Thursday, December 29, 2016

Case-Shiller Home Prices At New Highs

Financial FAQs

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 5.6 percent annual gain in October, up from 5.4 percent last month. The 10-City Composite posted a 4.3 percent annual increase, up from 4.2 percent the previous month.

Prices have now returned to 2003-4 levels, according to CoreLogic. That is when housing prices began double-digit increases for several years. The 20-City Composite reported a year-over-year gain of 5.1 percent in October, up from 5.0 percent in September. These are same-home price rises averaged over 3 months to make them less volatile.

But the price rises have leveled off at 5.1 percent on average over the past 2 years, a sign that rising housing inventories are beginning to have an effect on prices after prices soared during the housing bubble years. Portland and Seattle housing prices are still rising at 10 percent per year, with Dallas and Denver close behind.

Rising interest rates may also affect next year’s market, though the 30-year fixed conforming rate is still available @3.875 percent for one origination point in California. But Pending Home sales are the lowest in a year, which are contract signings scheduled to close in approximately 60 days, according to the National Association of Realtors chief economist Lawrence Yun.

“The budget of many prospective buyers last month was dealt an abrupt hit by the quick ascension of rates immediately after the election,” Yun said in NAR’s latest report. “Already faced with climbing home prices and minimal listings in the affordable price range, fewer home shoppers in most of the country were successfully able to sign a contract.”

What about housing’s contribution to economic growth? It is still below trend, at close to 4 percent, whereas it has averaged 5 percent historically. So that’s an additional $18 billion that can be added to GDP growth over the next years if housing sales and construction return to more normal times—but only if interest rates continue to rise gradually.

Trump supporters and Republicans believe the housing market will return to more normal times once they reduce the regulatory burden on housing, which they continue to blame on Dodd-Frank and the Consumer Finance Protection Bureau, for some reason. But these entities have been mostly responsible for the massive settlements with banks that sold falsely advertised AAA rated mortgage securities that created those negatively amortized liar loans, the main cause of the housing bubble.

These settlements should deter lenders from making such risky bets in the future, but what if those Dodd-Frank regulations are abolished by a Republican controlled Congress? Who will then stand in the way of future lending abuses that could once more put tax payers at risk?

Incoming Treasury Secretary Steve Mnuchin has been making noises about resuscitating Fannie Mae and Freddie Mac, the main guarantor of conforming mortgages as private entities, albeit with some revisions to pass part of the lending risk onto banks and other lenders. This may be a good thing in that it could ease the strict qualification standards that have hampered some mortgage lending.
But will that confidence in the Trump administration’s efforts to cut red tape translate into a better (and more affordable) housing market? “NAHB expects an increase in single-family home construction next year, fueled by a growing economy and solid job growth,” said NAHB Chief Economist Robert Dietz. “Moreover, builder confidence has risen on anticipation of reductions in regulatory costs, which is good news for home buyers and renters. However, the pace of construction will continue to be restricted by shortages of lots and labor in some markets.”
So though hopes have risen for more housing, all this remains to be seen, in other words.

Harlan Green © 2016

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Tuesday, December 27, 2016

New-Home Sales, Confidence Also At New Highs

The Mortgage Corner

Just as existing-home sales are at their cyclical highs, the Commerce Department on Friday said new home sales increased 5.2 percent to a seasonally adjusted annual rate of 592,000 units last month. That was the second highest pace since 2007, said the NAHB. Economists had forecast single-family home sales, which account for about 9.5 percent of overall home sales, rising 2.1 percent to a 575,000-unit rate last month.

The real problem is still lack of inventory with just 5.1 months of available supply (red line in graph), but builders optimism is the highest since 2005 that they can increase that inventory with a better mix of more affordable housing. Sales rose 16.5 percent from a year ago, boosted by a 43.8 percent jump in the Midwest to a nine-year high. Sales surged 7.7 percent in the West, their highest level since January 2008, but fell 3.1 percent in the South. They were unchanged in the Northeast.

“NAHB expects an increase in single-family home construction next year, fueled by a growing economy and solid job growth,” said NAHB Chief Economist Robert Dietz. “Moreover, builder confidence has risen on anticipation of reductions in regulatory costs, which is good news for home buyers and renters. However, the pace of construction will continue to be restricted by shortages of lots and labor in some markets.”

And consumers are feeling much more confident since the November elections, with most of the jump in older respondents to both the University of Michigan and Conference Board surveys. They are putting a lot of faith that Prez-elect Trump will be able to carry out his election promises of draining the Wall Street/DC swamps, in other words.

