Sunday, November 28, 2010

Why Such a Mortgage Mess?

The Mortgage Corner

What is causing the mortgage ‘mess’ to continue, in this case the controversy over ownership of mortgages that is embroiling Wall St. and Washington? Much of it is exaggerated by the media and attorneys for the plaintiffs suing various banks to take back those mortgages packaged and sold as mortgage backed securities. So it is not easy to understand the underlying facts, especially when real estate values have yet to stabilize.

The beginning of the mortgage origination process is fairly straightforward. When a bank, mortgage bank, or other entity originates a mortgage, it is either held by that lender in its “portfolio”, or sold to someone else. Many commercial banks still hold onto their shorter term loans—such as for businesses or construction projects. These are usually due within 5, and so don’t tie up a bank’s capital reserves for a longer period.

But most mortgages are permanent, meaning not due for 15-30 years. These are usually sold onto the secondary market—Wall Street firms who bundle them into mortgage pools that are sold to investors as mortgage backed securities (MBS). Some such securities for the VA/FHA, Fannie Mae, and Freddie Mac (the GSEs), are considered AAA rated, because either guaranteed or insured by the Federal Government. So someone holding a ‘Ginnie Mae’ Certificate knows it has an ownership share in a pool of AAA rated FHA/VA loans on which it receives a percentage yield.

The main ownership problem is that banks in particular may hold on to servicing the loan, even though it has been sold to investors. This means that said bank still collects the payments and passes them on for a fee of usually 3/8 to ½ percent of the loan amount. So if the ownership papers weren’t properly documented to the MBS investors, either servicers or investors may not have clear title to sell or auction the underlying property held as security if the property is foreclosed on.

Another ‘mess’ is if there was fraud involved—i.e., the loan originators didn’t follow their own underwriting guidelines when funding the mortgages. It is hard to believe that is the case, as lenders know they must buy back a loan if fraud—i.e., misrepresentation—is involved. But given the huge number of foreclosures—more than 2 million this year—so-called foreclosure mills in those 22 states who have judicial foreclosures may have taken shortcuts in not verifying all the documentation, or even faking lost documents.

Meanwhile, the delinquencies have declined substantially in 2010, and consumers incomes are improving--indicators that say real estate values may be stabilizing. And that is the bottom line in improving the foreclosure rate. Lenders tend to panic when housing values are falling, and so are quicker to foreclose in order to recoup as much as possible of loan principal.

Calculated Risk cites a report by LPS Applied Analytics that foreclosures leveled off at 3.92 percent, from a 1 percent historical rate and delinquencies at 9.29 percent in October, up from its historical 4 percent rate. So there is a long way to return to normal. Delinquencies began to take off at the beginning of 2007 (i.e., 3+ years ago), so it should take another 3 years to return to historical levels.


Home prices are coming under weakness again due to distressed sales adding to housing supply and tighter credit standards cutting demand, but that may be mainly to seasonal factors. Fewer homes are put on the market and sold during the winter months. The Federal Housing Finance Authority purchase only house price index for homes with conforming loans slipped 0.7 percent in September after no change the month before.

On a year-on-year basis, the FHFA HPI is down 3.4 percent, compared to down 2.8 percent in August. This index is based on resale prices for homes financed or bundled by federal housing agencies (i.e., the GSEs).


The price weakness is reflected in lower new and existing-home sales in October, down 2.2 and 14 percent, respectively. The National Association of Realtors also said the sales drop was mostly due to seasonal factors and tightened lending standards.

“A review of recently originated loans suggests that they have overly stringent underwriting standards, with only the highest creditworthy borrowers able to tap into historically low mortgage interest rates. There could be an upside surprise to sales activity if credit availability is opened to more qualified home buyers who are willing to stay well within budget,” said NAR chief economist Lawrence Yun.

The consumer is making a moderately strong comeback in October in both income and spending. Meanwhile, core inflation is subdued and still too low for Fed comfort. Personal income in October posted a healthy 0.5 percent gain, following no change in September. Income growth topped analysts' forecast for 0.4 percent increase. Importantly, the wages & salaries component jumped 0.6 percent, following a 0.1 percent improvement the month before.


