percent, following a 1.8 percent decline in October. On a year-ago basis, overall construction outlays improved to up 0.5 percent in November from down 0.6 percent in October.

That may be because housing prices are still falling overall. In real terms, the S&P Case-Shiller Home Price Index is back to Q1 1999 levels, the Composite 20 index is back to April 2000, and the CoreLogic index back to March 2000. In real, inflation-discounted terms, all appreciation in the '00s is gone, says Calculated Risk.

Graph: Calculated Risk

Another sign that housing is coming off a second bottom is that pending existing home sales rose a very strong 7.3 percent in November on top of October's 10.4 percent gain.

Graph: Econoday

November's gains were led by the West and include the Northeast and Midwest with the South showing no change. November and October taken together show solid gains for all regions. The index is at its highest level since April 2010, during the federal homebuyer tax holiday.

This is while the seasonally adjusted estimate of new houses for sale at the end of November was 158,000. This represents a supply of 6.0 months at the current sales rate, which is the long term supply average. But 158,000 for sale is far below the replacement rate needed for population growth, hence the increase in new construction.

Graph: Calculated Risk

Most of the increase this year has been for multi-family starts, but single family starts are increasing too. Single-family housing starts in November were at a rate of 447,000; this is 2.3 percent above the revised October figure of 437,000. The November rate for units in buildings with five units or more was 230,000.

Graph: Calculated Risk

Builder confidence in the market for newly built, single-family homes has edged up two points from a downwardly revised number to 21 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for December. This marks a third consecutive month in which builder confidence has improved, and brings the index to its highest point since May of 2010, said Calculated Risk.

“This is the first time that builder confidence has improved for three consecutive months since mid-2009, which signifies a legitimate though slowly emerging upward trend,” said NAHB Chief Economist David Crowe. “While large inventories of foreclosed properties continue to plague the most distressed markets and consumer worries about job security and the challenges of selling an existing home remain significant factors, builders are reporting more inquiries and more interest among potential buyers than they have seen in previous months.”

Graph: Calculated Risk

So it does look like additional housing stock will be needed in 2012 just to fill the rising demand for rental properties. And the construction industry will benefit, which has lost more than 2 million jobs during the Great Recession.

Graph: Calculated Risk

Construction employment declined by 20 thousand jobs in October, and is now down 2.2 million jobs from the peak in April 2006. However construction employment is up 27 thousand this year through the October BLS report. After five consecutive years of job losses for residential construction (and four years for total construction), says Calculated Risk, it looks like construction employment will increase this year. However there will not be a strong increase in residential construction until the excess supply of housing is absorbed.

2012 Will Be Better

2011-12-29T06:48:00.000-08:00

Popular Economics Weekly

The elements seem to be in place for a better 2012 economy, despite the euro worries, budget deficits, and 8.6 percent jobless rate. Why? Banks are lending again, and it was the tight bank credit after bursting of the housing bubble that basically stopped businesses from growing. Banks stopped lending because of their losses from the Great Recession, which finally ended in June 2009.

After three years of Scrooge-like underwriting following 2008's financial crisis, banks have turned on the spigot, boosting lending at annual rates as high as 8.2 percent since July, according to Federal Reserve statistics.

Lending had fallen from mid-2008 through this year's second quarter, deepening what became the worst recession since the Great Depression. The data seem to allay fears that making banks keep more capital on their books as a cushion against future downturns and loan losses will take away the cash flow businesses need to keep the recovery moving.

Even small businesses have seen a difference, says Bill Dunkelberg, chief economist of the National Federation of Independent Business. In a monthly NFIB survey, only 3 percent of small-business owners say lack of credit is their most important problem, trailing taxes, regulation and still-sluggish demand, and small business accounts.

Then the Conference Board’s Index of Leading Economic Indicators continues to show 3 percent plus GDP growth for the next 6 months.

Graph: Wrightson ICAP

The LEI is a weighted gauge of 10 indicators designed to signal business cycle peaks and troughs. Among the 10 indicators that make up the LEI, seven made positive contributions in November. The index rose a very solid 0.5 percent following October's 0.9 percent surge. The leading positive is the rate spread which reflects the Federal Reserve's zero interest rate policy, said its press release. The second positive is building permits which appear to be building steam in what is very good news for the construction sector.

Consumer expectations are also a big positive in the month and judging from this month’s consumer sentiment report look to be a big positive for December. Another positive that's likely to extend through this month is the November improvement in jobless claims which gave the fifth strongest contribution to the month's 0.5 percent gain.

The sharp decline in weekly initial unemployment insurance jobless claims means fewer workers are being fired. Layoffs are on a steady decline in what is good news for the jobs market and for the December employment report. Initial claims fell for a third week in a row, down 4,000 to a much lower-than-expected level of 364,000 (prior week revised to 368,000 for a 17,000 decline). The four-week average is also down for a third week in a row and down for six of the last seven, declining 8,000 to 380,250 which is the lowest level of the recovery.

Graph: Econoday

Both the University of Michigan and Conference Board sentiment surveys continue to improve. The U. of Michigan reading implies a very strong 72.1 over the last two weeks which points to momentum for January. The bulk of the gain is centered in expectations, at 63.6 in December for a more than eight point monthly gain that points further to momentum in the New Year. The assessment of current conditions, likely held down by bad news out of Europe, rose only two points in the month to 79.6.

Graph: Inside Debt

The New York-based Conference Board said that its December Consumer Confidence Index rose almost 10 points to 64.5, up from 55.2 in November. The surge builds on another big increase in November, when the index rose almost 15 points from the month before.

One likely positive for sentiment is improvement in the jobs market as well as the stock market which has been on the recovery, said Econoday. Another positive may be gasoline prices which, despite $100 oil, are on the decline. One-year inflation expectations eased one tenth in the month to 3.1 percent with five-year expectations unchanged at 2.7 percent.

Small businesses are important because they account for 70 percent of new jobs. Though slack demand is still making entrepreneurs wary of borrowing, says NFIB chief economist William Dunkelberg: Only 12 percent think business will be better in 12 months than it is now. “Two-thirds of business owners say, “Who wants a loan?” says Dunkelberg, who is chairman of a small Pennsylvania bank. “In thirty years, I’ve never seen anything like it. The banks all have money to lend, but there’s a shortage of eligible customers coming in.”

Small businesses are the key, so we know the recovery will become sustainable if they can continue to borrow. Increased bank lending is a sign of increased demand for products and services in 2012, a good sign for all businesses.

Greater Equality is Good For Democracy

2011-12-27T12:32:00.000-08:00

Financial FAQs

A recent Gallup poll said 82 percent of respondents thought economic growth “extremely”, or “very” important, while just 46 percent said reducing the income and wealth gap between rich and poor was extremely or very important.

Yet there is growing evidence that the two are inextricably linked, because new research shows that inequality breeds all the evils that we see in societies—from high crime rates, poor health and educational institutions, to declining environmental quality. An even worse outcome may be a drop in democratic and rise of authoritarian institutions.

Paul Krugman has worried about this—specifically, the European austerity programs leading to so much economic suffering in Europe are also leading to a rise in intolerance and extremist organizations, even governments. “Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.

“Right-wing populists are on the rise from Austria, where the Freedom Party (whose leader used to have neo-Nazi connections) runs neck-and-neck in the polls with established parties, to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April,” said Krugman. “And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.”

“Last month the European Bank for Reconstruction and Development documented a sharp drop in public support for democracy in the “new E.U.” countries, the nations that joined the European Union after the fall of the Berlin Wall. Not surprisingly, the loss of faith in democracy has been greatest in the countries that suffered the deepest economic slumps.”

“Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it’s a sample of what may happen much more widely if this depression continues,” worries Professor Krugman.

We can also see it in the U.S. with the rise of right wing activism, such as the Tea Party with its anti-immigrant, anti-government credo. This is not anti-democratic on its surface, but it’s credo contains much that is undemocratic, such as government invasion of private choice in wanting to control abortion and gay marriages.

Richard Wilkinson’s TEDx lecture and book with Kate Pickett, “The Spirit Level” is the best exposure of the dire effects of income inequality on the quality of life. The most important factor, and a sign of dire consequences when inequality has approached the level of the Great Depression, is our violent crime and incarceration rates, which Wilkinson discusses at length. The U.S. is by far the most violent country in the world—worse than any other developed country.

So why aren’t such quality of life indicators discussed with economic growth? Part of it is misconceptions—that economic growth and equality aren’t compatible. The conservative position espoused by 1970s Economist Arthur Okun was that greater equality meant less market efficiencies to produce and so fewer incentives for greater wealth, since leveling the playing field meant leveling out the opportunity for large profits. But he also advocated more progressive taxation, and various other social safety net programs to alleviate the effects of income disparities on the quality of their lives.

But that was before the decline of centralized planning in socialist and communist countries. The abilities of capitalist, market-driven economies to produce more and better products is no longer disputed. In fact, the various asset bubbles of recent years show a propensity for markets to overproduce. It also produces more pronounced income inequality, which leads more than ever to unequal opportunity for those at the bottom of the wealth ladder.

Studies have shown that the greatest periods of economic growth occurred during Democratic administrations, when equality was greatest, and government was not the problem. In fact, greater equality is a necessity if we want peace and prosperity between nations, as well as within our own.

Will Younger Generation Rescue Real Estate?

2011-12-21T12:48:00.000-08:00

The Mortgage Corner

Privately-owned housing starts in November were at a seasonally adjusted annual rate of 685,000, which combined with increasing builder sentiment is a sign that children of the baby boomers—the so-called Boomerang or echo boomer generation—may finally be venturing out from their parents’ homestead. This is 9.3 percent above the revised October estimate of 627,000 and is 24.3 percent above the November 2010 rate of 551,000.

Household formation is the big uncertainty. It hit record lows during the Great Recession, as the offspring of baby boomers stayed at home longer, rather than buy or rent their own living space. But population pressures are building as the echo boomers outnumber their parents—some 86 million who will eventually live separately.

U.S. home prices won’t recover until the economy improves enough to boost the number of households and clear an oversupply of properties, said economist Karl Case, co-founder of the S&P/Case-Shiller home price index.

“Normally, the way we’ve cleared the market is we’ve had more household formation,” Case, a retired Wellesley College professor, said in an interview today with Tom Keene and Ken Prewitt on Bloomberg Radio’s “Surveillance.” Lackluster economic growth has encouraged people to move in with friends or family, meaning “demand is not going anywhere,” he said.

The number of U.S. households, a key determinant in home sales, grew by 600,000 this year, less than half the 1.5 million pace of 2006, when prices reached a record, according to IHS Global Insight Inc. This year’s pace isn’t enough to absorb the so-called shadow inventory of distressed properties poised to come on the market, said Patrick Newport, an economist with the Lexington, Massachusetts-based research firm.

Whereas something like 750,000 and 1 million new households were predicted in 2011, predicts UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport, according to a recent Bloomberg article. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau. As employment picks up, new households are likely to rise above the past decade’s average of 1.3 million a year, according to Newport.

Graph: Calculated Risk

Builder confidence in the market for newly built, single-family homes also edged up two points from a downwardly revised number to 21 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for December, just released. This marks a third consecutive month in which builder confidence has improved, and brings the index to its highest point since May of 2010, said Calculated Risk.

“This is the first time that builder confidence has improved for three consecutive months since mid-2009, which signifies a legitimate though slowly emerging upward trend,” said NAHB Chief Economist David Crowe. “While large inventories of foreclosed properties continue to plague the most distressed markets and consumer worries about job security and the challenges of selling an existing home remain significant factors, builders are reporting more inquiries and more interest among potential buyers than they have seen in previous months.”

Existing-home sales might also pick up, because of the fire-sale prices. Foreclosures and short-sales now make up some 30 percent of existing-home sales, according to CNBC’s Diana Olick. But that number might change with the new revisions of existing-home sales since 2007 by NAR. As it is, existing sales jumped 4 percent in November. Total housing inventory at the end of November fell 5.8 percent to 2.58 million existing homes available for sale, which represents a 7.0-month supply at the current sales pace, down from a 7.7-month supply in October.

Graph: Calculated Risk

So who is right, Karl Case or Patrick Newport? Even 600,000 new households is a doubling of last year’s new households. And that is why we are seeing more housing construction. Much of it has to be rentals, but the pressure to build will continue as more of the echo boomers find jobs and leave their parents’ homes.

Consumers Regaining Financial Health

2011-12-16T07:48:00.000-08:00

Popular Economics Weekly

Consumers are spending for the holidays. Retail sales in particular have rebounded to almost pre-recession levels. Overall retail sales in November grew 0.2 percent, following a 0.6 percent boost in October (originally up 0.5 percent) and a 1.3 percent spike in September (previously up 1.1 percent). Retail sales in November rose 6.7 percent annually, compared to 7.5 percent in October. Excluding motor vehicles, sales were up 6.6 percent on a year-on-year basis, compared to 7.5 percent the month before.

Graph: Inside Debt

So once again, as with jobs, the numbers were higher than initially reported. Overall components were largely favorable. The strongest component was for electronics & appliance stores which jumped 2.1 percent in November, followed by nonstore retailers (up 1.5 percent) and auto dealers (up 0.5 percent). Also seeing gains were furniture & home furnishing, clothing & accessory stores, sporting goods & hobby, and general merchandise.
The Labor Department’s Job Openings, Layoffs, and Turnover Survey (JOLTS) report also looked good, with 3.27 million job openings. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in October was 1.2million higher than in July 2009 (the most recent trough for the series). The number of job openings has increased 35 percent since the end of the recession in June 2009.

Graph: Wrightson ICAP

But will consumer spending hold up in 2012? Since consumer confidence is rising from the mid-year pessimism of congressional gridlock, Japanese Tsunami, and S&P credit downgrade, it looks like that will happen—in part because real incomes are rising again with declining inflation. Consumer spending has in fact been increasing 7 percent annually since March 2010.
It is particularly hard to understand why we are still in a disinflationary environment, when energy and food prices fluctuate so much. The largest factor is almost no increase in labor costs. This is because wages and salaries—which make up 80 percent of personal incomes and two-thirds of product costs—are barely rising, while housing prices are still falling. And corporations are hoarding some $2 trillion in cash, banks have $1.8 trillion in excess reserves they are not spending or lending. With so little money in circulation—whether from wage earners or corporate spenders—then prices cannot rise appreciably.

Payroll jobs in November advanced a relatively strong 120,000 after gaining a revised 100,000 in October (originally 80,000) and increased a revised 210,000 in September (previously 158,000). So look for upward revisions once again. Private payrolls (less government layoffs) gained more than overall, up140,000, following a 117,000 increase in October and 220,000 rise in September.
The stronger employment numbers are corroborated by weekly initial claims for unemployment insurance. Back to back declines of 19,000 in initial jobless claims are signaling sudden strength in the labor market. Claims in the December 10 week came in at 366,000, far below expectations for 390,000 and compared to 385,000 in the prior week (revised 4,000 higher). The 366,000 level is the lowest since May 2008. The four-week average is down 6,500 to 387,750 for the lowest level since July 2008. The average, in a convincing sign of strength, has been down in 10 of the last 12 weeks, said Econoday.

That is the main reason economists are revising growth estimates upward to 3 percent plus in 2012. Consumers are spending—and borrowing again.
Harlan Green © 2011

2011—The Year That Wasn’t

2011-12-11T12:47:00.000-08:00

Popular Economics Weekly

What do we make of this year’s economy, with its ups and downs that have confused even the ‘experts’; and what to make of 2012? Believe it or not, the congressional gridlock that caused the S&P Treasury debt downgrade may actually boost growth. Because the Bush-era tax cuts are scheduled to expire end of 2012, which would put them back to the Clinton-era tax brackets. And we know what happened during Clinton’s Presidency—22.7 million jobs created, and 4 consecutive years of budget surpluses were paid for with the combination of higher income tax brackets and reduced government spending.

Firstly, we should understand that the experts overestimated economic growth at the beginning of 2011, then underestimated it by midyear—which means that we were never in danger of a second recession. The best example is our unemployment numbers. From June onward, both private payrolls and the self-employed have been increasing at more than 200,000 per month, which is close to pre-recession levels.

The household survey component of the jobs report including the self-employed – an actual headcount of working Americans – has shown a gain of 1.28 million over the past four months alone, whereas initial payroll formation showed zero or almost zero job growth in August-September before it was upgraded. And that—with the S&P credit downgrade and euro worries—is what set off new recession talk.

Payroll jobs in November advanced a relatively strong 120,000 after gaining a revised 100,000 in October (originally 80,000) and increased a revised 210,000 in September (previously 158,000). So look for upward revisions once again. Revisions for September and October were up net 72,000. Once again, private payrolls (less government layoffs) gained more than overall. Private nonfarm payrolls gained 140,000, following a 117,000 increase in October and 220,000 rise in September.

Then we had the so-called congressional Supercommittee not being super at all. They couldn’t agree on what budgets to cut, or revenues to raise. But as Paul Krugman has said, that may be a good thing—

“The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?”

In fact, such a budget deficit during the worst recession since the Great Depression is necessary to fund vital public services and keep the economy running, until private business begins to invest again. And that won’t happen until consumer spending picks up, as we have said in past columns. The deficit will improve as the economy continues to grow, in other words, but won’t pick up if more jobs are cut—whether from the private or public sectors.

Consumer spending has barely held up during the various crises. It is best measured by consumer credit. Strength in consumer spending is confirmed by a build in outstanding consumer credit, up $7.6 billion in October following a revised $6.9 billion increase in September. The increase is once again centered in non-revolving credit, which reflects strength in vehicle sales. But a steady increase is now appearing for non-revolving credit, up $0.4 billion for a second consecutive month and offering evidence that consumers are once again, at least to a limited extent, using their credit cards.

That means it is real estate that is still holding up a stronger recovery. Despite headwinds, the latest pending home sales report indicates that housing may be back on a modest uptrend—at least for sales, according to Econoday. Low prices and low interest rates appear to be creating traction as the pending home index, which is a measure of contract signings for sales of existing homes, jumped 10.4 percent in October, following a 4.6 percent decline the prior month.

But the real measure of housing health is existing-home sales, which have been stuck in the 5million range since 2008, due to the large number of foreclosures and distressed sales.

Housing prices are just now beginning to recover from a more than 30 percent plunge, as measured by the Case-Shiller Home Price Index. Housing construction is also showing some strength for the first time since 2009, which will add to GDP growth. Why? Household formation is picking up, as the so-called echo boomers—children of baby boomers—finally begin to leave their parents’ home. Household formation should double this year to 1 million from last year’s 500,000.

That is probably why construction spending in October advanced 0.8 percent after rising an unrevised 0.2 percent in September. The October increase was led by a 3.4 percent boost in private residential outlays, following a 0.6 percent rise in September. Construction outlays have risen three months in a row and in six of the last seven months. The level of activity is still subdued but it now appears to be growing and adding to overall economic growth, as we have said. It is not an “engine” like manufacturing but it is in better shape than even less than a year ago.

