Monday, November 28, 2022

Record Amount Housing Under Construction

 The Mortgage Corner

Calculated Risk

There are a record number of housing units under construction, in part because of pandemic delays in construction (e.g., material shortages), but also because home sales have fallen sharply since the Fed’s rate hikes.

This is causing housing prices to moderate, a leading sign that inflation will also begin to decline more steeply.

Calculated Risk’s Bill McBride says that last week, the National Association of Realtors® (NAR) reported that median house prices were up just 6.6% year-over-year (YoY) in October. This is down from the peak growth rate of 25.2% YoY in May 2021.

And, Case-Shiller reported that the National Index was up 13.0% YoY in August, down from a YoY peak of 20.8% in March 2022.

This hasn’t stopped builders, who seem to be anticipating higher home sales next year. This should also moderate housing prices that have been rising in double digits until recently.

Privately‐owned housing starts in October were at a seasonally adjusted annual rate of 1,425,000, according to the Census Bureau. This is 4.2 percent below the revised September estimate of 1,488,000 and is 8.8 percent below the October 2021 rate of 1,563,000. Single‐family housing starts in October were at a rate of 855,000; this is 6.1 percent below the revised September figure of 911,000. The October rate for units in buildings with five units or more was 556,000.

Apartment construction is out distancing single-family construction because so many cannot afford to purchase in this interest rate environment. The 30-year conforming fixed rate is still hovering around 6 percent and the 5-year fixed rate ARM at 5.5 percent making it slightly more affordable.

Existing-home sales faded for the ninth month in a row to a seasonally adjusted annual rate of 4.43 million, according to the NAR. Sales fell 5.9% from September and 28.4% from one year ago. Prices are moderating, with the median existing-home sales price up to $379,100, an increase of just 6.6% from the previous year, vs. double digits raises in the past year.

Another reason for the high construction inventory is that the inventory of unsold existing homes is still low historically. It slipped for the third consecutive month to 1.22 million at the end of October, or the equivalent of 3.3 months' supply at the current monthly sales pace, when it is 4-6 months during normal times.

"Inventory levels are still tight, which is why some homes for sale are still receiving multiple offers," Yun added. "In October, 24% of homes received over the asking price. Conversely, homes sitting on the market for more than 120 days saw prices reduced by an average of 15.8%."

Much also will depend on the Fed’s actions. It’s a tossup just where interest rates will be next year. The Fed’s latest minutes telegraphed smaller rate hikes looming as inflation subsides and Nobelist Paul Krugman has been saying that he doesn’t see interest rates remaining high over the longer term as producers continue to ramp up production to meet the supply shortages.

Neither do home builders, apparently. There is still a tremendous pent-up demand for housing, whether it’s rentals or owner-occupied, as builders are also playing catchup from the supply shortages caused by the busted housing bubble.

This should make any recession caused by the Fed’s rate hikes short and mild.

Harlan Green © 2021

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

Monday, November 21, 2022

Is It a Recession or Recovery?

 Popular Economics Weekly

The recent 1,000 + point surge of the DOW following news of declining inflation in the latest CPI report may have been prompted by the Leuthold Group’s noted market analyst Jim Paulsen in a recent CNBC interview, when he said that “we may by heading for a new recovery rather than a recession.”

This is while the Conference Board’s Index of Leading Economic Indicators (LEI), a well-regarded prognosticator of future growth, is forecasting recession next year, as is Goldman Sachs and some economists.

The U.S. economy is in limbo at the moment, suspended and not sure of a direction. Half of it is running too hot (e.g., employment) and half too cold (e.g., housing), which means the U.S. economy could go either way in 2023—be in a recession or recovery.

“The US LEI fell for an eighth consecutive month, suggesting the economy is possibly in a recession,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “The downturn in the LEI reflects consumers’ worsening outlook amid high inflation and rising interest rates, as well as declining prospects for housing construction and manufacturing. The Conference Board forecasts real GDP growth will be 1.8 percent year-over-year in 2022, and a recession is likely to start around yearend and last through mid-2023.”

Conference Board

That would make sense with the slowdown in manufacturing and the fact that housing busts have foretold recessions in the past. But it hasn’t stopped shoppers, which show up in service sector statistics. Retail sales that account for some half of consumer spending jumped a huge 1.3 percent in October, 7.6 percent YoY, with much of the boost due to leisure activities (e.g., dining out and travel).

And the Atlanta Federal Reserve’s GPNow estimate of future growth says fourth quarter growth could be as high as 4.2 percent! Its GPNow estimate proved to be almost right with its third quarter estimate of 2.9 percent (it was actually 2.6 percent) so its Q4 GDP prediction could also be in the ballpark.