Graph Econoday

That said, the U. of Michigan consumer sentiment index edged up to a reading of 98.2 from 98 earlier this month. That was the highest reading since January 2004. And the Conference Board’s confidence index is up 12.9 points since the November election in gains driven by older consumers, as we said. The level for December is 113.7 which is the highest reading since way back in August 2001.

The University of Michigan said a record 18 percent of respondents "spontaneously mentioned the expected favorable impact of Trump's policies on the economy." Consumers anticipated that a stronger economy would create more jobs, with the share expecting higher income rising to a one-year high.

And personal incomes are rising at a 4 percent clip, the unemployment rate has dropped to 4.6 percent, and GDP growth is now up to 3.5 percent in the third revision to Q3 growth, with fourth quarter GDP growth also looking good.

So why shouldn’t consumers feel more confident of the future? It has a lot to do with Republican policies in Congress, yet Repubs say they want to repeal much of Obama’s legacy, which created the recovery from the Great Recession—the worst recession since the Great Depression. And a repeal of Obamacare and Dodd-Frank, the law that is attempting to reign in some of the excesses that caused the Great Recession, could put US back into another recession.

In other words, those voters need to be careful of what they wish for beyond the Twitters of Prez-elect Trump.

Harlan Green © 2016

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Friday, December 23, 2016

Q3 GDP Growth Now 3.5%!

Popular Economics Weekly

The third-quarter lived up to its early expectations, rising with each new revision to an inflation-adjusted 3.5 percent annualized rate for the best showing in two years, said the Commerce Department. The consumer was the main engine in the quarter, spending at a 3.0 percent rate (up from 2.7 percent in the prior estimate) on top of the second quarter's very strong 4.3 percent rate.

In fact, real gross domestic income (GDI), another measure of economic growth, increased 4.8 percent in the third quarter, compared with an increase of 0.7 percent in the second. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 4.1 percent in the third quarter, compared with an increase of 1.1 percent in the second (table 1).

This is perhaps a more accurate measure of growth since it combines both domestic income and spending, which shows that it may be difficult to implement President-elect Trump’s $1B infrastructure plan. The economy is already fully employed and it will be difficult to goose GDP growth higher, unless exports and hence global demand increases as well.

The increase in real GDP in the third quarter primarily reflected positive contributions from PCE, exports, private inventory investment, nonresidential fixed investment, and federal government spending that were partly offset by negative contributions from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

More good news is that the GDP price index increased just 1.5 percent, vs. 2.0 percent in Q2, and increased 1.7 percent, excluding energy and food prices. This means very little inflation is occurring, even with the increased economic activity. It’s mainly the still cheap energy prices that hold inflation down, needless to say, due mostly to depressed worldwide demand for commodities, such gas and oil products.

But growth could reach or exceed 4 percent in the fourth-quarter, though it might be held down by a reversal for exports (stronger dollar) and perhaps by less strength in consumer spending, which isn't quite tracking as strongly as the third quarter proved to be, says Econoday.

Lastly, the Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2016. In the past month, the indexes increased in 43 states, decreased in three, and remained stable in four, for a one-month diffusion index of 80, as indicated in the enclosed map.

The green states are those with the highest growth rates, and pink/red states have the least growth. In fact, Alaska, New Mexico, Maine, West Virginia and Alabama economies are still contracting. Growth is flat in Michigan and Louisiana. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average), which closely mimic Gross Domestic growth.

This is one more sign that most, but not all, of the U.S. has recovered from the Great Recession.

Harlan Green © 2016

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Thursday, December 22, 2016

Top Economics Blog: 2016 Award Winner: Top Economics Blog

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Wednesday, December 21, 2016

Housing Construction, Sales Strong, Interest Rates Still Ultra-Low

The Mortgage Corner

Housing starts are being hit by huge swings. November starts fell 18.7 percent in November to a much lower-than-expected 1.090 million annualized rate following an upward revised gain of 27.4 percent to 1.340 million in October, says Econoday. But that’s to be expected with winter weather already hitting the Midwest and eastern states.

This is while interest rates have barely budged since the Fed raised its short term rates 0.25 percent to s range of 0.50 to 0.75 percent. That’s why housing construction and builder sentiment remain strong. The 30-year conforming fixed rate remains below 4 percent--@3.875 percent for one origination point (i.e., one percent) in California.