The latest report from the Institute for Supply Management also added to growth estimates as the manufacturing sector is regaining momentum. The ISM manufacturing index moved further into positive territory, rising 1.2 points in November to a reading of 52.7. The gain in the index was led by a 6.5 point jump in the production index to 56.6. Importantly, the new orders index was up a very strong 4.3 points to 56.7, above 50 to indicate monthly growth and pointing to continuing momentum.

Lastly, Gross Domestic Product estimates, the best measure of overall growth, are being revised upward to 3 percent plus next year by economists, after the mid-year scare. So this also means more job creation if those forecasts are fulfilled.

Graph: Calculated Risk

The bottom line is that many difficulties lie ahead, but it doesn’t look like congressional gridlock can do much more to limit growth. In fact, if the Bush tax cuts of 2001, 2003, and 2006 were extended past 2012, it would increase the deficit by $3.7 trillion over the next decade, according to CNN. Whereas letting the cuts expire on December 31, 2012 would reduce the federal deficit by 40 percent over just the next five years.

So, if both progressives and conservatives would step out of their idelogical strait jackets, they would see that government doing nothing at the moment might be the best road to a recovery. One caveat—Wall Street can’t be allowed to again do business as usual. They are still lobbying ferociously to weaken regulation of derivatives’ trading under Dodd-Frank, which will also reveal just how much risk they are still taking with Other People’s Money—i.e., their investors. Until such reporting requirements are made law, over-the-counter derivatives’ trading, which totals some $600 trillion, according to the New York Times, will continue to endanger our overall economy.

Equality is Good for Everyone

2011-12-08T12:43:00.000-08:00

Popular Economics Weekly

President Obama might have found his voice in jumping on the Progressive bandwagon with his Osawatomie, Kansas speech about income inequality. The small farm town of Osawatomie was where Teddy Roosevelt gave his now famous “New Nationalism” speech in 1910 that called upon the three branches of the federal government to put the public welfare before the interests of money and property.

That is what such groups as #OccupyWallStreet are calling for in renewing the cry that we are all in this together. Yet equality is more than a moral issue of what is fair, or even the core American value of everyone’s right to the pursuit of happiness. It is in fact the future.

For in an era where technology is replacing workers making the necessities of life at an ever accelerating rate, more Americans will have more leisure time to pursue their own interests. And more importantly, the ever increasing productivity of those machines will be able to lift all boats—that is, provide more necessities, as well as amenities to improve lives—rather than go only to the profit makers. That is to say, more Americans will be able to live off the fruits of technology.

In giving his Kansas speech, President Obama was going back to a time when Robber Barons ruled, having made enormous wealth from the founding of the railroads, banks, oil and steel industries in the 19^th century.

It was still the beginning of the Industrial Revolution, when most of America was rural and Oligarchs ruled government and business. Sound familiar? That has happened once again with the enormous fortunes created via deregulation and the digital revolution. And once again 99 percent of American households are suffering from the excesses of modern oligarchs who want to abolish the safeguards that were established to protect householders from those excesses.

“The American people are right in demanding that new Nationalism without which we cannot hope to deal with new problems,” said Roosevelt. “The new Nationalism puts the National need before sectional or personal advantage. It is impatient of the utter confusion that results from local legislatures attempting to treat National issues as local issues. It is still more impatient of the impotence which springs from over-division of governmental powers, the impotence which makes it possible for local selfishness or for legal cunning, hired by wealthy special interests, to bring National activities to a deadlock. This new Nationalism regards the executive power as the steward of public welfare. It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that the representative.”

President Obama seems to be finally realizing that the common good is as important as the profit motive. In fact, one doesn’t work without the other. One cannot prosper if there are no rules, such as protections against predatory behavior provided by financial regulations. Congress abolished the Glass-Steagall Act that prevented banks from trading against their own clients, which created conflicts of interest. How could banks’ clients now be sure that their investments hadn’t been set up to fail, such as happened with Goldman Sachs and many other banks during the subprime bubble?

Much of the Great Recession and slow recovery is due to widespread ignorance of economic fundamentals that actually depend on social welfare. For no economy can prosper if educational and environmental standards are ignored, which enable good health and social mobility. It is also an ignorance of what is in our national interest. Raising educational and environmental standards, restoring our aging infrastructure, and creating a truly universal health care system make us more competitive globally.

Teddy Roosevelt obviously knew this when he saw the results of too much wealth in too few hands—the monopolies and cartels of his era. That was why the Federal Reserve was created in 1913. It was to protect our currency from too much speculation, just as today we need stronger institutions that protect our stock market from too much risk taking.

Obama’s speech mainly targeted the reasons for so much income equality. The theory of “trickle down economics,” which holds that greater wealth at the top generates jobs and income for the masses below, drew some of Obama’s harshest criticism, according to the Washington Post: “It’s a simple theory — one that speaks to our rugged individualism and healthy skepticism of too much government. It fits well on a bumper sticker. Here’s the problem: It doesn’t work,” Obama said of supply-side economics, drawing extended applause. “It’s never worked.”

It is obvious why it hasn’t worked, because ‘trickle down’ Reaganomics’ believers maintain that because government is the problem, lower taxes are the answer. The problem is that public services suffer which are so necessary in our modern, already overcrowded world. More knowledge—including financial knowledge—is required to live in our complex society, just as we need safeguards against increasing pollution and crime created by increasing populations. And wealth doesn’t really trickle down, anyway. That’s why there has been so much income inequality over the past 30 years.

Don’t take my word for it. Lord John Maynard Keynes saw the consequences of increasing abundance in his famous 1930 essay, Economic Possibilities for our Grandchildren: “Thus for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”

Professor Robert Shiller also discusses its consequences in his recent book, “The New Financial Order, Risk in the 21^st Century”, in which he lays out what our new information technologies will be able to do. In it, “Shiller describes six fundamental ideas for using modern information technology and advanced financial theory to temper basic risks that have been ignored by risk management institutions--risks to the value of our jobs and our homes, to the vitality of our communities, and to the very stability of national economies”, says the publisher, Princeton University Press.

It will do all this by leveling the playing field in order to create a greater transparency of markets, as financial information in particular will be available to all. Therefore much of the risk in one’s profession, or housing value, or even health, will be able to be insured against unexpected events, such as recessions, or loss of career, or debilitating illnesses because of the new information technologies..

In other words, there is no longer any reason to be ignorant of how the modern world works. It will become more difficult for those who profit from such ignorance to accumulate excessive wealth. Or, as Teddy Roosevelt knew, we will continue to repeat our past mistakes.

Budget Austerity (That) Doesn’t Work

2011-12-02T12:43:00.000-08:00

Financial FAQs

It should be obvious that austerity doesn’t work, when it means tax cuts for the wealthy but spending (and so income) cuts for the rest of US. But austerity does work when applied to the wealthiest who have used their wealth to create more instability, rather than creating jobs.

Great Britain is the best current example. The budget cuts of its ruling Conservative Party have brought economic growth to a halt, whereas U.S. growth is returning to a more normal 3 percent rate because of U.S. government stimulus programs. Britain is much more socialized, yet if it had taxed the wealthiest to support their programs instead of giving them even more tax breaks, it would have paid down debt without taking the earning and spending power away from government workers and unions (a lesson that we have only partially learned). Then such a slowdown would have been averted.

Paul Krugman brings this out in a recent blog, stating that “…what’s happening in Britain now is that depressed estimates of long-run potential are being used to justify more austerity, which will depress the economy even further in the short run, leading to further depression of long-run potential, leading to …It really is just like a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding.”

Their economic thinking is not quite medieval but certainly from the 18^th century, when Adam Smith’s invisible hand theory was first used to rationalize conservatives’ ideology that government is unnecessary. We now know that cutting spending doesn’t lead us out of recessions, or worse. Budget deficits during bad times are necessary to prime the pumps of private employers, until they loosen their own purse strings and begin to invest the $trillions from record profits that they have instead used to buy back their stock in order to boost executives’ incomes.

Most of the economic damage is being done in the government sector, as our own Labor Department’s November employment report shows. The increase in hiring took place entirely in the private sector, with employment rising by 140,000. Governments cut 20,000 jobs last month to put the total loss over the past two years at around 600,000. In other words, states and municipalities have been forced to reduce staff to balance their budgets as required by local law.

Graph: Wrightson ICAP

And hiring in October was revised up to 100,000 from 80,000 and the job gains in September were revised up to 210,00 from 158,000, which shows private employers are having to hire more payrolls to keep up with consumers demand during the holidays. So the damage to employment is being done to precisely the workforce targeted by conservatives in both England and America—government workers.

The expansion in the Institute for Supply Management’s manufacturing survey also buttressed our stronger growth prospects, which increased in almost all areas. The new orders index for November is up a very strong 4.3 points to 56.7, above 50 to indicate monthly growth and well above October. This index had been stuck at slightly sub-50 levels in prior months which now are forgotten. Helped by new orders, the ISM composite index is up 1.2 points to a 52.7 level that compares with the Econoday consensus for 51.5. November's level is the best since June.

And it may not be a lot (coming from a low base) but it is starting to look like the construction sector is incrementally adding to overall economic growth. Construction spending in October advanced 0.8 percent after rising an unrevised 0.2 percent in September. Analysts had forecast a 0.3 percent boost for October.

The October increase was led by a 3.4 percent boost in private residential outlays, following a 0.6 percent rise in September. Private nonresidential construction spending also posted a gain, rising 1.3 percent, following a 0.1 percent dip the month before. Once again public outlays declined 1.8 percent after a 0.3 percent increase the prior month, illustrating the damage those pushing for more austerity is doing to economic growth. On a year-ago basis, overall construction outlays improved to down 0.4 percent in October from down 0.6 percent in September.

Construction outlays have risen three months in a row and in six of the last seven months. The level of activity is still subdued but it now appears to be growing and adding to overall economic growth, said Econoday. It is not an "engine" like manufacturing but it is in better shape than even less than a year ago.

So we see the result of austerity policies during recessions. They do not bring on recoveries, period. And that’s why the situation in Europe is so much worse. Krugman’s warnings have been realized: “How did things go so wrong? The answer you hear all the time is that the euro crisis was caused by fiscal irresponsibility. Turn on your TV and you’re very likely to find some pundit declaring that if America doesn’t slash spending we’ll end up like Greece. Greeeeeece!

“But the truth is nearly the opposite. Although Europe’s leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole. And their efforts to fix matters by demanding ever harsher austerity have played a major role in making the situation worse.”

The real result of austerity during hard times is really that it falls on necessary public services such as education, police and fire departments, and even environmental regulation. These are the essential services needed by all, rich or poor. Cutting back on those services not only prolongs any downturn, but makes it more severe that it needs to be.

Elizabeth Warren’s Teach-in

2011-12-01T08:00:00.000-08:00

Popular Economics Weekly

What better way to understand Elizabeth Warren’s bid for Massachusetts Senator to replace Scott Brown that conduct a Teach-in, much as the OccupyWallStreeters are doing. She stands for what we all need, after all, more knowledge on how to combat the huge levels of social and economic inequality that have arisen over the past 30 years from a corporate and Wall Street culture that glorified profits over social responsibility, or even honesty.

Professor Warren’s specialty at Harvard is contract and bankruptcy law, after all, so she has seen firsthand the damage that fine print in mortgage contracts and wholesale deregulation of financial oversight can do. A New York Times profile spelled out some of her agenda. “Ms. Warren talks about the nation’s growing income inequality in a way that channels the force of the Occupy Wall Street movement but makes it palatable and understandable to a far wider swath of voters,” said the Times. “She is provocative and assertive in her critique of corporate power and the well-paid lobbyists who protect it in Washington, and eloquent in her defense of an eroding middle class.”

But it’s more than that. She is a teacher, and so teaching the public why the middle and lower classes have lost so much of their wealth is a priority. In fact, their loss of wealth is why economic growth has been slowing historically. Part of it has to do with the massive deregulation of industries begun by President Reagan in his war against government; waged on the promise it would raise everyone’s prosperity level. But the result instead was it took away the income and wealth of ‘everyone’ and gave it to the wealthiest on the thinnest of rationalizations—that they were the real job creators, not the consumers who bought their products.

Does that mean we are helpless victims who have to be protected by Big Government, unable to take care of ourselves? No, in “All Your Worth: The Ultimate Lifetime Money Plan” written with daughter Amelia Tyagi, she spells out her beliefs on individual responsibility. “You can't count on good old-fashioned hard work the way your parents did. Go to school, get a good job, do your work, don't go crazy with spending, and everything will work out, right? Not anymore. That advice may have worked in your parents' day, but today you have to be smart with your money. Not just a little smart, but super smart. You have to learn the new rules -- the rules nobody told you and nobody talks about. And you have to learn them fast.”

And that in fact is what her teach-ins are about—learning the new rules, as well as working to change them to be more consumer friendly. What are they? Firstly, a major rule change was abolishing usury laws that have enabled national banks to charge as much as 30 percent on credit card debt. In another bestseller with her daughter, “The Two-Income Trap”, they spell out why the middle class has lost ground. Deregulation has allowed banks to write their own rules, with no concern for their own customers’ welfare.

For instance, the 2005 bankruptcy laws have means testing—only those with below median incomes for their states can file for Chapter 7 Bankruptcy, which abolishes all unsecured debt. So struggling households saddled with catastrophic health care costs (because health care costs aren’t controlled), have to sell everything they own to even file for bankruptcy.

“That puts women trying to collect domestic support obligations and credit card companies in direct competition for the ex-husband's resources,” said Ms. Tyagi in a 2004 Mother Jones interview. “Credit card companies can hire lawyers and develop extensive debt collect departments, something that is really tough for women. When the credit industry controls the bankruptcy rules, women lose.”

That is the real reason the standard of living of all but the top 1 percent has fallen. And it hurts all of us. Richard Wilkinson has spelled it out in a recent TEDS conference, and his book with Kate Pickett, “The Spirit Level”. Countries and states with the highest income inequality have the highest crime rates, illness outcomes, and most environmental degradation—you name it—as well as least social mobility that would allow greater opportunities to improve themselves.

Graph: TED Conference

Why such a shift from equal opportunity back to an era of Social Darwinism in just 30 years that was capitalism in its earliest form? It is in part due to the huge amount of wealth we have amassed. Former Fed Chairman Alan Greenspan has said: “It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously.”

Wealth generates its own temptations, in other words, and so removing the barriers to its acquisition can overwhelm even common sense when dealing with severe financial crises.

Housing Picture is Better Than We Know

2011-11-30T12:22:00.000-08:00

The Mortgage Corner

There have been some developments that tell us housing prices could stabilize and new home construction pick up in the New Year. This is even thought the continuing fall in housing prices has stymied any growth prospects, as well as the foreclosure mess that has kept banks from loosening their credit standards enough to encourage more home buying.

For instance, a recent press release from the National Association of Homebuilders said the number of improving housing markets continued to expand for a third consecutive month in November, rising from 23 to 30 on the latest National Association of Home Builders/First American Improving Markets Index (IMI).

And single-family housing starts rose 3.9 percent to a seasonally adjusted annual rate of 430,000 units in October, according to the U.S. Commerce Department. This is while single-family permits also posted a measurable gain of 5.1 percent to 434,000 units in the latest report, which is their fastest pace since December of 2010.

Sales of new single-family houses in October 2011 also rose slightly, to a seasonally adjusted annual rate of 307,000 ... This is 1.3 percent above the revised September rate of 303,000 and is 8.9 percent above the October 2010 estimate of 282,000.

The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties. And so we have the ‘distressing gap’ between new and existing-home sales, according to Calculated Risk.

Low prices and low interest rates appear to be creating traction in the housing market with pending home sales the latest report to show strength. The pending home index, which is a measure of contract signings for sales of existing homes, jumped 10.4 percent in October to 93.3. This is after pending home sales index fell 4.6 percent in September with declines split about evenly across regions. September's decline was unusually steep, following declines of 1.2 percent in August and 1.3 percent in July.

The gain points to strength in final sales of existing homes for November and December though cancellations, tied to low appraisals that keep buyers from selling their own homes and to restrictions to credit access, have been cutting into the proportion of contracts that make it to closing.

Consumers Feel Better

2011-11-30T07:14:00.000-08:00

Popular Economics Weekly

Black Friday, or the day after Thanksgiving, was an eye-opener. Sales jumped 7 percent, a record, and Monday’s cyber-sales followed its lead. How can consumers be spending so much with incomes that aren’t rising as much?

One clue is that consumers have paid down so much debt, while disposable income, as well as wages and salaries, have been growing at 2 percent—not great, but enough to keep things bubbling. In fact, it’s been enough to boost the Conference Board’s consumer confidence survey, at least, about future conditions. For instance, those seeing better job prospects in 6 months increased from 5.8 to 12.9 percent, while the proportion that sees jobs as hard to find dropped from 42.1 to 24.1 percent.

Graph: Inside Debt

Consumer confidence has surged this month, in other words, with improvement centered in employment. The Conference Board's measure jumped more than 15 points to 56.0 from an upward revised 40.9 in October. November is the best reading since the debt-ceiling debacle and cut of the US credit rating in August.

This is while consumer credit expanded $7.4 billion in September benefiting once again from strength in nonrevolving credit. Nonrevolving credit outstanding, reflecting strong vehicle sales, rose $8.0 billion in the month to $1.66 trillion.

September brings in third quarter data which shows consumer credit expanding at a 1.6 percent annual rate, down from the second-quarter rate of 3.5 percent. Revolving credit during the quarter contracted at a 3.2 percent annual rate, more than reversing the second-quarter rate of plus 1.5 percent, said Econoday.

Another eye-opener was the surge in ADP private payrolls employment. ADP today reported that employment in the U.S. nonfarm private business sector increased by 206,000 from October to November on a seasonally adjusted basis. The estimated advance in employment from September to October was revised up to 130,000 from the initially reported 110,000. The increase in November was the largest monthly gain since last December and nearly twice the average monthly gain since May when employment decelerated sharply.

So, can it be true that consumers’ optimism is well-grounded? The Conference Board’s survey said those saying jobs are currently hard to get fell nearly five percentage points to 42.1 percent. Another key reading is a sharp improvement in income expectations over the next six months with more, 14.9 percent, seeing an increase and fewer, 13.8 percent, seeing a decrease. This is the first time since April that optimists have outnumbered pessimists.

Other positives in today's report include an improvement in buying plans for both homes and appliances and a three percentage point decline in 12-month inflation expectations to 5.5 percent. It is of course the holiday season when shoppers like to shop, but this could be a turning point. Optimism leads to increased consumer spending, and we know it is consumer spending that drives economic growth.