Household spending also showed strength. Personal consumption expenditures rose 0.4 percent, following a 0.3 percent increase in September. For the latest month, strength was led by a 1.9 percent monthly spike in durables. Nondurables advanced 0.8 percent while services edged up 0.1 percent.

The bottom line? If consumers continue to consume as much as during this holiday season, employers will hire more employees, which leads to more housing sales and higher prices. So we see slow and steady improvement and a return to normalcy in real estate sales and values over the next 3 years.

Harlan Green © 2010

Thursday, November 25, 2010

Employment vs. Inflation?

Popular Economics Weekly

Many politicians (and economists) don’t seem to understand the relationship between unemployment and inflation. It should be obvious that when unemployment is high, consumers who make up 70 percent of the economy don’t spend much, and therefore can’t push up prices. But tell that to the ideologues, who claim that the fear of future inflation is what keeps employers from hiring.

Well, since Q3 Gross Domestic Product growth was just revised upward to 2.5 percent with declining inflation, and real GDP growth is up 3.2 percent in 12 months, we hope that canard is being put to rest.

The best way to look at the behavior of inflation vs. unemployment is the historical record. CPI inflation peaked in 1980 at 13.5 percent, and caused Fed Chairman Paul Volcker to raise interest rates into double digits. The unemployment rate was hovering around 6 percent then. Once the unemployment rate rose above 10 percent due to the Fed’s tightening, inflation plunged below 4 percent.


And the inflation rate has been trending downward ever since. In fact, there has never been appreciable inflation with an unemployment rate above 6 percent. And since no economist sees the unemployment rate improving much before 2011, if then, we know why the Fed is so concerned about deflation.

The increase in Q3 GDP was led by consumers and exports, as the cheaper dollar overseas is increasing manufacturing, in particular. Exports are up over 14 percent, while consumers are opening their wallets for the holiday season. Final sales in Q3 to domestic purchasers—the best measure of consumer demand—increased to 2.9 percent.

Consumer spending is beginning to lift growth, in other words, as are increasing Q3 corporate profits, up 28 percent in a year. But businesses cannot continue to produce more without hiring more employees. The severity of this 2007-09 recession is shown in the 30-year record of GDP growth by Calculated Risk (blue bars are recessions), which was negative for 6 quarters during this recession. The average annual Q3 growth rate is again above 3 percent.


Retail sales are the best measure of consumer spending, and sales are soaring again. With four impressive gains in a row, it is becoming apparent that the consumer sector is stronger on the spending side than would be suggested by high unemployment and low measures of consumer confidence.   On a year-ago basis, retail sales are up a huge 7.3 percent in October and, after excluding autos and gasoline, up 5.2 percent.  Those with jobs appear to have decided that it is safe to spend, in other words.


Also, corporate profits in the third quarter increased an annualized 13.5 percent, following a 3.8 percent gain the previous period. Corporate profits are up 28.2 percent on a year-on-year basis. We doubt that corporate profits will continue to increase without more employment, because existing employees tend to demand higher wages when working longer hours, so it is cheaper to hire additional employees.


It therefore looks like consumers are not worried about inflation, as they mend their balance sheets. They are paying down their debts with a vengeance, while household deposits have increased a staggering 32 percent to $7.5 trillion in the past 5 years. They are also defaulting less on consumer and mortgage loans, reports Barron’s Magazine’s Jacqueline Doherty.

A major reason for the pickup on growth is the Fed’s efforts to maintain record low interest rates. And we see the Fed can do so for a “prolonged period” because they have no worries about inflation with unemployment so high—another reason we are seeing growth (and employment) picking up sooner rather than later.

Harlan Green © 2010

Monday, November 22, 2010

The Fed Has Two Mandates—Growth + Price Stability

Financial FAQs

Why has there been so much debate over the Fed’s monetary policy of so-called Quantitative Easing? The simplest answer is that it pits those countries and ideologies that see the world as a zero-sum game—the I Win, You Lose crowd—vs. those who see the world as having enough wealth for everyone, if we would only share more equitably.

In fact, both sides of the debate mirror the Federal Reserve’s twin mandates—encourage maximum growth without excessive inflation. Among the I Win, You Lose crowd are those foreign countries who want to protect their export surpluses—read China, Germany, and Japan primarily—and the wealthiest individuals and creditors (read banks) who want to protect their wealth—i.e., don’t like deficits of any kind because it cheapens the value of their holdings.