Why the jump in GDP? Because the Atlanta Fed’s model shows consumer spending and exports still surging, while consumer expectations and personal incomes have remained high. So why wouldn’t consumers continue to spend in a fully-employed economy?

AtlantaGPNow

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 4.2 percent on November 17, down from 4.4 percent on November 16,” said the Atlanta Fed. “After this morning’s housing starts report from the US Census Bureau, the nowcast of fourth quarter real residential investment growth decreased from -7.6 percent to -11.7 percent.”

Manufacturing activity may be slowing but services are booming as reported in the latest retail sales report. Consumers are keeping up with inflation, in other words, and the holidays are an opportunity to celebrate their world returning to normal. Dining out at restaurants increased 1.3 percent in October, for instance, twice the current inflation rate.

Financial markets rallied again last Tuesday because the Producer Price Index (PPI) for wholesale goods and services continued its decline. Wholesale prices in October rose just 0.2 percent month-month and core inflation without food, energy and trade services declined from 5.6 to 5.4 percent YoY.

Some pundits have characterized this as a goldilocks economy that is neither too hot nor too cold. But half of our economy is still too hot (i.e., employment and consumer spending) and half too cold (manufacturing, housing), as I said.

So our economy is in limbo because of such uncertainty—poised between a recession or an economic recovery. But I believe not for much longer. Our economy is already on a wartime footing because of the $trillions needed to conquer the pandemic and modernize our economy. This should soon conquer the uncertainty and generate a lasting recovery.

Harlan Green © 2022

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

Wednesday, November 16, 2022

Inflation Won't Stop Holiday Shoppers

 Popular Economics Weekly

When will inflation subside enough to bring down interest rates again? There are estimates that it takes from one year to 10 years to cure large inflation spikes such as occurred this year, based on what pundits and economists see as past history.

But that hasn’t stopped shoppers. Retail sales that account for some half of consumer spending jumped a huge 1.3 percent in October, 7.6 percent YoY.

FREDretailsales

Consumers are keeping up with inflation, in other words, because it’s the holidays and they want to celebrate their world returning to normal. Dining out at restaurants increased 1.3 percent in October, twice the current inflation rate.

And inflation is already cooling. The Fed has pumped up short-term rates from essentially zero to 4 percent in 2022, which has pummeled stock and bond prices. But financial markets rallied on Tuesday because the Producer Price Index (PPI) for wholesale goods and services continued to decline. Wholesale prices in October rose just 0.2 percent month-month and core inflation without food, energy and trade services declined from 5.6 to 5.4 percent YoY.

Tradingeconomics.com

My bet is that inflation will drop quickly during the coming winter as supply chains continue to improve, which ground to a halt during the worldwide pandemic lockdowns.

For instance, the NY Federal Reserve’s Global Supply Chain Pressure Index (GSCPI) stated as much in its latest release. “The GSCPI’s year-to-date movements suggest that global supply chain pressures are falling back in line with historical levels,” it said.

It means that consumer prices will continue to decline as well, since the PPI measures the raw materials and data that go into retail products and services.

Alas, retail inflation is still too high, since the CPI declined to 7.7 percent in October compared to a year ago, down from 8.2 percent in September. Predictions are all over the map as to when the inflation rate will return to a more normal range. Treasury Secretary Janet Yellen has said in recent testimony it could take several years to return to the Federal Reserve’s two percent target.

Other pundits are predicting as much as 10 years, because they cite the 1970’s era of stagflation. Inflation soared to as high 14 percent in 1981 after 10 years of wage-price spirals. It was another 10 years before inflation returned to its more normal 2-3 percent range.

But this inflationary spiral has lasted just months, not years as in the 1970s, as Nobel Prize-winner and former Federal Reserve Chair Ben Bernanke has pointed out. So, there’s no reason for anyone to press the panic button, stock and bond traders included. Consumers are riding this inflation wave just fine to date.

Why shouldn’t they be upbeat, with Americans still fully employed?

The New York Fed also publishes a Survey of Consumer Expectations of inflation also shows inflation is a short-term problem. “Median one- and three-year-ahead inflation expectations increased to 5.9 percent and 3.1 percent from 5.4 percent and 2.9 percent, respectively. (But) The median five-year-ahead inflation expectations, meanwhile, rose by 0.2 percentage point to 2.4 percent.”