What Decline of Western Civilization?

2011-11-21T16:06:00.000-08:00

Financial FAQs
It’s hard to say whether Harvard Historian Niall Ferguson means what he says in his new book, “Civilization: The West and the Rest”; that the western world’s 500 years of predominance are over, thanks to growing debt problems in the U.S. and Europe, and dwindling populations. He obviously believes it’s not a good thing.
Well, maybe not, but why worry about western predominance when so many Americans are suffering from the misdeeds of our own governance that has piled debt upon debt, all in order to make the wealthiest even wealthier?
It is true United States position in the world has declined—not as a military power, but in almost all the measures of social and economic well-being. This is reflected in studies just now coming out by sociologists and psychologists, as well as economists. Richard Wilkinson is one such researcher who has managed to bring together a huge amount of research—especially on how income inequality affects citizens’ well-being.
We have discussed how income and education disparities have affected individual states in past blogs that have divided them into Blue and Red states politically, but never socio-economic misery on a national scale. The list is long. The U.S. has highest prison incarceration rate of any country, combined with the highest per capita income, as well as sub-par educational standards accompanied by an income inequality level next to Bulgaria’s.
So, it’s true that the rest of the world is catching up to the developed West, and want what we have. For instance, the U.S. with 5 percent of the world’s population can no longer count on corralling 25 percent of its resources. Our military—a major source of budget deficits—is already stretched thin, for one thing, and can’t afford to invade another Iraq for its oil resources. In fact, those deficits are a major price we have had to pay to maintain our military dominance.
And we know from the #OccupyWallStreet protests and economic historians that the growth in income inequality has reached its limit. Americans are finally becoming aware, in a word, that they have made an enormous sacrifice—the 99 percent whose incomes stagnated because they didn’t benefit from the tax cuts, loopholes and such that have also elevated corporate profits as a share of GDP to the highest in history.
So the U.S. will continue to decline if we continue on the path of Oligarchy, where a few at the top have most of the wealth, and the rest of us have to borrow to maintain our standard of living. Then wealth will continue to be transferred to the developing giants who are willing to lend us money—China, India and Brazil with their young and growing populations.
But Dr. Ferguson’s theme isn’t new. Root causes of the rise and fall of civilizations were earlier explored by UCLA Professor Jared Diamond in his books “Guns, Germs, and Steel”, and “Collapse” in far more convincing fashion. Our technological superiority was enabled by having major resources such as oil, benign climates that allowed cultivation of the major foodstuffs, and domesticated animals that gave us immunity to the major diseases that have wiped out native populations where such animals didn’t exist.
It follows then that the huge debt loads are a symptom of the underlying illness, economic class warfare over the past thirty years that has taken away much of the wealth of the middle class. Governments can easily pay for public services if wages and salaries continue to grow. But there has been diminished income growth for the majority of Americans—the wage and salary earners who make up 80 percent of consumers.
We know where much of that wealth has flowed—to higher corporate profits, for one, as corporations cut back on employee payrolls and benefits. And those excess profits have created greater market instability, and so retarded economic growth rates. In his New York Times Op-ed, “It’s Consumer Spending, Stupid”, and various blogs, economic historian James Livingston says what has been known to most modern macro economists—consumer and government spending have driven economic growth over the past century, not corporate profits.

The great wealth shift began during the Great Depression, according to Livingston: “The underlying cause of that economic disaster (the Great Depression of 1929-33, 1937-38) was a fundamental shift of income shares away from wages/consumption to corporate profits that produced a tidal wave of surplus capital that could not be profitably invested in goods production—and, in fact, was not invested in good production…and that, on the other hand, produced the tidal wave of surplus capital which produced the stock market bubble of the late-1920s.”

So we know Niall Ferguson has taken the opposite tack. His glorification of empires has made him blind to the results. The west’s predominance was at the expense of exploiting underdeveloped countries, and when they began to want more of what we have, our privileged position began to decline. Isn't that what we want? To be an island of privilege among a sea of poverty does not make for a stable, or more peaceful world.
Harlan Green © 2011

How Do We Put Americans Back to Work?

2011-11-14T12:29:00.000-08:00

Financial FAQs

It’s becoming evident that rather than the political gridlock, such as the congressional supercommittee’s obsession with spending cuts, we need to worry about economic growth and jobs. And there are some very good ideas on how to do that, such as in President Bill Clinton’s newest book, “Back to Work”. And economists such as Christina Romer, former Chairman of Obama’s Council of Economic Advisors, in a recent New York Times Op-ed are pleading with the Fed’s Ben Bernanke to actually target a growth rate that will both create jobs and keep inflation within a manageable range.

What? You mean the Federal Reserve’s QE-1, 2, and 3 buying of securities wasn’t doing just that? Well, no. It has accomplished the goal of keeping both short and long term interest rates low, but that hasn’t done anything for setting expectations of higher growth. In fact, the Fed just downgraded its own predictions of future growth. If anything, such low interest rates reflect deflationary expectations, which is the real problem. Companies won’t hire if they can’t raise prices, while consumers’ incomes fall in such an environment, stifling demand.

Dr. Romer and other major economists are beginning to insist the Fed should actually set what is called ‘nominal’ (i.e., before inflation accounted for) Gross Domestic Product growth target at the long term growth rate of around 5 percent. That way, expectations are raised for economic growth, without abandoning an inflation target of say, 2 percent, the current Fed inflation target.

How else can we boost demand for goods and services that is the actual driver of economic growth? We have discussed in a prior column how necessary it is for consumers—who power 70 percent of growth—to spend more, which in turn creates greater demand, which in turn creates more jobs in a virtuous circle. They won’t if their confidence remains low, which surveys show causes them to spend less.

Former President Clinton has much more to say in “Back to Work” that directly addresses how to put Americans back to work, and he should know. “..during my administration we had four surplus budgets and began to pay down the national debt,” he says; “we eliminated sixteen thousand pages of federal regulations; we cut taxes on the middle class, working families of modest means, and income from capital gains; we reduced the size of the federal workforce to its lowest level since 1960, and the economy produced 22.7 million new jobs.”

How did he do it? By emphasizing cooperation rather than competition between government and the private sector. “I believe the only way we can keep the American Dream alive for all Americans and continue to be the world’s leading force for freedom and prosperity, peace and security,” said Clinton, “is to have both a strong, effective private sector and a strong, effective government that work together to promote an economy of good jobs, rising incomes, increasing exports, and greater energy independence.”

Why is strong government so important? It is what engenders both business and consumer confidence, which are still at record lows. And without that confidence, consumers won’t spend to keep up demand, as we said, and businesses won’t hire in anticipation of higher growth.

Confidence from both the Conference Board and University Michigan surveys has remained at recession levels since 2008, really. And we know major reasons for such low confidence are both political gridlock, and the S&P downgrade of U.S. Treasury bonds to AA+. This is what it means to lose confidence in our institutions, readers. Also, the subprime debacle that brought on the housing bubble caused a major loss of confidence in our Too Big To Fail financial institutions, which were allowed to gamble with their investors’ monies, and then be bailed out by taxpayer money.

But the confidence measures have stood in contrast to strength in consumer spending. If recent gains for confidence can be extended in the weeks ahead, the economic outlook as well as expectations for holiday shopping will improve. Some thawing in the jobs market may be helping with sentiment, says Econoday.

So confidence has to be restored in all of our institutions if we want to bring back economic growth. “What’s the smart, effective way to do that?” asks Clinton. “With a strong economy and a strong government working together to advance shared opportunity, shared responsibility, and shared prosperity? Or with a weak government and powerful interest groups who scorn shared prosperity in favor of winner take all until it’s all gone?”

Studies have shown that only by sharing prosperity can we really create strong economic growth. And right now we rank near the bottom ranks of nations in income inequality, according to the much cited CIA World Factbook. So there is a lot of work to be done to restore confidence in Americans’ future.

Employment Report Means Holiday Cheers!

2011-11-12T08:56:00.000-08:00

Popular Economics Weekly

Not only were the employment numbers for the past 3 months much higher than originally estimated, but job openings are growing. All we need now is for consumers’ credit conditions to ease to bring back their confidence.

Much of the pessimism and predictions of a second recession were based on faulty data, and that has caused lenders to pull back. For instance, instead of 0 job growth in August that scared the markets, more than 104,000 jobs were created after ‘revisions’ to the seasonal adjustments that we have discussed in past columns. In fact, payroll jobs in October posted a gain of 80,000 after rising a revised 158,000 in September (originally 103,000). So revisions for August and September were up net 102,000.

In fact, consumers are spending for the holidays as if the Great Recession is finally over, in spite of still uncertain income and credit conditions. The caveat: It took 23 months for consumption per person to return to its pre-recession level in earlier recessions. At 42 months, personal consumption has not yet returned to 2007 pre-recession levels, though some of that consumption was fueled by the housing bubble and may not be desirable, says Kevin Lansing of the San Francisco Federal Reserve.

Graph: Calculated Risk

Firstly, the number of job openings in September was 3.4 million, up from 3.1 million in August. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in September was 1.2 million higher than in July 2009 (the most recent trough for the series). The number of job openings has increased 38 percent since the end of the recession in June 2009, which tells us growth is picking up. We should therefore see 3 percent plus GDP growth for the rest of this year, at least, contrary to the Federal Reserve’s downwardly revised forecasts.

The consensus expected unemployment to be stuck at 9.1 percent instead of dropping to 9 percent in the Labor Department’s October household report, which tracks self-employeds as well. The unemployment rate declined largely on a sizeable 277,000 boost in household employment which has posted significant increases for three months in a row. The increases in August and September were 331,000 and 398,000, respectively.

And there is additional favorable news in the household survey. Part-time employment for economic reasons is down and the duration of unemployment declined in October. In nonagricultural industries, the number of those employed part time instead of full time for economic reasons dropped 328,000, says Econoday.

By downgrading its growth estimates, the Fed is leaving the door open for additional ease with the emphasis on significant downside risks remaining. For real GDP, the central tendency forecast for 2011 is now a 1.6 to 1.7 percent versus the prior range of 2.7 to 2.9 percent. The large downgrade likely is due to a large downside miss to second quarter growth. (But we believe growth will also be upgraded in coming months.) For 2012, forecast growth is 2.5 to 2.9 percent versus June’s 3.3 to 3.7 percent. For 2013, forecast growth is 3.0 to 3.5 percent versus June’s 3.5 to 4.2 percent. The Fed doesn’t see sustained growth until 2014—a range of 3.0 percent to 3.9 percent.

And early data for October on actual purchases by consumers indicate that this sector is doing better than suggested by surveys on the consumer mood, as we said. Thanks to the one area where credit is easing, unit new motor vehicle sales rose 1.2 percent in October after surging 8.0 percent the month before. October’s sales pace was 13.3 million units annualized, compared to 13.1 million in September.

The bottom line is that credit is still being tightened in most areas, according to the Federal Reserve’s October 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices. Fewer domestic banks eased standards and terms on commercial and industrial (C&I) loans over the third quarter compared with recent quarters, particularly on loans to large and middle-market firms, said the survey. And all of the domestic and foreign respondents that reported having tightened standards or terms on C&I loans cited a less favorable or more uncertain economic outlook as a reason for the tightening.

And so consumers will have to be patient, if they want to see credit standards easing for such as home loans. We hope the HARP II loan modification program that allows lowered payments and shortened payoff terms Fannie Mae and Freddie Mac-owned mortgages, though no principal reduction, will spur refinances and thus many to move out of their homes to find new jobs to be helpful.

The bottom line is that consumers are borrowing again, but for longer term purchases and still reducing their credit card debt, in part because banks are still restricting credit card use. Consumer credit expanded $7.4 billion in September benefiting once again from strength in nonrevolving credit, said the Federal Reserve’s latest Consumer Credit report. So-called installment loans outstanding, reflecting strong vehicle sales, rose $8.0 billion in the month to $1.66 trillion. This offsets another contraction in revolving credit, down $0.6 billion to $789.6 billion outstanding.

Dear Supercommittee: “It’s Consumer Spending, Stupid!”

2011-11-03T07:37:00.000-07:00

Financial FAQs

“With only about a month remaining before its recommendations are due, lawmakers on the congressional supercommittee charged with finding savings from the federal budget wrestled with cuts to defense, foreign aid and other programs on Wednesday”, said Bloomberg Marketwatch.

But the historical record tells us that finding “savings” in government spending will shrink, not expand economic growth. And so finding savings that aren’t spent elsewhere on stimulus programs won’t in fact reduce the federal deficit, which depends on increased growth. So once again as Paul Krugman has said, “And those who are determined to forget the past run a high risk of reliving it — which is why we’re in the state we’re in.”

At the risk of stealing the title from a New York Times Op-ed by economic historian and Rutger’s Professor James Livingston, “It’s Consumer Spending, Stupid”, we now have historical data verifying that consumers and government spending have driven economic growth over the past century, not corporate profits. This should not be surprising given that consumer spending now makes up 70 percent of economic activity.

Professor Livingston’s apostasy is letting us in on the “best kept secret of the last century: private investment—that is, using business profits to increase productivity and ouput—doesn’t actually drive economic growth. Consumer debt and government spending actually do”.

This is blasphemy to the classical orthodoxy, needless to say, but a truth that the #OccupyWallStreet protests recognize. Livingston says, in fact “…corporate profits are…just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”

Graph: Congressional Budget Office

This also tells why this recovery has been so frustratingly anemic. It isn’t consumer debt, as much as the lack of income that has prevented consumers from spending enough to boost economic growth. There has been almost no household income growth above inflation since the 1970s, mainly because so much wealth was siphoned off to the wealthiest via tax loopholes and less progressive tax rates, according to the latest CBO study on income inequality.

It should no longer be a surprise to anyone that the share of income going to higher-income households rose, said the CBO study, while the share going to lower-income households fell. But it’s nice that the CBO is also providing more evidence, to whit:

The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
Most of that growth went to the top 1 percent of the population.
All other groups saw their shares decline by 2 to 3 percentage points.

How do we know that it isn’t corporations reinvesting their profits that spurs growth? After all, between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent.

We know because net business investment declined 70 percent as a share of G.D.P. over that century, says Professor Livingston. In 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.

In other words, over the course of the last century, net business investment atrophied while G.D.P. per capita increased spectacularly. In other words, corporations decided to spend their profits elsewhere. “The architects of the Reagan revolution tried to reverse these trends as a cure for the stagflation of the 1970s, but couldn’t, said Livingston. In fact, private or business investment kept declining in the ’80s and after. Peter G. Peterson, a former commerce secretary, complained that real growth after 1982 — after President Ronald Reagan cut corporate tax rates — coincided with “by far the weakest net investment effort in our postwar history.”

So even cutting corporate taxes, the cry of conservatives today, hasn’t encouraged corporations to invest in future growth. Professor Livingston has done a great service in what may be a first—actually exploding the myth that profits drive growth. It also explodes the myth that corporations have their customers’ best interests at heart. For their customers are consumers in the main, and consumers’ incomes have not even kept up with inflation. The huge jump in labor productivity has not been shared by their employees, in other words.

On the other hand, it is the investor class that profited immensely from the myth that business investment creates jobs. Even though the historical record shows it merely bloated the financial sector from 8 percent to more than 20 percent of GDP over the past decade, which led to excessive speculation. It was excessive investments in new technology, for instance, that caused the dot-com bubble and market crash in 2000. Then came the housing bubble that resulted from overbuilding of housing, fuelled by too easy credit conditions.

“Consumer spending is not only the key to economic recovery in the short term; it’s also necessary for balanced growth in the long term,” says Professor Livingston. “If our goal is to repair our damaged economy, we should bank on consumer culture — and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending. (The increased trade deficit that might result should not deter us, since a large portion of manufactured imports come from American-owned multinational corporations that operate overseas.)”.

We don’t need the traders and the C.E.O.’s and the analysts — the 1 percent — to collect and manage our savings. Instead, we consumers need to save less and spend more in the name of a better future. We don’t need to silence the ant, but we’d better start listening to the grasshopper, says Professor Livingston.

So when will consumers—you and I, that is—wake up to the fact that the future is ours for the taking?

Who Will Benefit From HARP II Modifications?

2011-10-28T07:06:00.000-07:00

The Mortgage Corner

Who will benefit from HARP II, the latest attempt at loan modification? President Obama announced in Las Vegas that Fannie Mae and Freddie Mac would loosen their loan modification rules, which could enable up to one million homeowners with Fannie or Freddie-owned loans to reduce their interest rate and/or “accelerate the reduction of principal”.

Since it’s estimated there are up to 11 million homeowners that are ‘underwater’ (have negative equity in their homes), who will this really help? Firstly, it will spur more refinance activity, which means many homeowners might finally be able to sell their homes and move to better job locations. Part of the reason for the 3.1 million job openings according the Labor Department’s JOLTS report is that employers can’t match their skill requirements to the local applicant pool.

Secondly, it will help the banks that are holding the underwater mortgages by giving more certainty to valuations in their mortgage portfolio. And lastly, it should lower default and foreclose rates, which have been a major reason for RE values continuing to fall.

Graphs: Calculated Risk Blog

The delinquency rate has been declining from its peak of almost 12 percent in 2009 to 8.13 percent in August 2011, but foreclosures are stuck in the low 4 percent range, whereas historical delinquency and default rates were in the 4 and 1 percent range, respectively. Fannie and Freddie’s default and foreclosure rates, on the other hand, have remained within historical levels because of their stricter qualification requirements that have always required income and asset verification.

Calculated Risk’s take is, “What this program does do is remove many of the stumbling blocks to refinancing Fannie and Freddie loans (eliminate reps and warrants, reduce or eliminate fees, automatic 2nd subordination, minimal qualifying). These were all deal killers for HARP, and hopefully these changes will smooth the refinance road.”

Then questions remain on what to do with all the non-agency, or private label securities (PLS). They are where almost all of the subprime mortgages originated by the likes of Countrywide, Bank of American and Wells Fargo remain, and where most of the foreclosures occur.

One solution being worked out by the State Attorneys General, as reported by Jon Prior’s Housing Wire, is a reduction in the principal of the existing mortgage. “As part of the negotiations, the AGs are working to force servicers to refinance current borrowers into lower-rate mortgages,” said Prior. “A source said last week principal reductions were also very much a part of the talks, which some states began to split from, including foreclosure heavy California and New York…”The settlement negotiation is also going to be focused on significantly accelerating the reduction of principal," Department of Housing and Urban Development Secretary Shaun Donovan said Monday.

Pricing details won't be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1, according to Calculated Risk. Loans that exceed the current limit of 125 percent of the property's value won't be able to participate until early next year. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.