Quantitative easing is the Fed’s policy of pushing down interest rates to encourage spending, instead of hoarding. We know that both consumers and businesses are holding onto their cash because of their loss of confidence in those financial institutions that almost brought down Wall Street. Household deposits held in such as banks and money market accounts are up 38 percent to $7.5 trillion over the past six years, according to the Federal Reserve, while banks have excess reserves they are not lending, and corporations more than $1.8 trillion in cash they are not investing.

Bernanke and the Fed Governors are with the Win-win crowd. They maintain that unless we all cooperate, so that the major exporting countries allow their currencies to appreciate, then everyone will be poorer. The U.S. will continue to lose jobs to the cheaper overseas wages of exporting countries, and the exporters won’t divert the resources necessary to develop their own domestic economies.

If China, for example, allowed its yuan to appreciate, goods would be cheaper for its own people, thus raising their standard of living. As it stands today, almost all that is made in China is exported, so China has to worry about inflation, since not enough is produced to satisfy its domestic demand for goods.

“Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals,” Bernanke said in a recent speech to the EU.

Chairman Bernanke’s timing may be right. Economic indications have been strengthening going into QE2, gains reflected by two strong back-to-back 0.5 percent gains for the Conference Board's index of leading economic indicators (September revised from plus 0.3 percent). A wide yield spread continues to be the biggest positive though to a smaller degree given declines underway in long rates, declines triggered and furthered by QE2. A rise in money supply, also related to QE2, is an increasingly significant plus. Another central positive is the factory workweek, strength that is likely to continue given the uplift underway in the manufacturing sector.


A rise in the M2 money supply, meaning money that is actually circulating in the economy, is what fuels growth. Because unless this money is put back into circulation—whether as investments in plants and equipment, or consumer goods and services—economic growth stagnates, as we have said.

But right now the M2 supply has risen just 2.8 percent since April, which is why some inflation indexes are at their lowest level in 50 years—since the Labor Dept. has kept records. And the Fed considers this level to be dangerously close to deflation.


The slow growing money supply is probably why the Personal Consumption Expenditure price index rose just 0.1 percent in September after rising 0.2 percent in August.  The core rate was flat after nudging up 0.1 percent in August.  Year-ago headline PCE inflation held steady at 1.4 percent.  Year-ago core PCE inflation fell to 1.2 percent from 1.3 percent the prior month.  Both series are below the Fed's implicit inflation target of 1.5 to 2 percent, hence the deflation worries.

So is the Win-Win crowed right? Is there enough wealth for everyone, if we would only learn to share? Dr. Bernanke maintains that those countries who keep their currencies devalued harm their own people, by not allowing them access to a better life. While the developed countries have to increase growth to pay off their debt and find employment for their citizens.

Leaving aside politics, economists such a Robert Shiller believe there is enough wealth for everyone. In his groundbreaking book, The New Financial Order (2003, Princeton U. Press), Dr. Shiller postulates that though incomes are never guaranteed, they can be insured against ones profession. In fact, social security and unemployment insurance are limited examples. If insurance underwriters can calculate the rate of fires for fire insurance, or life expectancy for life insurance, why not that for professions? It is just a matter of accumulating sufficient data, which modern computer technology is now capable of doing. So that an policy can be taken out on one’s earning potential. When it falls below a certain level, insurance payments kick in, as with unemployment insurance.

We even have something that resembles it—the Earned Income tax credit for those earning annual incomes of less than $10,000. European Union countries have developed it even further. We know that enough is produced in the world to feed itself. The question is how to distribute it.

Harlan Green © 2010

Friday, November 19, 2010

Where is the Inflation?

Popular Economics Weekly

Paradoxically, the latest inflation numbers show that the Fed’s various attempts to keep us out of a deflationary spiral of wages and prices aren’t yet working. That is, the lowest interest rates since the 1950s plus wholesale purchases of Treasury Bonds and Mortgage Backed Securities by the Fed have not boosted aggregate demand sufficiently—i.e., the demand of consumers and businesses for more housing, consumer and capital goods—to stop wages and prices from continuing to fall.