Wholesale prices are still high. The Producer Price Index for final demand in the U.S. rose 0.2 percent month-over-month in October of 2022, the same as a downwardly revised 0.2 percent increase in September. Goods cost went up 0.6 percent, the largest advance since a 2.2 percent rise in June, mainly pushed by a 5.7 percent jump in gasoline cost. Prices for diesel fuel, fresh and dry vegetables, residential electric power, chicken eggs, and oil field and gas field machinery also advanced. In contrast, the index for passenger cars declined 1.5 percent. Meanwhile, services cost fell 0.1 percent, the first decline since November of 2020.

So, the inflation outlook is muddled, but consumers’ inflation expectations give us a better picture of how consumers will behave in the future. It is another ingredient that helps to determine the Fed’s next move, and when shoppers buy or hold.

All this news backs my bet of inflation falling back to historical levels as soon as next summer.

Harlan Green © 2022

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

Friday, November 11, 2022

Inflation Falling Fast

 Financial FAQs

CPI inflation declined to 7.7 percent in October compared to a year ago, down from 8.2 percent in September, the government said Thursday. But it’s not making consumers any happier with the approach of the holidays. The University of Michigan’s survey of consumer sentiment also declined further to 54.7 from 59.9.

Food prices rose 10.9 percent year-over-year. Food at home — grocery store or supermarket purchases — increased by 12.4 percent, ticking down from 13 percent in September, and rose 0.4 percent on the month, the smallest monthly increase in the category since last December, said MarketWatch’s Jeffery Bartash.

But several categories rose far more than the overall rate of inflation. Egg prices rose 43% year-over-year in October, butter increased by 26.7%, and flour and prepared flour mixes were up 24.6%. Lettuce prices rose 17.7% year-over-year, while bread and milk prices rose by 14.8% and 14%, respectively.

Tradingeconomics.com

Such unpleasant news could continue due to a typical scarcity of these products in winter.

“Declines in sentiment were observed across the distribution of age, education, income, geography, and political affiliation, showing that the recent improvements in sentiment were tentative,” wrote Joanne Hsu, director of the survey, in a statement. “Instability in sentiment is likely to continue, a reflection of uncertainty over both global factors and the eventual outcomes of the election.”

How fast will prices continue to decline that might improve sentiment, regardless of who wins congress? I noted recently that market strategist Jim Paulsen of the Leuthold Group has done research on the history of such inflationary spikes, and they seem to behave similarly, regardless of monetary policies.

CPI inflation generally taken 12 months to return to more normal levels from its high point. Since this inflation spike peaked in March-April 2022 he maintains we should see inflation returning to a normal range of 2-3 percent by next March-April 2023.

And consumer surveys already show consumers becoming more confident about the future with longer-term inflation expectations holding at 3 percent over the next five years.

Thursday’s 1,000 + point surge of the DOW following news of the latest CPI report may have been prompted by Paulsen’s remarks last Tuesday in a recent CNBC interview, when he said that “we may by heading for a new recovery rather than a recession.”

If, that is, we do see inflation continuing to decline into the new year, as Paulsen predicts.

Harlan Green © 2022

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

Tuesday, November 8, 2022

We Have A Soft Landing (if the Fed is listening)

 Financial FAQs

FREDdurablegoods

After four consecutive 0.75 percent rate hikes, the Fed should slow down its rate increases, say at least three Federal Reserve Governors. That is good news as we try to assess the likelihood of another recession.

It’s good news because there are already signs of a possible soft landing in 2003, if the Fed will take their foot off the economic brakes until there is more certainty of its tightening efforts down the road.

Reuters quotes the Chicago Fed’s Charles Evens (San Francisco and Richmond Fed Presidents also advocate slowing) that it is time for the Federal Reserve to shift to smaller interest rate hikes to avoid tightening monetary policy more than needed and slow the pace further once risks become more "two-sided," (i.e., a possible recession) Chicago Fed President Charles Evans said on Friday.

"From here on out, I don't think it's front-loading anymore, I think it's looking for the right level of restrictiveness," Evans told Reuters in an interview, referring to the U.S. central bank's string of supersized rate hikes.

If the Fed did nothing more this year, we could have a ‘soft landing’ since growth is already slowing in both the manufacturing and service sectors of our economy.

New orders for factory goods are down, for instance (see top line in above FRED graph from 2/92) and holding at a lower level of activity. Orders for manufactured goods rose 0.3 percent in September, the Commerce Department said last Thursday, and orders have risen eleven months of the past year. The factory sector led the economy’s recovery from the pandemic because of huge pent-up demand for things like automobiles and other durable goods after the pandemic.