How does one find out who qualifies for the HARP II loan modification? The first step is to find out if the borrower has a Fannie or Freddie-owned mortgage. Homeowners can use mortgage “look-up tools” to determine if Fannie or Freddie owns their loan.

Homeowners can also contact their current lender or loan servicer, to find out if the loan is backed by Fannie or Freddie. It’s a key requirement for HARP 2.0 and will likely remain in place throughout 2012, says the Home Buying Institute.

“Put those three programs together: HARP refinance for GSE loans, a HARP like refinance program as part of the mortgage settlement for many non-GSE loans, and an REO dispositions program that keeps many occupants in place as renters and I think that will help,” said Calculated Risk.

Third Quarter Growth Will Be Better

2011-10-26T14:53:00.000-07:00

Popular Economics Weekly

We now know the reasons for this summer’s growth pause, but growth is picking up for the rest of the year. The Japanese earthquake and Tsunami disrupted a fragile recovery at the same time as Europeans found out they had a fragile banking system. And several stimulus programs had expired—such as the housing tax credits while much of the ARRA $800 billion had been spent. Top that off with congressional gridlock, the U.S. credit downgrade, with consumers and businesses still paying down their debt, and we can see why many pundits were calling for a second recession.

But that ain’t happening, folks, as I’ve said. In part, because of so much cash being held by corporations with record profits, and banks in excess reserves. Economic growth for the second quarter ended up stronger than previously estimated but remained anemic, as I’ve said.

And we will see better third quarter economic growth—in the 2 to 3 percent range—as the steady increase in consumer spending (read retail sales) means more businesses will be hiring, while manufacturing is holding up. One reason is industrial production. Manufacturing data point to a stronger third quarter—and no recession. Manufacturing—especially autos—continues to lead industrial production.

Manufacturing has even outpaced growth for the overall economy over the past year. On a seasonally adjusted year-on-year basis, overall industrial production was up 3.2 percent in September, compared to 3.3 percent in August. Through the second quarter, real GDP growth was 1.6 percent on a year-ago basis. Basically, manufacturing is leading the recovery and at the national level is running stronger than implied by manufacturing surveys.

Obama’s new push on allowing more homeowners to refinance—up to 1 million by some estimates—can also breathe new life into the housing market. Expansion of his Home Affordable Refinance Program (HARP) will streamline the refinance process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as homeowners are current on their mortgage payments, said President Obama at his Las Vegas unveiling. Fannie and Freddie have also agreed to waive some fees that made refinancing less attractive for some.

It seems that businesses have chosen to get the most out of their current workforce rather than hire new workers. It shows in the flagging productivity numbers and rising unit labor costs (ULC) seen in Econoday’s graph, which means their existing employees cannot produce much more per worker.

This means businesses aren’t hiring more workers because they don’t yet see increasing demand for their products. But the recent pickup in exports, capital goods orders and retail sales are telling us that the Third Quarter will look better. We are still in a deflationary cycle, as Krugman, et. al., have been saying ad nauseum. It is called a liquidity trap when businesses and consumers hold onto their savings rather than spend or invest out of the fear that conditions can worsen again. What will loosen their wallets is some confidence in the future.

Real Estate Will Survive This

2011-10-24T07:54:00.000-07:00

The Mortgage Corner

We are finally seeing some turnaround in housing—in those markets and regions that haven’t suffered as much from the housing bubble. That means of course where housing wasn’t overbuilt and unemployment not so severe. The boom and bust cycle occurred mostly in Florida, Nevada, California, and Arizona, where unemployment is highest. Michigan has the biggest drop in joblessness—from 14 percent to 11 percent, thanks to a recovering auto industry.

The latest S&P Case-Shiller Home Price survey tells us where are the winners and losers. Gambling capital Las Vegas still leads the losers, with Phoenix, Arizona, Miami and Tampa, Florida close behind. Dallas, Denver, and Boston suffered the least.

Graphs: Calculated Risk Blog

On a Not Seasonally Adjusted (NSA) basis, as of July, the Case-Shiller composite 10 index was 3.8 percent above the post-bubble low. The Composite 20 index was 3.7 percent above the post-bubble low (NSA). But the prices rises may be temporary due to a not very strong selling season and might fall to new lows (NSA) later this year or early in 2012, says Econoday.

Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, tell us the overall state of housing. They declined 3.0 percent to a seasonally adjusted annual rate of 4.91 million in September from an upwardly revised 5.06 million in August, but are 11.3 percent above the 4.41 million unit pace in September 2010.

And we can see that sales have been hovering around 5 million after the huge volatility in 2009-10, with the end of the housing tax credit and fears of a double-dip recession. Housing sales seem to have stabilized, in other words, and probably won’t show much upside until the huge backlog of foreclosures is worked through. But very strict credit conditions are also dampening sales, according to the National Association of Realtors.

NAR chief economist Lawrence Yun also said the market has been stable although at low levels, and there is plenty of room for improvement. “Existing-home sales have bounced around this year, staying relatively close to the current level in most months,” he said. “The irony is affordability conditions have improved to historic highs and more creditworthy borrowers are trying to purchase homes, but the share of contract failures is double the level of September 2010. Even so, the volume of successful buyers is higher than a year ago and is remaining fairly stable – this speaks to an unfulfilled demand.”

One key to future sales will be the for-sale inventory, which is also impacted by the large number of foreclosures coming on the market. Sales are still hovering around an 8 months’ supply, whereas 4 to 5 months is the historical norm, according to Calculated Risk.

Another plus was that builder confidence in the market for newly built, single-family homes rose four points to 18 on the just released National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for October. This is the largest one-month gain the index has seen since the home buyer tax credit program helped spur the market in April of 2010, and is in line with the rise in housing construction.

"Builder confidence regained some ground in October due to modest improvements in buyer interest in select markets where economic recovery is starting to take hold and where foreclosure activity has remained comparatively subdued," said NAHB Chairman Bob Nielsen.

One reason for the increased builder optimism was that construction spending actually increased for the first time year-over-over year since the beginning of the recession. This was largely from the public sector although major private components also gained. August construction spending rebounded 1.4 percent, following a 1.4 percent drop in July. The rise in August came in much higher than the consensus forecast for a 0.2 percent decrease, again according to Econoday.

What about the future? Housing demand has historically depended mostly on household formation, largely a function of twenty-somethings leaving home to strike out with their own household. It has historically hovered around 1 million per year, but sunk to a 500,000 annual average during the recession. We will see a sharp increase in housing construction and sales when this generation feels confident about jobs and the economy to begin to buy again.

“Living in tight spaces is not sustainable”, says the NAR’s Lawrence Yun. “More people cannot be comfortably shoved into existing households. Aside from the desire to be independent and to move away from temporary living situations, there is the issue of “familiarity breeding contempt,” as the saying goes. It is just a matter of time before household formation returns to its historic normal growth of 1 to 1.2 million each year. There could even be more-than-normal household formation for a few years from both normal population growth and from people leaving temporary arrangements. A stronger economy and job prospects will help in restoring normal household formation.”

Home builders are expected to add only 770,000 new units this year, which is well below the one million new demand from household formation, but still up from the 500,000 range of the past three years. One optimist on household formation is Warren Buffet, who believes it will take new household formation to bring back the housing market and economic growth in general.

We are already seeing that happen with the latest construction spending numbers, which showed a big jump in apartment construction, rising rents and a drop in vacancy rates. Predictions are that household formation could again reach the 1 million mark as early as next year, if jobs creation continues to improve.

Who is Elizabeth Warren?

2011-10-19T15:58:00.000-07:00

Financial FAQs

Now that Elizabeth Warren, Harvard Law Professor (Contracts) and creator of the barely born Bureau of Consumer Financial Protection, is running for Ted Kennedy’s former Senate seat, she should receive the attention she deserves. Professor Warren is perhaps the most eloquent spokesperson for rebalancing 30 years of policies that tilted income and wealth from the middle class to the investor class (i.e, to producers/investors, rather than consumers) of our economy.

A recent New York Times’ editorial said it best: “Ms. Warren talks about the nation’s growing income inequality in a way that channels the force of the Occupy Wall Street movement but makes it palatable and understandable to a far wider swath of voters. She is provocative and assertive in her critique of corporate power and the well-paid lobbyists who protect it in Washington, and eloquent in her defense of an eroding middle class.”

But really, even the New York Times misses the point. Not only has income inequality destabilized our financial system, but the economy as a whole. Don’t take my word for it. Clinton Labor Secretary Robert Reich, and many others have pointed out the results of too much inequality that puts us near the bottom of developed countries. We are 97^th of the 136 countries ranked—next to Cameroon and a handful of other African countries, according to the CIA Factbook.

The more frequent financial destabilizations of late are but a symptom, while the redistribution of wealth itself is the core illness that has in fact directly lowered economic growth by reducing overall aggregate demand—which is the willingness of consumers, investors and government to spend or invest.

In other words, the supply-side theories implemented by Milton Friedman, Ronald Reagan, et. al., have taken away the wealth of those who create most demand—middle class wage and salary earners. Their incomes have become stagnant, and may result in a permanent underclass, if Elizabeth Warren doesn’t have her way.

The remedies are available. Bring back a more progressive tax structure that existed even as recently as the Clinton era. And re-regulate the banking and shadow banking systems as mandated by Dodd-Frank—specifically implement the so-called Volcker Rule that won’t allow banks to trade for their own profit—as well as other measures that reduce the size of the too-big-to-fail financial sector. The bloated financial sector was the real cause of the Great Recession, and reducing it will return resources and capital taken away from the productive sectors of our economy.

Professor Warren fought this battle when creating the Consumer Financial Protection Bureau, which is within the U.S. Treasury. Her message was simple in creating the Bureau: the consumer “market” for financial products does not operate like a proper market because leading firms (bigger banks and also nonbanks, like some payday lenders) have figured out how to make a great deal of money by confusing their customers.

“If someone attempted to sell boxed cereal in the same fashion that many financial products are now sold, that person would be drummed out of the cereal business. The norms of that sector (and many other nonfinancial sectors in the United States) would not stand for this degree of deception and malpractice”, said one critic of the successful Republican campaign against her nomination as first Bureau Director.

Transparency is an issue with all financial markets, not just mortgage and payday loans, of course. The multi-trillion dollar derivatives’ business is controlled by a self-appointed consortium of the major banks. And they have resisted providing a record of their transactions to a central clearing house, a provision of the Dodd-Frank bill that is still being developed.

So let us listen to Elizabeth Warren for Massachusetts Senator in her campaign to reoccupy Ted Kennedy’s Senate seat. The principles she espouses to restore the middle class will actually restore economic growth for all of us, if carried out.

STOP Blaming the Consumers

2011-10-17T07:15:00.000-07:00

Financial FAQs

It’s time to stop blaming consumers for the jobless recovery. The pundits have come up with too many reasons for their depressed confidence to list here, (at least according to the polls).

"Hopes for full global recovery in the next 12 months substantially weakened in the second quarter as the majority of consumers around the world remained in a recessionary mindset", said one survey.

Then why are U.S. consumers actually spending more, as evidenced by the latest retail sales in almost every area, almost as much as during boom times—7.9 percent annually? They are also paying down their debts and saving more. Maybe it’s their way of railing against the system that gives rewards to the wealthiest, like the #OccupyWallStreet protesters are doing.

Graph: Inside Debt

Overall retail sales in September jumped 1.1 percent, following a 0.3 percent increase (originally no change). The September number topped consensus expectations for a 0.8 percent surge. Retail sales on a year-ago basis in September stood at 7.9 percent, compared to 7.5 percent in August. Excluding motor vehicles, sales were up 7.8 percent on a year-on-year basis, compared to 7.9 percent the prior month.

Today's sales numbers are a relief for equities, says Econoday, adding to the argument that the economy is gradually improving and not returning to recession. Based in these numbers, third quarter GDP growth estimates are already being revised upward.

The biggest increase was in motor vehicle sales. Inventories previously held back by disrupted supply in Japan are flowing again. Car buyers responded by boosting overall unit new motor vehicle sales to an annualized 13.1 million units which were up 8.0 percent from August’s 12.1 million units.

So what is holding back job growth, if not consumer spending? Total personal consumption expenditures are running at maybe half normal, but business investment is still rising—witness the strong capital goods numbers. So it is really technology investments that have boosted production instead of new workers, and of course globalization that has exported so much production overseas.

The 1.1 percent rebound in nondefense capital goods excluding aircraft was a big plus, following a 0.2 percent decline in July. Shipments for this series jumped 2.8 percent in August after a 0.4 percent rise the month before. Overall, manufacturing remains on a moderate uptrend, taking into account the volatility of durables orders.

So while businesses may not be hiring people, it clearly looks like they are “hiring” equipment with the rise in nondefense capital goods excluding aircraft, says Econoday.

New York Times columnist Joe Nocera recently reread a book on the history of the Great Depression by Frederick Lewis Allen, and the problems were just the same.

“In “Since Yesterday,” he says, “bankers are vilified; homes are foreclosed on; people desperately search for work — just like today. Businessmen speak of the need for “confidence,” a word that “enters the vocabulary only when confidence is lacking.” Elsewhere Allen writes, “No longer were vital economic decisions made at international conferences of bankers; now they were made only by the political leaders of states.”

And…“while small business suffered terribly during the Great Depression, big corporations did well. When large companies needed to lay off workers to maintain profitability, they did so ruthlessly. Bursts of economic growth, however, were rarely accompanied by an increase in employment. Why? Because new technology allowed companies to increase productivity at the expense of workers. Just like today”, said Nocera.

So it is a wondrous thing to see consumers hanging in there, in spite of chaotic markets and dysfunctional politicians. Maybe we are seeing some of the innate optimism Americans are famous for. So watch out, politicians. Consumers seem to be finding a way around the economic and political gridlock that is stopping this recovery from putting more people back to work.

Why Dumb Down Our Government?

2011-10-15T14:47:00.000-07:00

Should it surprise us that we, the people, are smarter than the politicians we’ve elected? Maybe the money machine it takes to get elected these days has discouraged more Mr. Smith’s from going to Washington. Or, maybe the Facebook revolution that is connecting youth and students worldwide has enabled us to circumvent the corporate-owned mass media that controlled the ‘message’ the moneyed interests wanted us to hear.

In fact, it looks like educated citizens, at least, are way ahead of the politicians in knowing what to change to insure a future for US. It is our government that has been dumbed down, and Main Street has outdistanced the pols because 99 percent of US see a decent future slipping away.

So it is no wonder that many are staging protests all over the world, as in #OccupyWallStreet. They see politicians who are blatantly ignorant of the most basic science—who ignore global warming and evolution, for instance. Or of basic accounting rules, or a working health care system. It doesn’t take a graduate degree to know how to pay down our record debt that is holding back a recovery, or bring down health care costs, yet politicians can’t seem to figure it out.

The dumbing down is non-partisan. Even some Democrats are opposing Obama’s new American Jobs Bill that would create 1.9 million jobs and grow economic growth an additional 1 percent, according to the White House.

And #OccupyWallStreet is nonpartisan. Interviewees have stated on NPR and other venues that they didn’t want to be labeled Democrat or Republican. Why? Because the winner-take-all American political system needs at least a third party to get around the sclerosis of a two-party system that is locked into their respective ideologies.

How did it start? Back in July, an idea by Kalle Lasn and his colleagues at Adbusters, a nonprofit magazine run by social activists, had started to come together, said a Washington Post Blog article. It was to bring about our own Egyptian Tahrir Square protest via the Internet that has been spreading to other cities and other countries. Why has it caught fire?

‘They look at the future and see just one big black hole,” said Kalle Lasn, in the Post interview. “They look at a world with climate change that will be much hotter when they get older, at a political crisis and corruption in Washington, at the American democracy not working any more at a time when America is in decline, and at a financial crisis in which the Dow Jones could plummet tomorrow. If we don’t stand up and fight for a different kind of future, they realize, we won’t get one.”

The list of demands is familiar, per CoupMedia.org:

Restore the Glass Steagall Act repealed in 1999 that separated banks from investment banks that made risky bets.
Punish the Wall Street wrongdoers who caused the financial markets to crash.
Give some mortgage relief to the 11 million homeowners with underwater mortgages from the unused $billions that were set aside for mortgage modification but never used.
Congress should enact legislation to protect our Democracy by reversing the effects of the Citizens United Supreme Court Decision which essentially said corporations can spend as much as they want on elections.
Congress should pass the Buffett Rule on fair taxation so the rich and corporations pay their fair share & close corporate tax loop holes and enact a prohibition on hiding funds off shore

The list of demands goes on and on, from Universal Health Care to greater environmental protection, but the intent of #OccupyWallStreet protesters is clear. Bring back the democracy that has been lost to the special interests. We are seeing a public consciousness that is rising above those private interests that have tried to stamp out the public sector’s interest in a responsive government, and sustainable future growth.

Alas, much of the dumbing down we see is intentional. It is an anti-intellectualism of the far right including the Republican leadership that hopes their electorate, at least, will not notice the world crumbling around them. Paul Krugman, for one, calls it terrifying should one of the anti-intellectuals succeed to the White House.

“It’s a terrible thing when an individual loses his or her grip on reality,” he said. “But it’s much worse when the same thing happens to a whole political party, one that already has the power to block anything the president proposes — and which may soon control the whole government.”

But that doesn’t have to happen. Intelligence will win in the end, if we are to preserve the real world. The dumbing down of government will be reversed when it comes to represent our common intelligence. For what else can bring back hope in any future, but citizens taking back their power?

Where Are All the Jobs?

2011-10-12T07:48:00.000-07:00

Popular Economics Weekly

Friday’s Labor Dept. employment report was good for several reasons, but tight credit is holding back small business hiring, where most jobs are created. The loss of government jobs is also holding back substantial jobs’ growth, but prior months’ jobs creation was much better than forecast. Payroll jobs advanced 103,000 in September, following a revised 57,000 rise in August (originally flat) and revised 127,000 increase in July (previously 85,000).

And revisions to Labor’s JOLTS Report (Job Openings, Layoff and Turnover Survey) show that 3.228 million jobs were available in July, an increase of 275,000 job openings just since April, the low point of the current slowdown.

Another good sign was that wages rebounded 0.2 percent in September after dipping 0.2 percent the prior month. On a year-ago basis, average hourly earnings are up 1.9 percent, compared to 1.8 percent in August. The average workweek for all workers in September ticked up to 34.3 hours from 34.2 hours in August. Looking ahead, September’s numbers point to a healthy private wages & salaries component in the upcoming personal income report, says Econoday. Aggregate private weekly earnings jumped 0.6 percent in September.

So where are the jobs, and why all the corrections? Actual job creation has been rising much faster than reported, but the Bureau of Labor Statistics doesn’t always get it right when it subtracts so-called Seasonal Adjustments of up to 1 million jobs per months during summers when students tend to flood the jobs market. Hence the revisions in past months when state unemployment insurance claims are finally tallied. So this is a case where initial employment reports are always subject to revisions, whereas longer term averages are more accurate.

