Wednesday, November 30, 2011

Housing Picture is Better Than We Know

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.

Harlan Green © 2011

Consumers Feel Better

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.

Harlan Green © 2011

Monday, November 21, 2011

What Decline of Western Civilization?

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

Monday, November 14, 2011

How Do We Put Americans Back to Work?

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.

Harlan Green © 2011

Saturday, November 12, 2011

Employment Report Means Holiday Cheers!

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.

Harlan Green © 2011

Thursday, November 3, 2011

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

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? 

Harlan Green © 2011