The ISM’s manufacturing index is now close to breakeven. The S&P global U.S. manufacturing PMI inched up to 50.4 in its “final” reading in October from the “flash” reading of 49.9. This is down from a reading of 52 in September.

“The U.S. manufacturing sector continues to expand,” said ISM Chair Timothy Fiore, “but at the lowest rate since the coronavirus pandemic recovery began. With panelists reporting softening new order rates over the previous five months, the October index reading reflects companies’ preparing for potential future lower demand.”

The Institute for Supply Management (ISM) serviced sector (non-manufacturing) Index that measures conditions at companies such as retailers and restaurants fell to 54.4 percent in October and touched the lowest level since the U.S. lockdowns in 2020, pointing to a slowing U.S. economy. A number above 50 signals expansion; but settling in a more normal range typical of a slower growing economy.

Granted this is before the Fed’s latest rate hikes take hold that could reduce the demand for goods and services even further, Consumer borrowing that is reported by the Fed is a better indicator of consumer wherewithal, since they wouldn’t be shopping as much as they have been if they fear an imminent recession.

Consumercredit

Consumer credit has been declining slowly, but again it is back to more normal pre-pandemic levels (see above Fed chart from 1/04). Revolving credit, like credit cards, rose 8.7 percent in September, less than half of the 18.1 percent gain in the prior month. Nonrevolving credit, typically auto and student loans, rose 5.7 percent, up from a 4.5 percent growth rate in the prior month. This category of credit is much less volatile.

The growing danger is to continue to tighten while there are still shortages of food and energy supplies, while demand is already shrinking in the rest of the world.

China’s economic woes are one example. Reuters reports “China's exports and imports unexpectedly contracted in October, the first simultaneous slump since May 2020, as a perfect storm of COVID curbs at home and global recession risks dented demand and further darkened the outlook for a struggling economy.”

The San Francisco Fed has also flagged the danger with its own published research that suggests we have already tightened too much. U.S. monetary policy is tighter than the Federal Reserve's policy rate suggests, according to research published Monday by the San Francisco Fed, with financial conditions by September 2022 reflecting the equivalent of a 5.25 percent policy rate, which it the top boundary of Chairman Powell’s own prediction.

"Accounting for the broader stance of policy and comparing the proxy rate to simple rules suggests U.S. monetary policy tightened sooner and more sharply than has been generally recognized," the Letter said.

Given what could be a brutal economic winter for much of the world, and demand maybe reaching parity with supply so that risks become more "two-sided" in Chicago Fed President Charles Evans words, we may now see a more benevolent Federal Reserve and enjoy the possibility of a soft landing.

Harlan Green © 2022

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

Friday, November 4, 2022

Americans Still Fully Employed

 Popular Economics Weekly

MarketWatch

Every sector added jobs in October’s nonfarm unemployment report except mining, and the unemployment rate is still at a record low of 3.7 percent, even with the Fed promising to continue to raise interest rates.

“Total nonfarm payroll employment increased by 261,000 in October, and the unemployment rate rose to 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in health care, professional and technical services, and manufacturing.”

Why are businesses so busy that they see good times ahead rather than a looming recession? One answer is the U.S. economy grew 2.6 percent in the third quarter just reported due to exploding exports after two quarters of negative growth from the aftereffects of the pandemic, and record GDP growth in 2021.

I maintain it’s because we are still recovering from the pandemic, with two years of lock downs repressing demand. And 3 million workers have not returned to the workforce, leaving businesses scrambling to find enough workers.

Americans are fully employed and there is a job for every American that wants one. We have almost twice as many job openings as jobs being created. More consumers want to travel and dine out, children are back in school, and supply chains have caught up in most sectors to meet the demand.

Education & Health y in the report added 79,000 jobs, followed by Professional/Business (39,000), Leisure and Hospitality (35,000) and Manufacturing (32,000) new jobs.

It’s incredible that Democrats haven’t trumpeted the need for more workers since it is immigrants that will fill those vacancies. Canada just announced they are welcoming new immigrants to fill their worker shortage, reports the Financial Times Christina Lu.

“Look, folks, it’s simple to me: Canada needs more people,” said Sean Fraser, the Canadian immigration minister. “Canadians understand the need to continue to grow our population if we’re going to meet the needs of the labor force, if we’re going to rebalance a worrying demographic trend, and if we’re going to continue to reunite families.”

Immigration shouldn’t be a political hot potato because of the U.S. worker shortage. Republicans for demonizing immigrants and opposing more workable immigration laws when immigrants are desperately needed to fill the 10 million plus job vacancies.