And though there are more than 14 million unemployed, the 3.2 million job openings in America are largely due to the rapidly changing need for skills. A recent CNBC article highlighted the misfit between job openings and skill shortages. Over the past few weeks a number of CEOs have appeared on CNBC and told the same story: they have job openings they can’t fill because they’re unable to find workers whose skills match the job.

But that does beg the question. Companies can always train new workers to fill their job slots. The National Federation of Independent Business (NFIB) business conditions index (a small business survey) highlights a deeper reason for the so-called skill disparities. It is a lack of available credit that small businesses in particular need to expand, since small businesses provide most of the job creation in any recovery.

The NFIB’s business conditions index September increase wasn’t large (+0.8 points to 88.9), but was better than a seventh straight decline would have been, said Wrightson ICAP. In August, the net percentage of small business respondents reporting that credit was harder to obtain jumped three points to an 11-month high of 13 percent, and the percentage expecting credit conditions to deteriorate also rose.

The culprit? Our S&P debt downgrade and European debt problems have scared the debt markets so that little new debt is being issued, which all businesses need to expand. Per Wrightson ICAP: “In the wake of the debt ceiling default scare, the index for general economic expectations fell to -26 in August, versus a previous cyclical low of -23 in 2008. The September “recovery” brought it back only to -22.”

In another revision, economic growth for the second quarter actually did end up stronger than previously estimated but still anemic. The Commerce Department’s final estimate for second quarter GDP growth was bumped up to a rise of 1.3 percent annualized, compared to the prior estimate of 1.0 percent annualized and to first quarter growth of 0.4 percent. The anemic growth was due to declining incomes, which have been dropping since their high in January. This is what is being described as the ‘new normal’ for economic growth—i.e., not enough growth to keep up with population growth

There is also some recovery in real estate, as construction made a comeback in August, largely from the public sector although major private components also gained. Construction spending in August rebounded 1.4 percent in August, following a 1.4 percent drop in July, and is in positive growth territory for the first time in more than a year.

And both the service sector and manufacturing ISM surveys were looking better in September. Business activity in the service sector, that is production, rose 1.4 points to a 57.1 level that shows the strongest rate of monthly growth in six months. The manufacturing sector also continues to improve, with employment and production up, but orders in the manufacturing sector flat at the very best, according to September data from the Institute For Supply Management.

The bottom line? We must find more ways to ease credit conditions. Lenders are scared that Europe may default on its debts, and that the U.S. might suffer a further S&P downgrade, at least, if Congress can’t agree on a budget for the new fiscal year that began on September 1.

We can stimulate faster growth if we will all pull together, as Fed Chairman Bernanke so eloquently said in his latest congressional testimony: “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector”.

What is the ‘New Normal’?—Part II

2011-10-07T07:37:00.000-07:00

There is no reason we have to accept predictions of a slower growth ‘new normal’, as I said in a recent column, unless we react as the Japanese government did with too little stimulus spending until it was too late. Most pundits define the current slowdown as a growth recession mirroring the Japanese malaise that resulted in falling wages and prices from 1996 to the present, due mostly to massive debt accumulated during the bubble years.

Why not accept it? Firstly, Bernanke’s Federal Reserve just announced another bond buy back of $400 billion that will keep long term interest rates low for an extended period. Secondly, manufacturing and exports are still growing. It is true that personal incomes have been falling in line with declining employment, which is typical as businesses keep cutting their costs. But that also means no danger of inflation, as wages make up 70 percent of product costs.

And the economic indicators are improving, in spite of the euro crisis, political stalemate, falling stock prices, and the more than 16 million unemployed or underemployed? So it would take much less to stimulate more new normal growth, such as Obama’s $440 billion jobs bill presented to Congress.

So we can stimulate faster growth if we will all pull together, as Fed Chairman Bernanke so eloquently said in his latest congressional testimony: “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector.”

Economic growth for the second quarter actually did end up stronger than previously estimated but remained anemic. The Commerce Department’s final estimate for second quarter GDP growth was bumped up to a rise of 1.3 percent annualized, compared to the prior estimate of 1.0 percent annualized and to first quarter growth of 0.4 percent. The anemic growth was due to declining incomes, which have been dropping since their high in January. This is what is being described as the ‘new normal’ for economic growth—i.e., not enough growth to keep up with population growth.

The latest month's rebound was led by a 3.1 percent jump in public sector outlays, following a 1.5 percent dip in July. Private residential construction spending made a partial rebound of 0.7 percent, following a 3.2 percent fall the prior month. Private nonresidential outlays edged up 0.2 percent after a 0.3 percent advance the prior month.
On a year-ago basis, overall construction outlays improved to up 0.9 percent in August from down 0.1 percent in July.

The ISM survey on overall non-manufacturing (service sector) activity is also looking better. Rates of monthly growth in orders are accelerating though employment is now contracting in what is a mixed report on the non-manufacturing sector for September. New orders rose a very solid 3.7 points to 56.5, over 50 to indicate monthly growth and well above August to indicate an accelerating rate of monthly growth. Backlog orders are now over 50, up five points to 52.5 to end three months of contraction. These are solid readings that point to rising overall strength for the sector in the months ahead.

Business activity, that is production, rose 1.4 points to a 57.1 level that shows the strongest rate of monthly growth in six months. Yet despite the rise in output, non-manufacturers are not hiring with the employment index falling 2.9 points to a sub-50 reading of 48.7 that indicates contraction in the sample's workforce. This is the first contraction in employment since August last year, and tells us that the service sector is not expanding fast enough to warrant more hiring.

And the manufacturing sector continues to improve, with employment and production up, but orders in the manufacturing sector flat at the very best, according to September data from the Institute For Supply Management. Its composite index came in slightly higher. The employment component rose two full points to 53.8 to indicate a tangible increase in hiring. This is in line with a tangible increase in production which rose more than 2-1/2 points to 51.2. One plus on the order side is a pick up in new export orders which rose two points to 53.5, signaling that exports are on the rise again.

What is the real reason for the current slow growth new normal that has continued since January? It could be that consumers haven’t paid down enough debt and are saving more, while incomes have been declining, as we have said. So to grow out of it more jobs must be created, and right now the rest of government isn’t doing its job to stimulate growth.

What will Boost Real Estate?

2011-10-02T07:43:00.000-07:00

The Mortgage Corner

Never in my 30 years as a Mortgage Banker did I think I would see interest rates this low—as low as during Harry Truman’s Presidency. Yet very few homeowners are able to take advantage of those rates, which have dropped more than 2 percent since 1997, the beginning of the market crash. And we know why; whether it was the loss of a job, health insurance, or equity in their home with housing values down as much as 50 percent in some states.

This is while the foreclosure backlog is so great it could take more than 60 years in some states to work through, according to New York Times reporter David Streitfeld.

So when two Presidents—President Obama in his new jobs plan, and former President Clinton on the Sunday TV talk shows touting his Clinton Global Initiative—say that real estate has to recover for our economy to recover, it should take precedence in discussions on how to boost economy growth.

And there are concrete steps we can take now to cure much of the housing malaise of vacant homes and deteriorating neighborhoods. Obama’s inclusion of $15 billion in his new jobs plan to rehabilitate depressed neighborhoods is one such. But much more can be done if he can convince Fannie Mae and Freddie Mac to cooperate in loosening some of their almost draconian qualification requirements for both purchase and refinance transactions made more restrictive after the housing crash.

Credit scores, for instance, do not have to be 680 or better, if there are other so-called compensating factors, such as long term employment, or good assets. Or, the almost set-in-stone 45 percent maximum overall debt-to-income ratio could be more flexible with good job security and assets.

And much more can also be done with HARP, the Housing Affordable Refinance Program that was touted to help millions of homeowners, but has helped just 838,000 to date. Hence President Obama’s pronouncement that loan modifications would be allowed for “responsible applicants” can mean that compensating factors should be considered when qualifying borrowers.

But there is another restriction keeping many homeowners from refinancing or buying—the declining equity in their current home. Whereas just 10 years ago average equity was 61 percent, it is now just 38.6 percent, according to the Federal Reserve’s latest Flow of Funds report. If Fannie and Freddie would qualify someone with good credit and assets that is, say, 50 percent underwater, the case in many neighborhoods, then they should be allowed a haircut—meaning a reduction in their principal balance—that would enable them to refinance at today’s record low rates with a new loan that brought it back to 100 percent of current value. The 30-year conforming fixed rate today is hovering at 4 percent.

What is holding Freddie and Fannie back from offering this now, which could in fact refinance an additional 2.9 million homes without significantly increasing tax payers’ liability, according to a recent CBO report? Once again, it seems to be Republicans’ opposition to any more government liabilities, and the fact that an independent agency, the Federal Housing Finance Authority is Fannie and Freddie’s administrator, charged with limiting their losses now that they are government-owned.

But the CBO study showed that it could save homeowners about $7.4 billion in just the first year and help about 111,000 homeowners avoid default with just a net cost of $600 million. What’s not to like about this program?

The ‘New Normal’ Doesn’t Have To Be Slower Growth!

2011-09-17T07:42:00.000-07:00

Popular Economics Weekly
There is no reason to accept what pundits and some economists are telling us we have to accept—a ‘new normal’ for economic growth that is some kind of growth recession. Because we have the means to spur sufficient economic growth, if only we will reject an insidious disinformation campaign that discredits all scientific and factual reality, a campaign that can only work if we listen to those who would blame others for the Great Recession—and who blame immigrants, the budget deficit, too much government, or too high taxes in order to justify further spending cuts.
A growth recession is what the Japanese have experienced ever since their twin real estate and stock bubbles burst circa 2000, because they didn’t cure the ills that caused their bubbles, or spend what it took to revive their economy until it was too late to prevent more than a decade of deflation and poor economic growth sound familiar?).

Graph: Trading Economics

So don’t believe the scapegoaters for a minute. We need more job creation programs, not tax and spending cuts, because corporations are holding onto their record profits generated by laying off domestic workers while sending jobs overseas, so that 50 percent of S&P 500 corporation profits now come from overseas operations. And consumers aren’t spending enough to cause domestic expansion because their incomes aren’t rising, even though they produce more per worker.
The ‘new normal’ of growth we are currently seeing is really a product of the so far successful Republican campaign to oppose any kind of stimulus spending. But they can only do this by dumbing down the electorate or (at least their own constituency) that believes austerity is more important than job creation, that cutting taxes for the richest is more important than repairing our aging infrastructure, or protecting the environment, or even maintaining social security and Medicare.
The Republicans answer to Obama’s $447 billion job formation bill was predictable. House Majority Leader Boehner said long term tax hikes should not pay for short term stimulus, which is not being truthful. The tax hikes are paying for long term jobs—in infrastructure, education and environmental protection. And the tax hikes on itemized deductions for the wealthiest 2 percent would cut some $400 billion from the deficit over the next 10 years, since those tax breaks are being paid for with borrowed money. Another $62 billion of the deficit would be cut by eliminating the various tax breaks on oil and gas, private equity partners, and corporate jets.
Republicans are, in a word, trying to convince us what is in effect a ‘new normal’ of ignorance, a wholesale ignorance of reality based facts—whether economic or scientific. For instance, how can anyone believe Republicans who maintain Obama’s stimulus spending created zero jobs, when the CBO says it created or preserved 1.4 to 4 million “Full Time Equivalent jobs to date? Or Rick Perry’s blatant untruths about social security being a “Ponzi scheme”, global warming not having a scientific consensus when his own Texas is burning because of a record drought, and evolution is just one competing theory?
Their campaign is insidious, as the discounting of facts does appeal to their base of support on the extreme religious right. They have to keep their electorate ignorant, if they want to transfer even more wealth to Wall Street by privatizing social security while advocating deregulation when that is what caused the market crash.
Republican House Whip Eric Cantor tries to justify his opposition to paying for the jobs bill by saying it’s a tax on the “job creators”. But the only job creators will be government tax dollars returning to the private sector to create more private sector jobs, when the private sector isn’t hiring.
And social security and Medicare are really only in danger of running out of funds if Republicans and their conservative backers won’t support the actual reduction of federal debt, rather than keep the tax cuts and loopholes that have transferred so much wealth to the wealthiest, and continue to oppose regulations that would lower health care costs. As a result corporate profits are now highest in history as a percentage of GDP, as we have said.
A growth recession is not what we want. The Japanese are bedeviled by debt that is now 200 percent of GDP, as they have allowed deflation and a cheap currency to facilitate exports, but has suppressed domestic demand—mainly because such a deflationary spiral means their citizens’ wealth continues to decline.
There are other reasons for Japan’s economic decline—reacting too slowly to the bubbles and so choosing austerity instead of pump priming (sound familiar?), static population growth (because of immigration restrictions), and a keiretsu economic system of interlocking ownerships that has banks owning aging corporations they kept afloat too long rather than putting money into new growth opportunities.
But there is no reason we should follow Japan’s example. Instead, we have to turn back 30 years of conservative attempts to shrink government with a vengeance that has not really transferred wealth to the private sector—except to their wealthiest supporters. But it will take the growing anger of the unemployed and under-employed to accomplish it—such as happened with Wisconsin’s public workers—rather than angry Tea Partiers blaming welfare immigrants and the lazy jobless for budget deficits that are only growing because of the disinformation campaign that attempts to dumb down voters.
Harlan Green © 2011

Consumers Continue to Spend—What Pessimism?

2011-09-12T12:59:00.000-07:00

Financial FAQs

Consumers continue to spend, in spite of the doom and gloom of the latest confidence surveys and high unemployment rate. This is confirmed in part with July’s outstanding consumer credit numbers, as well as a robust service sector. Overall consumer credit advanced $12.0 billion in July, following an $11.3 billion boost the prior month. But the latest increase was due to a solid gain for auto sales in July as nonrevolving credit rose $15.4 billion. Nonrevolving credit has now risen for 11 straight months.

In contrast, gains in revolving credit, reflecting credit-card use, have been hard to come by with the component down $3.4 billion in July to end a short run of strength. Consumers continue to deleverage credit card balances and banks are still writing off bad credit card debt though at a slower pace.

The good news is that consumers are still spending—but increasingly with cash, says Econoday. Retail sales excluding autos hit a recent bottom of $278.9 billion in March 2009 and for July 2011 posts at $323.6 billion—a cumulative 16.0 percent rebound. Keeping the plastic in wallets has slowed retail sales growth but it likely has been necessary to strengthen consumer balance sheets that had become way out of balance with debt. Until job growth picks up, consumers will likely be reluctant to take on more debt and sales growth will remain moderate. And importantly, sales growth is possible even without the plastic.

And service sector growth, which now makes up two-thirds of economic activity, is also holding in the ISM non-manufacturing report. The Institute For Supply Management’s non-manufacturing composite actually edged 0.6 points higher to 53.3, when anything above 50 means expansion. This was a sharp contrast with a number of regional surveys that had turned negative. It also topped market expectations for a reading of 51.1.

The debt-ceiling drama and the S&P downgrade of the US did in fact pull down consumer confidence which fell in August to 44.5 for the lowest reading since April 2009. Weakness was concentrated heavily in the leading component which is expectations where the consumer's outlook on employment, business conditions and on income all fell. The expectations index, at 51.9, is also at its lowest level since April 2009.

This hasn’t stopped consumer spending, as I said, which rebounded a sharp 0.8 percent after slipping 0.1 percent in June. By components, durables jumped 1.9 percent after declining 1.1 percent in June. Clearly, motor vehicle sales are up as the supply constraint related parts shortages from Japan is easing. Nondurables increased 0.7 percent, following a 0.5 percent decrease in June. Services rose 0.7 percent after nudging up 0.1 percent in June. The latest numbers on spending should allay concern about a double-dip recession—even with the latest jobs report.

This should put double-dip fears to rest. The current fears have more to do with Europe’s problems. And if President Obama fights for his new $447-billion jobs plan, then the fears will be confined to Europe, which still believes that austerity is the way to prosperity. But given the latest zero job growth numbers and public discontent with the current ‘do nothing’ Congress, US politicians might finally be convinced that creating more jobs is the path to prosperity.

Where is Harry Truman When We Need Him?

2011-09-08T13:45:00.000-07:00

Popular Economics Weekly

The U.S. economic outlook has "clearly" deteriorated this year, and the continued softness of economic indicators shows that the headwinds facing the country are even stronger than thought, Chicago Federal Reserve President Charles Evans said last Wednesday.

"Conditions still aren't much different from an economy still in recession," said Evans, speaking at a seminar in London.

Is there something we can do about it with our Accommodator-in-Chief giving conservatives what they want, such as cancelling the new air quality regulations, without negotiating for something in return? Well yes. Bring back another “Give ‘em hell” Harry Truman, or have President Obama choose him as a model for how to weather the next year during an election season, instead of the “Give ‘em what they want” Barack we have known of late.

“Give ‘em hell” Truman was given that nickname for a reason. During a 1948 campaign speech a supporter yelled out "Give 'em Hell, Harry!". Truman replied, "I don't give them Hell. I just tell the truth about them and they think it's Hell."

The post-WWII economy was going through the same malaise as today. Federal debt had ballooned to 120 percent of GDP to pay for WWII (vs. 80 percent today), unemployment was high, and Republicans crying deficit reduction had triumphed in the 1946 Congress.

"Republicans stand four-square for the American home--but not for housing,” he said during his 1948 campaign. “They are strong for labor--but they are stronger for restricting labor's rights. They favor minimum wage--the smaller the minimum wage the better. They endorse educational opportunity for all--but they won't spend money for teachers or for schools. They think modern medical care and hospitals are fine--for people who can afford them. They consider electrical power a great blessing--but only when the private power companies get their rake-off. They think the American standard of living is a fine thing--so long as it doesn't spread to all the people. And they admire the Government of the United States so much that they would like to buy it."

Does all this sound terribly familiar, even to the Republican attacks against him?

“The smear campaign on your President started in all its vile and untruthfully slanted headlines, columns, and editorials,” said Truman. “Hearst’s character assassins, McCormick-Patterson saboteurs all began firing at me, as did the conservative columnists and radio commentators. Not because they believed anything they said or wrote, but because they were paid to do it.”

Truman was following one of FDR’s more well-known maxims: “Human kindness has never weakened the stamina or softened the fiber of a free people. A nation does not have to be cruel to be tough.” Truman and the Democrats were alone in trying to keep the U.S. economy afloat, in other words. So instead of compromising with deficit hawks by cutting spending, he blasted the “do nothing 80^th Congress of that time”, advocating Universal Health Care and extension of unemployment benefits. When the deficit hawks in Congress voted down those benefits—both ‘blue dog’ Democrats and Republicans, we might add—he was able to blame them for the continuing malaise. Then he upset heavily favored New York Governor Thomas Dewey in 1948—it was one of the most famous comebacks in Presidential history.