That is the real goal of the Fed’s QE2 Quantitative Easing program. The problem is reversing the downward spiral—which only decreases the demand for more products and services—and creating some upward push in wages and prices.

The most looked at gauge—the Consumer Price Index for retail prices (CPI)—has been literally flat for the last 3 months, while the Producer Price Index for raw materials and wholesales goods has risen slightly. The Personal Consumption Expenditure Index, the broadest gauge of prices used by the Fed, is still falling.

The overall CPI in October posted a 0.2 percent boost, following a 0.1 percent rise in September. The market consensus had expected a 0.4 percent boost for the latest month. Excluding food and energy, core CPI inflation was unchanged for the third month in a row.


Year-on-year, overall CPI inflation crept up to 1.2 (seasonally adjusted) from 1.1 percent September. But the core rate slipped to 0.6 percent from 0.8 percent the prior month, the lowest core rate in 50 years of record keeping by the Labor Dept.

Inflation at the producer level was more moderate than expected in September with the core tugged down by discounts in motor vehicle prices. The overall Producer Price Index inflation rate held steady at 0.4 percent in October, coming in significantly below the consensus forecast for a 0.8 percent increase. At the core level, the PPI surprisingly fell 0.6 percent, down from a 0.1 percent gain in September and coming in lower than the median forecast for a 0.1 percent uptick. The core was led down by a 3.0 percent drop in passenger car prices and a 4.3 percent decrease in light truck prices.


For the overall PPI, the year-on-year rate increased to 4.3 percent from 4.0 percent in September (seasonally adjusted). The core rate softened to 1.4 percent from 1.5 the previous month. This shows moderate inflation at the wholesale level, mainly in petroleum prices, due to the lower dollar exchange rate. When its value drops, oil and commodity producers raise their prices to compensate for the cheaper dollar.

Meanwhile, the PCE price index rose just 0.1 percent in September after rising 0.2 percent in August.  The core rate was flat after nudging up 0.1 percent in August.   Year-ago headline PCE inflation held steady at 1.4 percent.  Year-ago core PCE inflation fell to 1.2 percent from 1.3 percent the prior month.  Both series are below the Fed's implicit inflation target of 1.5 to 2 percent, hence the deflation worries.


So why is the Fed easing when there is such concern about budget deficits and too much debt? Because inflation is caused by an overheating economy, not one such as ours with so much excess production capacity and unemployment. Historically, inflation hasn’t become a problem until our unemployment rate has fallen to the 6 percent range—which might not happen for years, according to most economists.

In fact, inflation is caused by too much money in circulation with too few goods to purchase. But right now almost no money is in circulation. The M2 measure of dollars in circulation has been falling because it is being hoarded by consumers and corporations. This is while the exporting countries are producing so much that there is a surplus of goods and services—which is why imported goods are so cheap, in spite of the weaker dollar exchange rate.

Fed Chairman Ben Bernanke has been vociferously defending QE2 in recent speeches. ““Fully aware of the important role that the dollar plays in the international monetary and financial system, the [Federal Open Market Committee] believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in the context of price stability in the United States,” said Bernanke.

So now is not the time to worry about inflation. Consumers can’t spend what they don’t have, and businesses won’t spend until they see some increase in demand for their products and services. Hence the stalemate we are in. It isn’t only the congress that is in gridlock at the moment, but most of our economy.

Harlan Green © 2010

Monday, November 15, 2010

The Blame Game—Political Economics 101

Financial FAQs

Everyone played the blame game in this election. Did Obama deliver the change in Washington he promised? Both conservatives and progressives are unhappy with the slow growing economy; and jobless rate still hovering around 10 percent. And no one is quite sure who to blame—Obama or Dubya Bush; too much government, or too little?

But in fact, there is really only one underlying cause of the lingering high unemployment and slowness of this recovery. Real (after inflation) household incomes have been declining since the 1970s for all except the top 20 percent of income earners. And that is because most of the income went to the top 1 percent, who took in 23.5 percent of pre-tax income in 2007, vs. just 8 percent in the 70‘s.