Nor should the Fed be pushing up the unemployment rate to cure inflation that they say is needed. They have it exactly backwards. More jobs create less pressure on rising wages and greater productivity, both tools that would bring down inflation, which is what happened with today’s unemployment report.

It showed wage increases are slowing from more than 5 percent to 4.7 percent in October, while more than 10 million jobs have come back since 2001 and the Biden presidency.

Then why so much political discontent when the current congress has just passed record-breaking legislation that will help the discontented populace that Nobel prize-winner Angus Deaton described in a recent Project Syndicate article:

“Although two-thirds of the adult US population does not have a four-year college degree, the political system rarely responds to their needs and has frequently enacted policies that harm them in favor of corporate interests and better-educated Americans. What has been “stolen” from them is not an election, but the right to participate in political decision-making – a right that is supposedly guaranteed by democracy. Viewed in this light, their efforts to seize control of the voting system are not so much a repudiation of fair elections as an attempt to make elections deliver some of what they want.”

And who has been delivering what red staters in particular say they want? Republicans have consistently opposed better health care insurance, such as Obamacare and increased Medicare spending, better labor laws, and a higher minimum wage that would most benefit the two-thirds of Americans Deaton mentions.

In fact, government has never been the problem, though from President Reagan’s term onward Republicans have attempted to make it so.

Deaton concludes: “The less-educated Americans who are at a greater risk of dying early did not all vote for Donald Trump in 2016 and 2020; but many of them did. The overlap can be seen by tabulating “deaths of despair” – from suicide, drug overdose, and alcoholic liver disease – across counties and matching them to Trump’s share of the vote.”

We know how to solve this by making government the solution, as we did with the New Deal. And it is what the latest legislation has done—spending $trillions on longer term projects like infrastructure, climate change, and capping health care costs.

But, alas, its effects will take some time to benefit the most discontented Americans.

Harlan Green © 2022

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

Tuesday, November 1, 2022

Healthy Economy Should Be Fed's Priority

 Financial FAQs

Calculated Risk

Just days before an election that may decide the future growth path of the U.S. economy, the Labor Department’s JOLTS report shows Americans still fully employed. It seems companies aren’t yet ready to shrink their payrolls in the face of high inflation and soaring interest rates.

This is a volatile mix—high inflation plus interest rates, vs. plentiful jobs—that may stir Americans to elect a political party in the midterm that wants to cut taxes and many government programs during a war and economy already depressed in many red states, when it is government spending that is keeping America and most developed countries solvent after suffering through the worst pandemic in 100 years.

“The number of job openings increased to 10.7 million on the last business day of September, the U.S. Bureau of Labor Statistics reported today. The number of hires edged down to 6.1 million, while total separations decreased to 5.7 million. Within separations, quits (4.1 million) changed little and layoffs and discharges (1.3 million) edged down.”

The fact that job openings are still almost double the 6.1 million job hires will, alas, probably not deter our Fed from continuing to boost interest rates another 0.75 points tomorrow after conclusion of the FOMC meeting.

By doing so, the Fed will send the wrong message to many Americans, because the investments needed to win the war in Ukraine and cool global warming are far more important priorities than continuing to fight an inflation rate that is already trending downward.

For instance, the Fed’s preferred PCE inflation index has dropped nearly one percent to 6.2 percent in three months, the core rate down to 5.1 percent without food and energy, whereas the Euro Zone just reported the inflation rate in their 19 countries has risen to 10.7 percent.

The European Commission reported annual inflation rates of 11.6 percent in Germany with its terror of inflation that came from the 1920s, 16.8 percent in the Netherlands, and even higher inflation in the Baltic countries and Russia.

So why such a preoccupation with inflation when so much of it is due to outside circumstances the Fed cannot control? Are we still looking in the rear-view mirror of 1970s stagflation, while trying to solve everyone else’s problems?

Psychologists say that people tend to focus on what’s right in front of them—fixing the pain of inflation now, rather than the future benefit of reducing global warming, or even a Ukraine free of the Russian yoke.

It’s sad to see that party politics in the upcoming election has made such a painful choice possible, and that autocrats such as Vladimir Putin are well aware of. He has increased the pain level caused by the food and energy shortages to such a level with his war in the Ukraine that it may convince enough Americans to vote for a party that will opt to reduce support of this war and what it takes to reduce global warming.

So, I was wrong to say last week that draconian choices might be avoided. Plentiful jobs are a necessity to weather the upcoming storms. We may have to tolerate a moderately higher inflation rate in order to maintain near full employment until the storms have passed.

But how to convince voters to conquer their inflation fears for the better good in the upcoming midterm elections?

Harlan Green © 2022

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