“I have told the people that there is just one big issue in this campaign and that’s the people against the special interests. The Republicans stand for special interests, and they always have. The Democratic Party, which I now head, stands for the people–and always has stood for the people.”

Why is this malaise dragging on so long? With some $2 trillion in cash sitting on S&P 500 corporations’ balance sheets, and profit margins the highest since WWII, employers are refusing to hire more workers. This is why there was zero (0) nonfarm payroll growth in August.

It’s because businesses have been living in a bubble they are reluctant to leave. It is called supply-side economics, because of a succession of business-friendly administrations that believed the bulk of government benefits should be directed to business, rather than consumers. This was mainly in the form of tax breaks, which are of little benefit to consumers—most of whom pay a payroll tax that has never been cut. Business tax breaks are an indirect form of government support, but nevertheless result in reduced revenues.

Yet consumers have been spending more as wages and salaries—80 percent of the workforce—are rising; have been rising in fact since July 2009, the nominal end of the Great Recession. Consumer spending rebounded a sharp 0.8 percent after slipping 0.1 percent in June. By components, durables jumped 1.9 percent after declining 1.1 percent in June. Clearly, motor vehicle sales are up as the supply constraint related parts shortages from Japan is easing.

So what is the lesson from “give ‘em hell, Harry”? Truman was not afraid to take on those who wanted to reduce government, when government was the only support for both businesses and consumers during tough times.

“People are waking up that the tide is beginning to roll, and I am here to tell you that if you do your duty as citizens of the greatest Republic the sun has ever shone on, we will have a Government that will be for your interests, that will be for peace in the world, and for the welfare of all the people, and not just a few.”

So the Obama the Accommodator has to turn into Obama the fearless Negotiator who is willing to attack his enemies, who are also the enemies of the majority who have been hurt most by the Great Recession.

Why the Terrible Payroll Report?

2011-09-07T11:06:00.000-07:00

The Labor Department’s (BLS) August unemployment report showing ZERO (0) nonfarm payrolls growth was a shocker, when seasonally adjusted. Though expectations were low, no one had predicted absolutely no increase in hiring. But wait a minute. Aren’t 4 million jobs created and 4 million jobs lost on average every month, according to the Labor Department?

Ah, there’s the rub. When Labor “seasonally adjusts” the jobs’ numbers it is really counting any increase or decrease over normal hiring for that season, as we’ve said in past columns. For instance, during the summer months, since it finds a seasonal increase of approx. 1 million jobs from youths entering the labor force, it subtracts that 1 million from any actual increase in hiring before calculating the final Household survey increase or decrease via algorithmic formulas. This is while Establishment survey of nonfarm payrolls seasonal adjustment actually added jobs in August, as education payrolls can decline as much as 20 percent during the summer months, necessitating adding a seasonal adjustment factor.

We see more with JOLTS, the July BLS Job Openings and Labor Turnover Survey (It lags by one month), which shows the actual job totals. The number of job openings surprised us by climbing to a new cyclical high of 3.228 million positions, and the quit rate was a little higher than expected with 1.95 million workers voluntarily leaving their jobs for other opportunities. However, the number of new hires in the month slipped back to a six month low of 3.984 million, suggesting slightly less dynamism in recent months, said Wrightson ICAP. So employment numbers are at best an estimation, and can be the elephant in the room when attempting to predict future economic activity. In fact, the BLS itself says that it can only be 90 percent to get within 100,000 of the real numbers!

Chart: Wrightson ICAP

Since the seasonal adjustment is never very accurate it keeps getting adjusted when the more accurate state initial unemployment insurance claims come in. For instance, July’s payrolls were adjusted downward from 117,000 to 85,000, and June dropped from 46,000 to 20,000 net nonfarm payroll jobs. And Barron’s economist Gene Epstein mentions that as many as 75,000 private payrolls jobs might have been lost by the (just settled) Verizon strike in August.

And both the service and manufacturing sectors are showing more strength in August. An unexpected one-point increase in orders contributed to an unexpected rebound in the ISM non-manufacturing survey. The 0.6 increase to 53.3 was small but surprising nonetheless. The employment index fell by less than one point to 51.6, which, over time would be consistent with somewhat stronger payroll growth than was reported on Friday.

Chart: Wrightson ICAP

The overall business activity index, which is the most subjective component, slipped just half a point to 55.6. That index remains a couple of points above the recent lows reached in the April-June period, and suggests that the non-manufacturing sector does not see signs of an imminent collapse.

Another indicator arguing against a double dip is the Chicago Purchasing Managers Index. Business in the Chicago area this month did not slow as much as expected with the purchasers' index coming in at 56.5, down only 2.3 points from July. August's rate is comfortably over 50 to indicate solid growth in the area's economy though at a slightly slower rate than July. Chicago's sample, which includes both non-manufacturing and manufacturing firms, is considered a good proxy for overall GDP growth.

Econoday reports it shows solid but slowing growth for new orders and production. The new orders index rose to 56.9, compared to 59.4 in July. Production came in at 57.8, down from 64.3 in July but well over breakeven. Supplier deliveries slower substantially which is a sign of strong business activity. These results were surprisingly solid given the run of negative indications on August business conditions that included extremely weak readings on consumer spirits and a run of regional manufacturing reports reporting contraction.

Why aren’t more jobs being created? Corporations with a $2 trillion cash hoard and record profits aren’t the problem. They would hire more if they could sell more. So additional demand has to be created by financing additional projects that create private jobs, like rebuilding our aging infrastructure. The American Society of Civil Engineers has calculated that the deferred maintenance of our public transportation system alone will cost $2 trillion to bring up to modern standards.

Inflation also isn’t the problem. The 10-year Treasury bond yield is now under 2 percent. And Nobelist Paul Krugman said recently there are only 2 numbers that tell us what we have to do to grow the economy. The record low yield of the 10-year Treasury Bond, and 0 net nonfarm payroll growth in August. So the problem at the moment is the lack of political will in Congress to create more jobs, not the private sector who would certainly hire more workers if they had work for them.

Labor’s Day—Have We Forgotten What It Means?

2011-09-02T07:30:00.000-07:00

Popular Economics Weekly

It’s officially the end of summer, start of school, fall colors, and Obama’s upcoming September 8 joint congressional State of the Jobs Market. With the labor market in dire straits, what can we say about this year’s Labor Day Holiday?

Former French Finance Minister and new IMF Managing Director Christine Lagarde gave a highly regarded speech at the Fed’s Jackson Hole conference that said in effect this was the wrong time to implement more austere, budget cutting policies with labor in such trouble. “In the United States, policymakers must strike the right balance between reducing public debt and sustaining the recovery—especially by making a serious dent in long-term unemployment,” she said.

But the latest data on record corporate profits tells us something alarming. Because of the globalization of technology, businesses know how to expand without hiring more employees—at least in this country. About 83 percent of S&P 500 companies have beat second quarter 2011 analyst estimates according to data compiled by Bloomberg News. This is while S&P recently reported that in 2010, 46.3 percent of all S&P 500 company sales originated outside of the US.

“If we look at the last 10 years, the divergence between the corporate profits of S&P 500 companies and domestic GDP growth is astonishing,” said GC Mays, an Independent / boutique research firm analyst in his Seeking Alpha blog. “Between the first Quarter of 2001 and 2006, a simple correlation showed that corporate profits explained 98.4 percent of domestic GDP growth. However, the most recent five years beginning with the first quarter of 2006 the correlation between corporate profits and domestic GDP growth breaks down as corporate profits only explain 10.1 percent of domestic GDP growth.”

Graph: The Mays Report

Why is it necessary to increase jobs when we now know we can have economic growth without job growth? Well, beside the obvious voter anger if politicos don’t take the lead in creating more jobs, it means taking away the demand that can grow the domestic economy. Corporate profits have risen to the highest level as a percentage of Gross Domestic Product since the Great Depression—14 percent—but much of the profit comes from overseas’ sales of U.S. companies, as we said.

And that doesn’t augur well either for decreasing the record income inequality for most wage earners or growing domestic jobs. Since World War II the unemployment rate has twice reached 10 percent—during the 1981-82 and just ended 2007-09 recession. But because of the housing and financial crashes that accompanied the Great Recession—or Small Depression, as Krugman has christened it—consumers are not spending and employers not hiring domestically as they have in past recoveries.

That means corporate profits are no longer dependent on domestic demand, so are not going to help reduce the various deficits—both household and governmental—without explicit policies to create more domestic jobs. It’s a straightforward equation. Decreasing domestic unemployment means decreasing domestic deficits, and growing household incomes means growing domestic businesses. But since corporations are no longer dependent on growing domestic jobs to sell their products, what policies will? Director Lagarde says it best:

“First—the nexus of fiscal (budget) consolidation and growth. At first blush, these challenges seem contradictory. But they are actually mutually reinforcing. Credible decisions on future consolidation—involving both revenue and expenditure—create space for policies that support growth and jobs today. At the same time, growth is necessary for fiscal credibility—after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?”

We can hope that Labor Day will be a cause for celebration; an international coming together of Big Business and dueling politicians on the need for concrete job creation policies. Make no mistake that as the public becomes better informed on the causes of the current employment malaise, they will seek out leaders who can implement the reforms necessary to correct the imbalance between growing corporate profits and declining payrolls.

“In sum,” concludes Lagarde, “risks to the global economy are rising, but there remains a path to recovery. The policy options are narrower than before but there is a way through. There are lingering uncertainties, but resolute action will help to dispel doubts.”

The Fed’s Paralysis—Who Will Do the Right Thing?

2011-08-30T09:11:00.000-07:00

Popular Economics Weekly

I actually agreed with Fed Chairman Bernanke in his latest Jackson Hole speech, when he said the Fed can’t grow the economy without some help. The weak growth of late has panicked markets, and Fed policy doesn’t seem to do the trick. Its record low interest rates aren’t helping at the moment, though that is keeping the housing market from dying completely.

So who is setting our monetary and fiscal policy these days? No one, at the moment. The White House is always one step behind events—worrying about deficit reduction when it can’t shrink the deficit without more job growth. And Congress is obsessing about the size of government, when government employment and spending have been shrinking faster than in the private sector.

“The country would be well served by a better process for making fiscal decisions,” was Bernanke’s understatement of the year, signaling it was fiscal policy that should now take the lead in growing the economy. So is Bernanke is throwing up his hands at the moment, in refusing to even hint at what other stimulus policies might come from the Fed until after a special 2-day September convocation of the FOMC? He was putting the policy ball back in the politicians’ court. It’s up to them to settle their differences if they want growth.

It’s of course obvious our ‘lack of a policy’ is now being set by the right wing of the Republican Party, who oppose all forms of stimulus. The downsizing of government has been their agenda since Ronald Reagan, and their only way seems to be by creating recessions. In fact, there have been 5 recessions during the last 3 Republican administrations. Two occurred during Reagan’s presidency (1980, 1981-82), one during Bush I (1991) and two during GW Bush’s presidency (2001, 2007).

Bernanke has been a strong advocate for an active Fed in stimulating economic growth in the past, which is why Nobelist Paul Krugman in effect called him craven for caving in to the Republican extreme right wing. “Now just imagine the reaction if the Fed were to act on the…arguably more important parts of the Bernanke 2000 agenda—more purchases of long term debt (i.e., a QE3), an announcement that short term rates would stay low for an extended period, to further reduce long term rates; and an announcement that the bank was seeking moderate inflation, “setting a target in the 3-4 percent range for inflation, to be maintained for a number of years.”

Bernanke himself actually accused the Bank of Japan at that time of a “self-induced paralysis” in not providing more stimulus to their sputtering economy, according to Krugman. “Well now, the Fed is suffering from externally induced paralysis,” he concludes.

At a time when growth has slowed drastically through the first 2 quarters of 2011 after soaring above 4 percent for several quarters last year, the fears of a double-dip recession is depressing financial markets at the moment. But the outcome is more likely a “growth recession”, defined as slow growth amid rising unemployment that the Japanese have been experiencing for the last 20 years.

Bernanke’s scholarly treatise on the causes of the Great Recession comes at the same time that GDP Q2 growth had just been revised downward to 1 percent from 1.3 percent. “Unfortunately, the recession, besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis,” said Bernanke.

Well, duh. How is that new news? He actually pins most of the blame for the current slowdown on the euro debt crisis and S&P downgrade. “It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth.” But then he goes on to discuss the need to cure the long term deficit, and only at the end of his speech does he mention the necessity for more job creation to cure the short term deficit due to the Great Recession.

“In the short term, Bernanke said, “putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.”

Why so much emphasis on debt, rather than recovery? It is because of timidity on all sides, from the White House and Congress. Even Europe is suffering from the same paralysis in not providing enough aid to Greece, a paralysis that is now spreading through several other countries, says Krugman

“The fiscalization of the crisis story — the insistence, in the teeth of the evidence, that it was about excessive public borrowing — has become an article of faith on both sides of the Atlantic. And that faith has done and will do untold damage.”

So in effect the current slowdown is due to a paralysis of will from our leaders, not lack of monetary and fiscal tools to bring about a sustained recovery.

Real Estate Prices Are Rising Again!

2011-08-27T09:06:00.000-07:00

The Mortgage Corner

Here’s a shocker. Prices of homes with agency-conforming mortgages rose for a third straight month in June and at an accelerating rate. This maybe the first time we can see housing reviving since last June’s homebuyer tax credit ended.

The Federal Home Finance Authority (that supervises Fannie Mae and Freddie Mac) purchase-only house price index is up a surprisingly strong 0.9 percent in June following a 0.3 percent increase in May (revised from plus 0.4 percent). Homebuyers want to buy, in other words, in spite of the reluctance of banks or their regulators to make it easier for borrowers in good financial standing to qualify for a mortgage.

The year-on-year rate improved for a second straight month, to minus 4.3 percent vs minus 6.2 in May and minus 6.3 percent in April. Seven of nine census divisions posted monthly gains led by a 3.3 percent gain for the East North Central. The Pacific region was the weakest at minus 0.8 percent.

What is happening? Contract signings for existing home sales were on the rise in June as the pending home sales index rose 2.4 percent to 90.9. The gain is especially notable given that it follows a surge in May of 8.2 percent. The year-on-year rate is another positive, moving from May's plus 13.4 percent to 19.8 percent. June is led by mid-single digit monthly gains in the West and in the largest region which is the South.

However, the recent boost in signings of pending existing home sales is not following through with actual closings as hoped. Existing home sales fell 3.5 percent in July to a 4.67 million annual rate that was well below expectations for 4.92 million and followed a 0.6 percent rise in June. Much of this is because of tighter lender restrictions, and uncertain real estate values that may have brought in lower appraisal values.

A little noticed surprise this week was another gain in construction spending. Construction outlays in June advanced 0.2 percent, following a revised 0.3 percent gain in May (originally a 0.6 percent decrease). The boost was led by private nonresidential outlays with public spending also up. Private nonresidental spending rose 1.8 percent, following a 1.2 percent boost in May.

So despite weakness in homes sales in May (existing homes down 3.8 percent and new homes down 0.6 percent), home prices are holding up. The Case-Shiller seasonally adjusted 10-city composite rose 0.1 percent in May, following a 0.4 percent gain the month before. Apparently, supply is down enough to keep monthly price changes from declining. Also, buyers are likely concerned about possibly higher mortgage rates as the Fed was ending its second round of quantitative easing.

A look at the unadjusted data shows wide gains as the unadjusted composite 10 index rose 1.1 percent. But spring and summer are when demand is strongest. So will the summer rally hold? Existing and new home sales are still falling, but that is last month’s news.

Supply on the market at the current sales pace turned higher to 9.4 months from 9.2 and 9.1 in the two prior months. In turn, the median price slipped 0.9 percent to $174,000 and down 0.8 percent for the average to $224,200. Year-on-year prices, which had turned positive in June, are back in the negative column, at minus 4.4 percent for the median.

So the real estate recovery is uneven, and new home sales at record lows. Why? Everyone is waiting for someone to resolve the foreclosure crisis. Banks are waiting for government, and government is too timid to require banks to speed up clearing their books of delinquent mortgages. No one is helping homeowners, in other words. Conservative that want to cut spending are setting the agenda, rather than those who want to revive housing. This is unfortunate, as Fannie Mae and Freddie Mac—who originate at least 80 percent of mortgages these days—in particular should be easing their qualification criteria, or the housing market cannot revive.

Our Psychological Depression

2011-08-21T07:40:00.000-07:00

Popular Economics Weekly

The plunging financial markets are telling us something depression, but it is more about crowd psychology, than actual events. Americans are very depressed about their financial prospects. Duh, says Paul Krugman, given the congressional deadlock. So why is it causing such market turmoil? I maintain it is because of the unfounded downgrade by Standard & Poors of U.S. Treasury securities to AA+ from AAA. This event has to be almost as shocking as 9/11 to our collective psyches. For just as Bin Laden meant the 9/11 attack to be an attack on our economy, the S&P downgrade means we are no longer the world’s only economic superpower.

So will the downgrade, which hasn’t been matched by either Fitch or Moody’s bond rating services, have an effect on real economic growth is the question. Yale Professor Robert Shiller and other behavioral economists maintain that consumer confidence, or ‘animal spirits’, affects consumers’ behavior. Professor Shiller also says that much of how people judge the economy doesn’t come from facts or economic fundamentals, but the stories they hear, as well as the degree of optimism or pessimism they feel about their own circumstances. For instance, surveys by Professors Shiller and Karl Case in their Macro Markets LLC, show that the housing bubble was fueled in large part by hearsay and media stories that housing values had always risen, and would continue to do so.

So confidence is only one factor that economists look at for their predictions. It’s a good thing, because we are seeing moderate economic growth at the moment and jobs being created. Even retail sales are surging 8 percent annually at the same time that consumer confidence measured by the Conference Board and University of Michigan surveys is at recession-levels.

So it may be that plummeting confidence in financial markets is causing the extreme market volatility of late, rather than economic fundamentals. For instance, the rise in the Consumer Price Index showing some inflation was the reason given for the stock market plunge, along with very negative Empire State and Philadelphia Fed industrial sentiment surveys.

But inflation is also a sign of increasing demand, and prices must rise for businesses to expand. The core CPI index without food and energy fluctuations is up just 1.8 percent annually, while industrial production is still healthy, according to the Federal Reserve. On a year-on-year basis, overall industrial production is rising at 3.7 percent in July. Overall capacity utilization in July also improved to 77.5 percent from 76.9 percent the prior month, signaling that businesses are expanding.