So the rest of the middle and lower classes have had to borrow anywhere they could to keep up their standard of living. There are lots of books to explain the tremendous redistribution of wealth—from Robert Reich’s high tech revolution in “The Future of Success”, to the corporate takeover of our political system in Professors Jacob Hacker and Paul Pierson’s new book, “Winner Take-all Politics”.

The bottom line is that paying down debt has become the priority for most Americans because they don’t have the income to do otherwise. This happened in Japan as well, so that Nomura Securities’ Richard Koo has named such down turns ‘balance sheet’ recessions. And the high debt leveraging won’t go away until income distribution again becomes more equitable. This really means bringing tax rates back to the 1970’s more progressive levels, when the top 1 percent had rates one-third higher than they are today, according to New York Times’ Frank Rich in his latest Op-ed column.

In fact economist Paul Krugman maintains that letting the above $250,000 Bush II tax cuts expire would save revenues equivalent to the social security shortfall over the next 75 years! That is to say, such wealth redistribution would also help the federal budget deficit, the US dollar, and therefore our trade deficit (and keep down commodity prices).

So where are consumers these days in rebalancing their balance sheets? Consumers are becoming thriftier, with the personal savings rate up to 5.8 percent from below 1 percent in 2003; and they have begun spending again.

The consumer sector is continuing to prop up the recovery-maybe even giving it a modest strengthening, says Econoday. October Motor vehicles & parts led the way, jumping 5.0 percent. And apparently, households are fixing up homes as building materials & garden equipment posted a 1.9 percent boost, in spite of the housing recession. Gains were also seen in food & beverage, gasoline stations, clothing, sporting goods & hobby, general merchandise, nonstore retailers, and food services & drinking places.


Overall retail sales in October jumped 1.2 percent after gaining 0.7 percent in September. The latest number sharply topped analysts' projection for a 0.7 percent increase. Excluding autos, sales posted a still healthy 0.4 percent increase, following a 0.5 percent advance in September and coming in a little higher than the median market forecast for a 0.4 percent boost.

This is mainly because personal incomes are again growing. Year on year, personal income growth for September came in at up 3.1 percent, down slightly from 3.2 percent in August. Personal Consumption Expenditures’ growth increased to 3.7 percent in September from 2.8 percent in August, a very large jump.


And we know average hourly earnings gained 0.2 percent in October from the October unemployment report, after rising 0.1 percent in September, while the average workweek for all workers edged up to 34.3 hours from 34.2 hours. In fact, the workweek has been on a rebound since mid-2009.  Between the gains in temp workers and average workweek, one should expect a pickup in hiring as these two series typically rise before overall employment.

Frank Rich blames both political parties for the economic damage caused by catering to the richest in their quest for campaign donations. “The bigger issue is whether the country can afford the systemic damage being done by the every-growing income inequality between the wealthiest Americans and everyone else, whether poor, middle class or even rich.”

In fact, economists are discovering that much of the financial markets’ instability has resulted from such inequality. The cheap money and lax financial regulation caused everyone to over leverage, not just consumers, resulting in the twin real estate and financial market bubbles that had to burst.

But there is some good news on the wealth redistribution front. Forty billionaires led by Warren Buffet and Bill Gates have pledged to donate one-half of their wealth to philanthropic causes. From Ted Turner to George Lucas, these 40 billionaires join Warren Buffett and Bill Gates in making the pledge as part of their The Giving Pledge, a campaign launched earlier this year "to urge wealthy individuals to give the majority of their money to charities of their choice either during their lifetime or after their death," said one headline. If only more of the superrich would follow their example.

Harlan Green © 2010

Sunday, November 14, 2010

Jobs Are Growing Again

Financial FAQs

Just maybe, we are turning the corner on the jobs picture.  Payroll jobs finally returned to positive territory as the impact of layoffs of temporary Census workers has dwindled and the private sector is strengthening.  Payroll employment in October rebounded 151,000—159,000 private payroll jobs less 8,000 government jobs lost. And private employment in September was revised to a 107,000 increase.


And, as a sign that consumers are consuming more, service-providing jobs added most to payrolls--advancing 154,000 after an 111,000 increase in September.  We are now a service economy, as many manufacturing jobs have moved offshore. Within services for October, temp help gained 35,000; health care added 24,000 jobs; and retail trade jumped 28,000.  Goods-producing industries edged up 5,000 after a 4,000 dip in September.  In the latest month, manufacturing was little changed, slipping 7,000; construction rose 5,000; and mining increased 8,000.