Then why were the Philly and Empire State surveys so pessimistic? It may be that since both surveys are a consensus of managers’ predictions about future prospects, they could also have been affected by the S&P downgrade, which is radiating outward as hedge funds and retirement funds with extensive holdings of Treasury securities also risk being downgraded by S&P, who has decided that it has to make up for allowing AAA ratings on subprime mortgage securities during the housing bubble, thus prolonging it.

There are also other indicators that show sentiment doesn’t match behavior. Imports are surging, the reason for the larger trade imbalance, which corroborates the higher retail sales’ numbers. And weekly initial unemployment insurance claims continue to fall. Though there was a slight uptick in last week’s claims, the four-week average fell for the seventh straight week, down 3,500 to a 402,500 level that is nearly 20,000 lower than the month ago comparison. In fact, private sector nonfarm payrolls grew 154,000 in July, following an 80,000 rise in June and 99,000 increase in May.

S&P has admitted their downgrade wasn’t really about the numbers, but about their judgement that the political situation could be gridlocked for years to come. This is because the numbers aren’t that bad. Most of the deficit is short term; caused by the Bush tax cuts, ywo unpaid wars and lost revenues from the Great Recession. The wars will end, so defense budgets will shrink, and revenues rise as economic activity continues to pick up. Politicos might also realize that most of those Bush tax breaks should probably be allowed to expire in 2012, rather than be renewed. This in itself would save some $3.8 billion over the next 10 years, according to the Center for Budget and Policy Priorities.

So S&P wasn’t making a judgment about the near term deficit, which they had overestimated by $2 trillion, but about what the federal deficit may look like in 10 years. Yet how can anyone know about events so far into the future? Though given the post-recession frayed nerves of consumers and investors, even the slightest ‘aftershock’ can cause an outsized response.

Warren Buffet’s Truth—No Shared Sacrifice

2011-08-19T10:19:00.000-07:00

Popular Economics Weekly

The Oracle of Omaha wrote a very profound New York Times’ Op-Ed recently. Warren Buffet said to “Stop Coddling the Super-Rich”; that what we needed was shared sacrifice in such times of plunging confidence in economic growth. But “when they did the asking, they spared me,” he said.

This cuts to the heart of why we even had a Great Recession, and how to dig ourselves out of the huge debt hole that resulted. There has been no shared sacrifice to date, and without it the economy and financial markets cannot recover. Firstly, the deficit cannot be paid down unless the richest individuals and corporations allow their tax breaks to expire.

The non-partisan Center for Budget and Policy Priorities has calculated that making all of the GW Bush tax cuts permanent would cost roughly $3.8 trillion over the next 10 years. And the Joint Committee on Taxation has calculated all the tax loopholes given oil, agriculture and the like will cost the U.S. Treasury roughly $1.3 trillion just in 2011 tax expenditures. That is our tax monies, folks, that is being paid to keep the super rich.

This is part of the redistribution of wealth that has occurred just since 1992. The top 400’s aggregate taxable income has risen from $16.9 billion to $90.0 billion in 2008, said Buffet. And their federal income tax rate fell from 29.2 to 21.5 percent. So the general taxpayer has been paying a multi-billion tax bill for the tax breaks of Big Business and the wealthiest. Reagan Budget Director David Stockman has labeled it the “reverse Robin Hood effect”.

What have the richest done with our tax monies? Certainly some have expanded their businesses, but much of it went overseas. U.S. corporations have some $1 trillion in unrepatriated profits from their overseas’ businesses sitting in foreign accounts, at the moment.

Much of it has also boosted executive incomes and stock buyback plans. USA Today recently reported that median CEO salaries increased 27 percent in 2010. Data from the Bureau of Labor Statistics shows, however, that workers in private industry experienced only a 2.1 percent pay increase last year. As USA Today points out, though, the great increase in CEO pay in 2010 is not really indicative of booming profits, but rather reflects the fact that many companies have been cutting costs and laying off workers.

In fact, the largest single chunk of the highest-income earners, it turns out, are executives and other managers in firms, according to a landmark analysis of tax returns by economists Jon Bakija, Adam Cole and Bradley T. Heim, says USA Today. These are not just executives from Wall Street, either, but from companies in even relatively mundane fields such as the milk business.

The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms. An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. In all, nearly 60 percent fell into one of those two categories.

And there is even less shared sacrifice in our increasingly unprogressive tax structure. To understand why, Buffet says you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. But for the middle class typically, they fall into the 15 percent and 25 percent income tax brackets, in addition to heavy payroll taxes.

“Back in the 1980s and 1990s,” said Buffet, “tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

“I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000.”

There is much more to Republicans’ disavowal of shared sacrifice, of course. GW Bush thought that by borrowing the monies for his 2 wars, he would prevent widespread anti-war sentiment so soon after Vietnam, our longest war. And it also muted criticism of his tax breaks for the wealthiest. Vice President Cheney’s infamous saying, “Ronald Reagan proved that deficits don’t matter.” was its incredible rationalization that helped to plunge us into the Great Recession.

“Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances,” says Buffet. “…It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.”

But that is clearly the objective of Tea Party Republicans in their budget cutting crusade. With the economy still recovering, unemployment still high, we cannot afford the taxpayer subsidies that are setting record budget deficits. The taxpayer paid tax breaks won’t reduce the debt load, but it will prevent any real economic growth before 2012, as I have said.

So there is even a deeper reason to bring back the idea of shared sacrifice. For as Americans become more hopeless about their economic futures, they become more passive. And passivity means they don't vote, and so participate in the democratic process, as is evidenced by progressively declining voter roles since the 1970s. The massive redistribution of wealth that has occurred most recently has bred a greater cynicism about the democratic process. Warren Buffet may not know this, but less participation in our democracy means fewer control the levers of power, as happens in Third World countries controlled by oligarchies made up of the wealthiest families. And it was depression-era Germans badly discouraged by the destruction of their economy that elected a Hitler.

Growing our Economy—Lessons of History

2011-08-17T09:31:00.000-07:00

Financial FAQs

What will increase the demand for more goods and services, the key to growing our economy? It’s been slowing since the 1970s, so is the question du jour, now that politicos are beginning to worry about the consequences of their budget-cutting frenzy. Everyone has their own answer, of course, that reflects their particular agenda—whether it’s shrinking government (lower taxes create more jobs), or using government to stimulate spending (when private sector won’t).

The answer is absurdedly simple and just needs some historical research to understand, rather than an economics degree. The problem has been a gradual reduction in the rate of economic (GDP) growth since the 1970s that was caused by many factors, but has resulted in a reduction in the overall demand for domestic goods and services—or aggregate demand in economic terms.

The long term slowdown was accompanied by increasing wealth disparities, as well as deregulation of whole business sectors—from media to transportation to finance. In fact, financial deregulation was the root cause of the housing bubble and Great Recession. It was also a time of tax cuts for the wealthiest when the maximum income tax bracket was reduced from its high of 92 percent in the 1950s to the current 35 percent, as well as increasing budget deficits.

This also hints at how to increase said aggregate demand, which is a combination of consumer and government spending, net exports, and investments to maintain or expand businesses. But it won’t be easy. Because it involves extensive restructuring of our tax code that has increased deficits and reduced incomes for most Americans since the 1970s, as well as strengthening financial regulations that would prevent another credit bubble--not downgrading government services, in a word. Only then will we be able to pay down our debt as well as grow much of the wealth lost during the Great Recession.

Today we are seeing the results of slower growth—increasing wealth disparities, higher disease rates than other developed countries, fewer educational opportunities (too expensive), a higher crime rate, and highest per capita prison population of all developed countries. We are imprisoning the dispossessed, in other words, rather than offering them the means to succeed.

Unfortunately, the gradual decline in economic growth has been largely below the radar of many economists, as well as the general public. Economists attribute much of it to aging factors, and the maxing out of credit use by consumers that has reduced consumption. Card use had surged through the 1960s when credit cards were introduced. But doesn’t the fact that above 65 households now earn more after inflation than those below 65 tell us something else?

If seniors are doing better—thanks in large part to Medicare and Social Security—then our aging population isn’t a main cause of declining demand. And if consumers have reduced their borrowing—that make up some 70 percent of economic activity—then it must be because of the fact their real, after tax incomes have not grown since the 1970s.

Aggregate demand, or AG, is a measure of what people or governments are willing to buy/sell, or invest. It must roughly equal the supply side of the supply-demand equation over time—U.S. Gross Domestic Product, the sum of all goods and services produced domestically.

This is why it is important to understand the concept of aggregate demand. An aggregate demand curve is the sum of individual demand curves for different sectors of the economy, says Wikipedia, the most available definition source. It’s not complicated. Aggregate demand is usually described as the sum of four separable demand sources.

where

is consumption (may also be known as consumer spending) = a_c + b_c(Y − T),
is Investment,
is Government spending,
is Net export,
- is total exports, and
- is total imports = a_m + b_m(Y − T).

C is personal consumption expenditures or "consumption," demand by households and unattached individuals for goods and services; its determination is described by the consumption function. The consumption function is C= a + (mpc)(Y-T)
- a is autonomous consumption, mpc is the marginal propensity to consume, (Y-T) is the disposable income.

I is gross private domestic investment, such as spending by business firms on factory construction. This includes all private sector spending aimed at the production of some future consumable.
G is gross government investment and consumption expenditures

Consumers make up some 70 percent of economic activity, hence the importance of personal consumption expenditures (PCE). Businesses say they won’t expand or hire more workers unless they see greater demand for their products, which is understandable. It is only ideologues, or those with a political agenda who say not so. If we give more tax breaks to the producers and investors, they will automatically create more jobs. More profits = more jobs, in their words.

Alas, that has never happened in history, as Warren Buffett said most recently. The administrations of Ronald Reagan and GW Bush gave the largest tax breaks to business and investors in the belief it created more jobs. But the result was 3 recessions, not greater demand (actually 4, including Bush I’s term), and also the largest increase in deficits of those times.

It should be blindingly obvious that the resultant massive concentration of wealth at the top has reduced overall aggregate demand for the rest of ‘U.S’. Most aggregate demand is generated by the incomes of the wage and salary earners, but also some of the smaller self-employed businesses, whose incomes have barely kept up with inflation since the 1970s.

And as the formula shows, demand is stimulated by government as well as private sector spending and investment. Right now, the private sector is hoarding their cash, as we have said, so it must be up to the government to dig us out of the debt hole—by job creation programs that put more monies in consumers’ pockets, not tax breaks for the wealthiest. Only then will we increase incomes of the 80 percent who have suffered most from the restructuring of our economy that has happened since the 1970s.

No ‘Double-Dip’ (In Spite of Republican Efforts)

2011-08-16T08:55:00.000-07:00

Financial FAQs

There will be no double-dip recession, in spite of the wild rumors and the S&P downgrade of U.S. debt to AA+. So what are the markets worried about? It is the lack of political leadership, which means government support of jobs’ and other growth programs.With corporations’ record profits over the past 2 years plus a $2 trillion cash hoard, and banks’ $1 trillion in excess reserves, there is no way the U.S. economy can sink back into recession territory. No, but Republicans efforts to stymie further stimulus spending could slow growth enough to upset Obama in 2012.

In other words, Republicans are purposely blocking any new efforts to stimulate growth. They want the economy to fail, so that President Obama will fail. They hate Barack Hussein Obama so much, in other words, they are willing to blatantly lie about the effectiveness of government stimulus spending. Obama’s problem is he doesn’t’ welcome their hate, as did President Roosevelt, and thus hasn’t unmasked their blatant hyprocrisy.

It is not new news, unfortunately, that Republicans’ words have not matched their actions. They love government stimulus when it is spent in their districts, and they even know it creates jobs—in their districts, of course.

Rachel Maddow has been talking about this for some time, and Huffington Post’s Sam Stein reported on leading Tea Partier Michelle Bachman’s many requests for some of the Obama stimulus $$ to be spent in her Minnesota district.

“A Freedom of Information Act request filed by The Huffington Post with three separate federal agencies reveals that on at least 16 separate occasions, Bachmann petitioned the federal government for direct financial help or aid”, says Stein. “A large chunk of those requests were for funds set aside through President Obama's stimulus program, which Bachmann once labeled "fantasy economics." Bachmann made two more of those requests to the Environmental Protection Agency, an institution that she has suggested she would eliminate if she were in the White House.”

Rachel’s ‘They’re Not Embarassed Hall of Fame’ includes 110 Republicans who have touted the success of the Obama stimulus spending in their districts in 2009-10, while saying publicly it wasn’t a success. Her Blog links to research by such as the Center For Public Integrity.

“Individually, over half of the entire Republican caucus has hailed nearly every aspect of the stimulus as a success — from infrastructure funds, to food programs, to education grants,” said the Center in joint research on their past record. “But politically, admitting its success might harm the GOP’s chances in November (2010). So with Republicans fixated on winning politically, they have focused on deceiving the public by calling the stimulus a failure, while pretending successful programs aren’t stimulus funded.”

Then, “Rep. Pete Sessions, the firebrand conservative from Dallas, Texas, who has relentlessly assailed the Democratic-passed stimulus law as a wasteful "trillion dollar spending spree", said the Center For Public Integrity, didn’t prevent him from asking for stimulus funds in 2010 that “…will create jobs, stimulate the economy, improve regional mobility and reduce pollution,” in his district.

In fact, the list is huge. Those asking for money before the 2010 election included “Tea Party favorites like freshman Massachusetts Sen. Scott Brown and Rep. Michele Bachmann, R-Minn., former presidential candidates Ron Paul and John McCain and Republican congressional leaders like Senate Minority Leader Mitch McConnell of Kentucky and Rep. Mike Pence of Indiana,” said the Center for Public Integrity.

But the economy is in fact reviving, as lower initial jobless claims and the Labor Department’s JOLT survey point to more hiring in the second half of 2011. For instance, Bond Trader Wrightson-ICAP said the June report on job openings and labor turnover (JOLTS) was a little less sluggish than expected. Total job openings climbed to 3.11 million, which is just below the March peak of 3.12 million.

“The pace of new hires and separations both fell modestly in June, as expected, but did so from upwardly-revised May levels. While the labor market remains less dynamic in terms of gross worker flows than was the case prior to the recession, the data for May and June were not quite as soft as anticipated.”

Wrightson ICAP has also taken issue, as has this reporter, with the recent downward revisions to GDP growth that were one of the causes for alarm that a double-dip was immanent. (The BEA had released revisions for GDP that showed the recession was significantly worse than originally estimated, mostly because consumers had cut back.) Hiring during the first 3 months of 2011 totaled more then 200,000 per month, with 1.96 million nonfarm private payroll jobs created in just the past 13 months. And 154,000 private payroll jobs were added in July, with expectations it will be revised upward. In fact, quarter GDP growth numbers are notoriously inaccurate. For instance, last year’s Q2 growth was revised upward from 1.8 percent to 3.8 percent, largely due to the government stimulus spending.

But consumers aren’t cutting back, as the Fed’s consumer credit report cited a huge surge in consumer borrowing. Though personal consumption was reported to have contracted in June (a lagging indicator?), you'd never know it from June consumer credit data, which show a $15.5 billion surge for the largest gain in more than four years. This is in part because auto sales are surging again, as well as back to school sales.

The gain is led by a $10.3 billion surge for non-revolving credit, less of a surprise given June's strength in motor vehicle sales, says Econoday. But the best news may be revolving credit which rose $5.2 billion for a second straight solid gain.

The result is that retail sales have surged to more than 8 percent—a number from the boom times. So look for higher GDP growth ahead, and no double-dip. The question is why haven’t Democrats called the ‘They’re Not Embarassed Hall of Famers’ on their incredibly blatant hypocrisy that gained the Republicans so many seats in 2010? Why can’t Democrats welcome the hate of their enemies, as did President Franklin D Roosevelt?

Republicans’ Dark Side—Their Job Killing Machine

2011-08-09T08:29:00.000-07:00

Financial FAQs

As Maureen Dowd just put it in a New York Times Op-ed, the debt ceiling audience has staggered away from a “slasher flick still shuddering…The gory, Gothic melodrama on the Potomac is a summer horror blockbuster—without the catharsis.” The shuddering had to come from the audience facing what Jungians would call their shadow side—the worst, most atavistic part of our nature that we have avoided facing until now.

In this case, it is the rise of the job killers—no compromise Republicans who would rather sink the economy that raise any revenues to pay down the debt. They are being led by the Tea Partiers, a mix of racists, misogynists, birthers—mostly white and less educated—who want to take back America to what it was before the last wave of immigrants reached our shores—maybe 100 years ago?

The result was incredible panic selling as ghoulish whispers of recession echoed through the financial markets. But a double-dip recession? No way, not with corporations holding $2 trillion in excess cash profits, and banks holding $1 trillion in excess reserves. These excesses are the real reason the Fed has held interest rates so low for so long. The Fed is attempting to coax them into doing something with their cash and reserve hoard, rather than hold them in MZM accounts—zero maturity earning almost zero interest rates.

Americans have not had to face the worst elements of our culture for a long time. Although our characterization of Vietnamese as “gooks” in order to make them enemies despicable enough to invade wasn’t so long ago.

The debt ceiling agreement was no catharsis because not enough was done to prevent the S&P downgrade of U.S. Treasury debt to AA+. They could not agree to reduce the deficit roughly $4 trillion, in S&P’s view, to stabilize the deficit by 2015. So S&P has begun to slash AAA ratings here and abroad.

Paul Krugman’s comment on the dark consequences of the European Union also embracing austerity when it should be stimulating growth was “Got that 30s feeling, all the way.” The results of insufficient job creation and growth would be ugly; such as the unrest in Greece cited in an AP report by Krugman.

ATHENS, Greece — They descended by the hundreds -- black-shirted, bat-wielding youths chasing down dark-skinned immigrants through the streets of Athens and beating them senseless in an unprecedented show of force by Greece's far-right extremists. In Greece, alarm is rising that the twin crises of financial meltdown and soaring illegal immigration are creating the conditions for a right-wing rise -- and the Norway massacre on Monday drove authorities to beef up security.

It took FDR, maybe our greatest President, and WWII to pull us out of the Great Depression. Right now, we have no such leadership when we need him or her the most. We happen to have President Obama, who seems to not want to face his own inability to find any villains of the Great Recession. And so the villains are prevailing at the moment.

If only he could face his enemies—which are those who want to tear him down by tearing down the economy. Roosevelt was able to face them down in his famous 1936 Madison Square Garden reelection campaign speech while on crutches and debilitated by polio:

“Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.”

Obama has failed to recognize the bullying tactics of House Republicans, such as blatantly ruling out any kind of compromise during the debt ceiling negotiations. It was also the Nazi’s main tool of intimidation during their rise in 1930’s Germany, described most recently via U.S. Ambassador William E Dodd’s account, “In the Garden of the Beasts”.

It is even showing up in our schools with the rise of children’s bullying in schools. Is all this pessimism warranted, is the real question, or is it the product of our 24/7 media feeding frenzy that wants to show up any sensational incident or event in its worst light to gain attention?