More good news was that the average workweek for all workers edged up to 34.3 hours from 34.2 hours in October, marginally topping expectations for 34.2 hours. The workweek has been on a rebound since mid-2009.  Between the gains in temp workers and the average workweek, one should expect a pickup in hiring as these two series typically rise before overall employment, as I said in this week’s Popular Economics Weekly. 

Could this mean that small businesses are in fact hiring again? “The depression in small business pretty much explains everything in the weakness of this cycle,” said Ian Stepherdson of High Frequency Economics. “I reckon in the last cycle they accounted for two-thirds of all new job creation. Not only are they big, they are better job-creation engines than big companies, which are more inclined to do their new hiring offshore.”

There was some confirmation in October’s National Federation of Independent Business small business optimism index rise of 2.7 points, to a reading of 91.7. However, their optimism index remains stuck in the recession zone established over the past two years and not a good reading. But job creation plans did turn positive and job reductions ceased, , according to the NFIB.

Service sector activity in October is following the manufacturing sector surge we reported on last week, according to the ISM's non-manufacturing index, which rose 1.1 points in October to 54.3.  This survey of ISM members covers services, construction, mining, agriculture, and forestry.


New orders show special monthly acceleration, at a 56.7 level for a nearly two point gain, as did backlogs orders moving back over 50 at 52.0 to indicate a month-to-month build. Rising orders and rising backlogs mean rising employment in coming months.

And, despite sluggishness in the latest home sales numbers, we may have seen the bottom in actual construction, another service industry. At a minimum, construction is no longer the sizeable drag on the economy that it had been during the recession. There is even the possibility that this sector will be a very mild positive for economic growth in coming months, says Econoday.


The large pickup in service-sector employment, which now makes up almost 70 percent of U.S. business, is a sign that the U.S. economy is growing again. Gross Domestic Product has now grown 3 percent in 12 months, meaning both consumer and commercial demand is increasing which is why employers have to add to their payrolls.

Harlan Green © 2010

Wednesday, November 10, 2010

QE2 Will Stimulate Economic Growth

Popular Economics Weekly

In a bid to stimulate banks to lend more by increasing their reserves, the Federal Reserve announced QE2 (Quantitative Easing 2). It will be buying up to $600 billion in Treasury securities from banks who hold them. We have no doubt this will kick start economic growth for several reasons. Not least, because there are signs of an additional pickup in both investment and hiring among small businesses.

In a New York Times’ column by Gretchen Morgenson, Ian Shepherdson of High Frequency Economics—noted for predicting the housing bust—sees growth increasing in the small business sector that creates the most jobs, because of a pickup in commercial and industrial bank lending.

And as commercial and industrial lending expands, Shepherdson maintains, it will unleash a pent-up demand among smaller companies for capital equipment, software, vehicles and other goods:

“The depression in small business pretty much explains everything in the weakness of this cycle,” he said. “I reckon in the last cycle they accounted for two-thirds of all new job creation. Not only are they big, they are better job-creation engines than big companies, which are more inclined to do their new hiring offshore.”

The deficit hawks maintain this will stimulate inflation down the road, because it puts too much money in circulation. But in fact buying back securities that banks have purchased from the U.S. Treasury doesn’t directly put money in the pockets of the consumers who spend it. It builds up banks’ cash reserves, which enables them to lend to small, as well as large businesses, as we have said.

Fed Chairman Bernanke downplayed the inflation danger in a recent Washington Post Op-ed: “Our earlier use of this policy approach (QE1) had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable, he said.”

The big news was that October private nonfarm payrolls (excluding government jobs) jumped by 159,000, and September was revised upward to 107,000. With wages and hours worked also increasing, it looks like credit is already expanding. In fact, the $30 billion small business credit bill passed recently will also inject additional liquidity into small businesses.

Average hourly earnings gained 0.2 percent in October after rising 0.1 percent in September, while the average workweek for all workers edged up to 34.3 hours from 34.2 hours in October. The workweek has been on a rebound since mid-2009.  Between the gains in temp workers and the average workweek, one should expect a pickup in hiring as these two series typically rise before overall employment.


Service sector activity in October —which accounted for 154,000 of the 157,000 private payroll pickup—followed the manufacturing sector surge. So the bulk of the economy picked up steam in October, according to the ISM's non-manufacturing index which rose 1.1 points in October to 54.3.  This survey of ISM members covers services, construction, mining, agriculture, and forestry.


And lastly, motor vehicles sales continued to surge, as all 3 Detroit automakers reported surging profits, with GM on track to pay back its government bailout with an upcoming IPO. Combined domestic and import nameplate autos and light trucks (includes minivans, vans, and SUVs) jumped 4.2 percent to an annualized pace of 12.3 million units. While still below the cash for clunkers recent peak of 14.2 million in August 2009, the October number represents nearly steady growth from the recession low.


Deficit hawks tend to forget that some inflation is necessary for an economy to grow. The Japanese deflationary experience is crucial to understanding this. That is why the Fed is still in effect easing credit conditions by adding to bank reserves. And why small businesses should be the biggest beneficiaries of QE2.

Harlan Green © 2010

Tuesday, November 2, 2010

The Double Dip Has Happened

Popular Economics Weekly

No, we are not talking about a double dip recession, or two scoops of ice cream. The much touted double-dip in economic activity has happened—only it was a dip in activity, rather than outright recession. In fact, as many including Alan Greenspan have said; such dips, or ‘troughs’ are common during recoveries. There is an initial burst—such as Q4 2009’s 5+ percent jump in GDP growth—followed by consolidation, as casualties of the recession continue to shed jobs and newer businesses begin to add employees.

The best evidence is that preliminary Q3 GDP growth edged up to 2.0 percent growth from its 1.7 percent trough in Q2 2010. And the Institute for Supply Management’s manufacturing index also jumped after several months of decline. We can therefore expect other sectors—including employment, personal income, the service sector, and even real estate—to pick up in coming months.


The manufacturing sector surged in October led by a burst in new orders and supported by strong employment gains. The composite headline index jumped nearly 2-1/2 points to 56.9. New Orders are the standout, up nearly eight points to 58.9 to indicate strong month-to-month growth for the best reading since May. Employment rose more than one point to 57.7 indicating no let up in hiring.


Personal income and expenditures (PCE) also seem to be coming out of their doldrums. Personal income’s trough was in June. It slipped again in September, following a 0.4 percent boost in August, but was still positive. Weakness was led by a sharp drop in government unemployment insurance benefits, rather than the private sector, where incomes are again expanding.


Spending was also positive in September. Personal spending rose 0.2 percent, following a 0.5 percent jump in August. By components, durables jumped 0.7 percent, nondurables rose 0.1 percent, and services edged up 0.1 percent. Annual PCE growth increased to 3.7 percent in September from 2.8 percent in August.


While the consumer sector is still slow, we are seeing improvement in construction and manufacturing today. Construction spending rebounded in September, gaining 0.5 percent after a 0.2 percent dip the month before. The boost in September was led by a 1.8 percent increase in private residential outlays, following a 4.2 percent decline in August. These numbers reflect recent improvement in housing starts. Also, public outlays advanced 1.3 percent after a 2.2 percent rise in August. So, we may finally be seeing some of the effects of fiscal stimulus in gains in public construction.

The double dip fears weren’t propagated because pundits had any evidence there would be a double recession. Rather, conservative economists in particular conjectured—with no basis in fact—that employers were holding back on investments and hiring because of too much government. You can name their pet peeves—the health care or Dodd-Frank bills that required health insurance for all and put new regulations on the financial industry, including consumer protections.

It is hard to believe that corporate CEOs, known for their hard-headedness, would act on a result that might happen in 4 years, which is when most of those provisions kick in. In fact, the Consumer Protection Act has yet to be fleshed out, so no one currently knows its effects.

But we can see the result of such unfounded conjecture. It has affected consumer confidence, which is still experiencing the double-dip, though much above its 2009 lows.


So it is more likely that most of the double-dip talk was because of the political season. They were more likely attempts, in other words, to sway opinion and install fears in those unsettled by these unsettled times.

Harlan Green © 2010