Alas, it is more than that. It is the steady loss of opportunity and growing income inequality we have allowed to happen over the last 30 years that is the real cause of the rise of our dark side. Michael Moore answers it best in his latest letter to his followers:

“From time to time, someone under 30 will ask me, "When did this all begin, America's downward slide?..."It ended on this day: August 5th, 1981.

“Beginning on this date, 30 years ago, Big Business and the Right Wing decided to "go for it" -- to see if they could actually destroy the middle class so that they could become richer themselves. And they've succeeded.”

On August 5, 1981, President Ronald Reagan fired every member of the air traffic controllers union (PATCO) who'd defied his order to return to work and declared their union illegal. They had been on strike for just two days.

Reagan had been backed by Big Business in his run for the White House and they, along with right-wing Christians, wanted to restructure America and turn back the tide that President Franklin D. Roosevelt started -- a tide that was intended to make life better for the average working person, said Moore.

The best evidence of Republicans job killing machine is their attack on government spending in the debt ceiling agreement, when government employment has fallen by 946,000 over the past 13 months, according to Barron’s Gene Epstein, while private payrolls have grown by 1.96 million over that time. And their attack has continued in Wisconsin, Indiana, and even Ohio with cuts in public employee benefits. This is when we most need to strengthen our governmental institutions that pay for environmental protection, education, health care, and public safety.

These are not signs of an incipient recession, in other words, but a lack of responsible leadership, as even S&P said in their downgrade announcement. So how do we put the darker side of ‘U.S.’ back into its bottle? The huge stock market losses make it harder for even the no tax, free marketers to deny the results of their work. The free market had spoken, after all, and did not like what it saw.

We can hope the panic subsides and rational thought returns. But it is really up to our leaders to lead again, as President Roosevelt once did.

Consumers Are Spending Again!

2011-08-06T08:14:00.000-07:00

Popular Economics Weekly

A little noted Federal Reserve report on consumer debt just pulled a big surprise. Consumers are borrowing on their credit cards again. Though personal consumption contracted in June, you'd never know it from consumer credit data, which show a $15.5 billion surge for the largest gain in more than four years. This is in part because auto sales are surging again, as well as back to school sales.

Are consumers really beginning to spend again? If so, look for higher GDP growth ahead, in spite of the S&P downgrade of federal government debt to AA+ from AAA, the first time that has happened to the U.S. It is too early to know if the downgrade of Treasury securities will have an effect on interest rates, or even be on the radar of ordinary consumers.

This is important because the personal consumption expenditures (i.e., consumer spending) has not yet recovered from the recession. Last Friday, the BEA released revisions for GDP that showed the recession was significantly worse than originally estimated, mostly because consumers had cut back. And Personal Income less Transfer Payments is one of four indicators the National Bureau of Economic Research (NBER) uses in business cycle dating to determine recessions, as we have said.

Here is Calculated Risk’s graph on the historical fluctuations in personal income that happens during recessions (blue streaks). Prior to the revisions, the BEA reported this measure was off close to 7 percent from the previous peak at the trough of the recession. With the revisions, this measure was off almost 11 percent at the trough - a significant downward revision and shows the recession was much worse than originally thought.

But the graph also shows that it is now less than 5.1 percent below its prior peak. Combined with a rise to 5.4 percent in the personal savings rate in July, this is another sign that consumers are regaining their financial health.

And motor vehicle sales soared in July. Unit sales show a big monthly gain, up nearly six percent vs June to a 12.2 million annual rate. The gain points to relief for the motor vehicle component of the retail sales report which has posted four straight declines in the aftermath of the March earthquake and tsunami that disrupted the Japanese supply chain.

And finally, jobs are returning to the private sector as the Bureau of Labor Statistics (BLS) reported 117,000 non-farm payroll jobs created, with the unemployment rate dropping back to 9.1 percent, and a good jump in average hourly wages, also a big improvement from last month’s jobs report.

The U.S. economy added an even larger 154,000 in the private sector, though partly because 193,000 people dropped out of the labor force, according to the latest government data. Job gains in May and June were also revised up by a combined 56,000, the Labor Department reported last Friday. Even better news was that average hourly wages rose 10 cents to $23.13, though the workweek was unchanged at 34.3 hours.

We can hope that with the debt ceiling crisis now on the back burner until 2012, the focus will return to job creation. There are lots of ways to create jobs in the private sector, which includes the return of some 70,000 private industry construction workers after temporary resolution of the FAA funding cutoff. Does it matter who pays them in times like these?

Why Are Republicans Playing With Fire?

2011-08-05T09:12:00.000-07:00

Financial FAQs

The reports that 4,000 FAA employees and up to 70,000 airport construction workers narrowly escaped being laid off until Labor Day is unbelievably true. And this is the height of the summer travel season.

In this case, Senate Majority Leader Harry Reid had to scotch together a last minute compromise after Republican Senator Orrin Hatch scotched an earlier compromise of the House bill negotiated by Senators Rockefeller and Kay Bailey Hutchinson that would have cut spending on rural airport subsidies, according to the New York Times.

In fact, such actions are putting into question the motives for Republicans’ opposition to any kind of stimulus spending to spur economic growth. Republicans have once again brought us ever closer to another recession by imposing their anti-government, anti-union agenda.

What else should we think? In fact, we just had the 30^th anniversary of President Reagan’s firing of 11,000 striking Air Traffic Controllers that Governor Scott Walker has been holding up as his model for banning collective bargaining of public employees in Wisconsin. (Though that may soon be reversed with next week’s Wisconsin recall elections.)

The only problem is that Reagan wasn’t against collective union bargaining according to Associate Professor Joseph A. McCartin of Georgetown University, author of a forthcoming book, “Collision Course: Ronald Reagan, the Air Traffic Controllers, and the Strike That Changed America.” And it exposes Scott Walker’s total disregard of both history and the truth.

“Although he opposed government strikes, Reagan supported government workers’ efforts to unionize and bargain collectively’” said Professor McCartin in a recent New York Times’ Op-ed. “As governor, he extended such rights in California. As president he was prepared to do the same. Not only did he court and win Patco’s endorsement (the Traffic Controllers union), he directed his negotiators to go beyond his legal authority to offer controllers a pay raise before their strike—the first time a president had ever offered so much to a federal employees’ union.”

How close are we to a double-dip recession? The latest revisions to Q1 and Q2 2011 Gross Domestic Product growth show that consumer spending has shrunk—mostly from a lack of confidence in the future, and household debt that is still too high. This is while DOW Jones plunged 512 points on Thursday—due to fears of another recession. So this is not the time for Republicans to be playing with fire.

It is why GDP growth has slowed so drastically. There are 4 indicators used by the National Bureau of Economic Research Business Dating Committee to determine a recession—employment, personal income less transfer payments, real GDP growth, and industrial production, as we have said. Of the 4, industrial production and GDP growth have been recovering since mid-2009. But they are really dependent on employment and personal incomes less transfer payments, which haven’t done so well. Personal incomes have improved for those who are employed, but the money is either being saved or used to pay down debts.

And employers are not hiring enough workers to keep up with population growth. So there is really no excuse for Republicans’ ideological blindness that opposes any kind of government action to stimulate growth, unless it is intentional. In other words, would they use another economic collapse to try to knock out Obama in 2012? It is a horrific thought, if so. Republicans should keep in mind the Blame Game can work in unexpected ways. Playing with fire during this economic conflagration could forfeit their chances of winning anything.

Why Repeat 1938?

2011-08-04T07:54:00.000-07:00

Financial FAQs

Why does the final debt ceiling agreement look like 1938, when Republicans took over Congress after President Roosevelt ok’ed spending cuts while raising some taxes? Because Congress may make the same mistake—a repeat of the Great Depression by cutting spending when the U.S. economy hasn’t recovered from the Great Recession.

Democrats lost 71 House seats and 8 Senate seats in the 1938 election, after Roosevelt had been persuaded by his advisors cut back on New Deal programs, which precipitated the 1937-38 second depression and gave Republicans ammunition to say the New Deal hadn’t worked. Production, profits and wages had regained their 1929 levels by the spring of 1937. Unemployment remained high, but was considerably lower than the 25 percent rate seen in 1933.

So in June 1937, some of Roosevelt's advisors urged spending cuts to balance the budget. WPA rolls were drastically cut and PWA projects were slowed to a standstill, according to Wikipedia. The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 per cent and production of durable goods fell even faster.

Does this look terribly familiar? In other words, we might be doomed to repeat the historical mistake of listening to creditors to whom so much of the federal debt is owed by cutting spending without creating jobs, when we should be stimulating growth both to reduce the ratio of debt to GDP and help debtors repay their debts.

The new agreement doesn’t allow any revenue increases in the first stage of some $2.1-2.4 trillion in mandated spending cuts over the next 10 years. This of course means the debt isn’t being paid down. All of the Bush tax cuts had added $3.7 billion to the $14 trillion in debt, with tax loopholes extended for energy and agribusiness, two wars and two recessions making up most of the rest. The spending cuts weren’t paid for then, and aren’t being paid for now, in other words.

But, had we continued the stimulus spending of 2009-10 that included the $787 Billion in ARRA stimulus, spent more of the $11 billion set aside for the HAMP mortgage modification program, and extended the homebuyer tax credits that expired last June, we might have started both a real estate recovery and longer term economic growth.

Instead, we are close to a ‘double-dip’ after just leaving the Great Recession. The first part of the Great Depression actually ended in 1934, which lulled everyone into believing that cutting spending in 1937 would do little harm. But it just made the Depression worse, until spending from government debt that topped 122 percent of GDP during World War II ended the Great Depression!

So history is very clear on what it takes to stimulate jobs and economic growth—more spending on policies that produce growth. That is the only way to bring down the debt level. But one can’t borrow for the wrong things, such as tax cuts. As one pundit put it, business doesn’t care where the dollars come from—a public or private worker. Calculate Risk has kept tabs on the possibility of a double-dip recession and second quarter numbers show the economy has almost ground to a halt. GDP growth revisions show Q1 2011 rose just 0.4 percent and Q2 1.3 percent in the ‘advance estimate’.

Personal Consumption Expenditures, which account for almost 70 percent of activity, have been falling for just the past 3 months for a number of reasons, including a spike in energy and food prices, and falling vehicle sales due to the Japanese Tsunami. It is why GDP growth has slowed so drastically. There are 4 indicators used by the National Bureau of Economic Research Business Dating Committee to determine a recession—employment, personal income less transfer payments, real GDP growth, and industrial production. Of the 4, industrial production and GDP growth have recovered the most.

There is some hope with the July Institute of Supply Management non-manufacturing survey that showed overall service sector activity had risen 2.7 percent in 12 of its 18 industries, which account for more than 70 percent of all economic activity. So we have not yet entered a double-dip. But without a viable job creation program, that may still happen.

So history as well as basic economics tells us those who want to shrink government by slashing spending without programs that also grow the economy are wrong. What would it take to convince them otherwise? Another Great Depression, or a Great War?

Harlan Green © 2011

Inequality and the Destruction of Our Wealth

2011-07-31T15:09:00.000-07:00

Popular Economics Weekly

This is making the case for a higher growth rate and greater prosperity, not the ‘new normal’, post-recession slow growth malaise so many pundits are predicting. And it has little to do with cutting government spending, or the recent Great Recession, but everything to do with the righting the tremendous inequality caused by current economic policies in place.

An illustration is the budget “compromise” being worked out in Congress—cutting spending without increasing tax revenues. It just continues policies that have contributed to the wholesale destruction of most Americans’ incomes and wealth. It does not even reduce the deficit but grows it, and so reduces the main source of our prosperity, our standing as the world’s superpower. It also continues the downward slide in household incomes by continuing to divert the tax dollars that would most improve our standard of living to the richest, whose standard of living hasn’t suffered.

The destruction of middle class wealth and income by Republicans, in particular, has been prolonged and systematic for decades. This standard of living has already declined for most of us, and will continue to decline if this “compromise” doesn’t include reversing the drain in tax revenues, for starters.

Don’t take my word for it. Check out CIA reports on how we compare with the wealth of other countries. We now rank 97^th in income equality below all developed countries, Iran, and Russia. In fact, the U.S. is now just above Jamaica and the poorest African countries. Wealth—both income and assets—has become concentrated among fewer and fewer Americans, in other words.

In fact, just since the end of this recession Americans have experienced the worst income inequality since the Great Depression. And most economists agree the inequality of that era, in which the top 1 percent income bracket had corralled almost a quarter of national income, destabilized financial markets to such an extent that it was a major cause of the Great Depression. It was also an underlying cause of the Great Recession and could soon tip us back into another recession if such inequality is not reversed.

This is the real casualty of the current budget gridlock. Instead of focusing on reducing the deficit by reducing or closing tax loopholes of the wealthiest, the budget cutting crusaders of the Republicans’ extreme right wing want to preserve their wealth. That is, in the name of ‘freeing’ private capital by reducing government expenditures, a huge amount of wealth has been ‘freed’ from the gainfully employed to their supporters on Wall Street and Big Business.

This has always been the rationale of modern conservatives for downsizing government. Yet such extreme inequality lowers the standard of living for all in several ways. For starters, it decreases opportunity. There is less opportunity to access the ever more expensive higher education, and so less upward mobility, which brings nurtures creativity. Studies show we are already less upwardly mobile than other industrialized countries. And it affects individual health. We already have an infant mortality rate lower than any other developed country—on a par with Cuba’s—and higher disease rates.

Greater inequality also puts more people on public welfare rolls. We already have the highest poverty rate since WWII. It also increases crime rates. With 2.3 million prison inmates, the U.S. already has the highest incarceration rate of any county in the world. This is not to speak of budget cutting effects on financial regulation, or to control environmental pollution, or to replace aging infrastructure, much less modernize industry.

How did all this happen? The decline began in the 1970s with the stagnation of household incomes. Then as Republicans became more conservative under the cry of smaller government, they began cutting incomes and benefits of the lower and middle class earners who create most of our wealth—i.e., are the real producers as well as buyers of our goods and services.

It was done under the Republicans’ supply-side theory that almost all government, collective bargaining and taxes are evil, while tax cuts pay for themselves. But lowering the highest tax bracket shifted the tax burden to the middle and lower income brackets, since payroll taxes weren’t cut. If fact, they were raised to pay for rising social security and Medicare benefits, worsening the growing inequality. Even then, President Reagan had to raise taxes 18 times when he realized the huge deficit it created.

The anti-government crusade continued with the $5.7 trillion in debt created by GW Bush’s tax cuts and unpaid wars, according to the non-partisan Center for Budget and Policy Priorities. More than 50 percent of the tax benefits in fact went to the wealthiest one percent—for capital gains and dividends, a lower maximum income tax rate, accelerated depreciation for companies, and the like.

The resultant increase in the deficit has endangered both social security and Medicare benefits, which mainly support the elderly as well as the lowest wage earners. The result is almost inevitable—the expectation of a ‘new normal’ growth rate with permanently higher unemployment, lower wages for average workers, and reduced social security and Medicare benefits.

In lowering our expectations, ultra-conservatives are having their way, in other words. And it will result in a greater social divide than ever—between the Have and Have-Not states, the educated and less educated, which will create a larger and more permanent Under Class.

But it doesn’t have to be that way. We could go back to a more progressive tax system that nurtures higher growth rates by closing the tax loopholes and raising the maximum income tax bracket back to 39 percent of the Clinton era. We know that President Clinton did it while cutting spending that resulted in budget surpluses from 1997 to 2001. In fact, a wonderful graph by Eliot Spitzer in Slate of the history of marginal tax rates shows that the GDP growth rate has been basically stagnant since 1980 with the decline in marginal income tax rates.

We can also cut entitlement expenses by continuing to implement the new Patient Protection and Affordable Care Act (PPACA, Public Law 111-148); and, following that, the Health Care and Education Reconciliation Act of 2010 (H.R. 4872), which made a number of changes to provisions of PPACA along with significant changes to the federal postsecondary education programs, will both improve preventative care and lower costs, as reported by the Congressional Budget Office.

In fact, allowing the GW Bush cuts to expire in 2012 would halve the deficit in 10 years, according to the Congressional Budget Office (CBO). While continuing the tax cuts for the 2011-2020 time period would add $3.3 trillion to the national debt, comprising $2.65 trillion in foregone tax revenue plus another $0.66 trillion for interest and debt service costs.

But until Republicans realize that shrinking government without policies that redistribute wealth back to the wage and salary earners who produce and spend it, very little growth will happen. And that shrinks the living standard for all of us. It shows policies which hide behind shrinking government really destroy wealth—and taking away the wealth of some takes away better economic growth and prosperity for all.

Case-Shiller Index—Home Prices Rising Again

2011-07-27T08:08:00.000-07:00

The Mortgage Corner

It’s not only the S&P Case-Shiller Home Price Index that is finally rising after falling drastically since June 2010, end of the home buyer tax credit. Both new and existing-home median prices are also rising. For Case-Shiller, 16 of the 20 metro areas were up in May.

San Francisco, Washington, Minneapolis, San Diego, and Los Angeles have risen the most from their post-bubble lows. The data through May 2011 actually showed a second consecutive month of increase for the 10- and 20-City Composite Indexes, non-seasonally adjusted, up 1.1 and 1.0 percent, respectively, over April. Sixteen of the 20 Metro Statistical Areas rose, as we said, with San Francisco up a huge 18 percent since the lows; Detroit, Las Vegas and Tampa were down over the month and Phoenix was unchanged.

New home sales fell 1.0 percent in June to an annual rate of 312,000 vs expectations for 321,000, but the median price was up 5.8 percent to $235,200 and the average price up 1.8 percent to $269,000.. Upward revisions of 13,000 to May and April sales helped, said Econoday. Year-on-year prices also jump into the positive ground in June, up plus 7.2 percent for the median price and up 4.8 percent for the average.

Sales of existing homes failed to pick up in June, slipping 0.8 percent to an annual adjusted rate of 4.770 million and following May’s 3.8 percent decline. But the median price jumped a monthly 8.9 percent to $184,300 with the year-on-year rate moving into positive ground for the first time this year at plus 0.8 percent.

And the FHFA (Federal Housing Finance Agency) purchase only house price index for homes with conforming loans rose 0.4 percent in May, following a 0.2 percent increase in April. On a year-on-year basis, the FHFA HPI is down 6.3 percent. For the nine Census Divisions, seasonally adjusted monthly price changes for month-ago May ranged from minus 1.0 percent in the West South Central Division to plus 2.0 percent in the Mountain Division. Six of the nine Census Divisions improved in May.

What is happening? It looks like more affluent buyers are beginning to buy homes. Let us hope this trend continues, since it means workers may be finding better paying jobs.