And existing-home sales are at record highs for this cycle. Existing-home sales ran at a seasonally adjusted annual 5.61 million pace, the National Association of Realtors said Thursday. That was up 0.7 percent from a downwardly-revised pace of 5.57 million in October and marks the highest since February 2007.
Lawrence Yun, NAR chief economist, says it's been an outstanding three-month stretch for the housing market as 2016 nears the finish line. "The healthiest job market since the Great Recession and the anticipation of some buyers to close on a home before mortgage rates accurately rose from their historically low level have combined to drive sales higher in recent months," he said. "Furthermore, it's no coincidence that home shoppers in the Northeast — where price growth has been tame all year — had the most success last month."
November’s existing sales rate was 15.4 percent higher compared to a year ago, the first month when new regulations, known as the “Know Before You Owe”, or TRID disclosures that added extra days to disclosure times went into effect, snarling closing times.

Single-family starts fell 4.1 percent in November to a seasonally adjusted annual rate of 828,000 units while multifamily production dropped 45.1 percent to 262,000 units. However, the best news in the report is a 15.4 percent gain in housing completions to a 1.216 million rate which follows a 6.3 percent jump in the prior month. Houses authorized but not started are also up, 3.0 percent higher to 138,000. Gains here will help ease what is very tight supply for new homes.
The Mortgage Corner
 “Single-family starts declined from a robust level in October but still remain very solid,” said NAHB Chief Economist Robert Dietz. “Though rising mortgage rates could be a headwind for housing, we expect single-family production to continue on a long-run, gradual growth trend. Meanwhile, the multifamily sector, which has been volatile in recent months, is expected to level off at a solid rate as that market finds balance between supply and demand.”
 Rising household wealth is one reason housing sales have returned to 2007 levels, as household net worth rose to a new all-time high and home equity rose to just a hair below its level in 2006, before the housing bubble burst, said the Federal Reserve in its quarterly flow of funds report.
NAR Chief Economist Lawrence Yun believes housing sales could go even higher if housing starts continue to increase. The “big obstacle,” said Yun, is the ongoing “housing shortage,” which is pushing prices to record levels, as well. There were 4.0 months of supply at the current pace of sales, the 18th month in which inventory was tighter compared to its level a year ago.”
 Rising household wealth is one reason housing sales have returned to 2007 levels, as household net worth rose to a new all-time high and home equity rose to just a hair below its level in 2006, before the housing bubble burst, said the Federal Reserve in its quarterly flow of funds report.
But inflation is on the rise, which will boost housing prices further and perhaps encourage more construction, as well. The median existing-home price across the country was $234,900, up 6.8 percent compared to November 2015. This means those with little or no equity in their homes will see their financial position improve, thus adding to future economic growth.

Harlan Green © 2016

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Friday, December 16, 2016

Janet Yellen and The Fed’s Rate Hike(s)

The Mortgage Corner

The Federal Reserve on Wednesday raised a key U.S. interest rate for the first time in a year and signaled a more aggressive approach in 2017—with maybe 2 to 3 more rate increases—if incoming president Donald Trump implements a so-called ‘full-throttle’ strategy to jack up the American economy.

Some economists think the tax cuts and increased spending plans put forward by the Trump team may trigger higher inflation and force the Central Bank to raise rates more aggressively. Others think the Fed may be able to accommodate some stimulus without reacting sharply, said observers of the Fed’s action.

Fed officials did not give many hints in their latest forecast for the economy. They still expect GDP growth to average 2 percent over the next three years, and inflation to be moderate, although the Trump team forecasts 4 percent growth for years to come with their spending plans. The Fed also predicts unemployment will stay close to the 4.6 percent rate seen in November, which would make those growth targets impossible to meet if he sends the 11 million undocumented workers home, as he promised.

But President-Elect Trump has to know that, so he won’t be ejecting all those ‘illegals.’ It’s another con, the same ploy he used with his refusal to retract the Obama birther charge for six years. It brought those white and racist male (and female) voters to his side, which he calculated would outnumber the hostile Hispanic vote.

In fact, inflation is already picking up, even though at the consumer level it remains low. The Consumer Price Index that measures retail prices rose just 0.2 percent in November with the year-on-year rate up 1 tenth to plus 1.7 percent. The core rate, which excludes food and energy, also rose 0.2 percent with its year-on-year unchanged at 2.1 percent, and now at the Fed’s inflation target.

However, this is not enough inflation to generate additional growth. Inflation levels in the Clinton and GW Bush administrations were in the 3 to 4 percent range before 4 percent GDP growth kicked in.

And the Trump economic team must also know higher inflation will come with higher growth projections, since they want to finance much of the stimulus with additional borrowing without raising taxes to support that debt, as the GW Bush administration did to finance its spending for the invasion and occupation of Iraq and Afghanistan.

So Wall Street Economist Greg Ip believes the Trump team’s plans will cause pain. “Donald Trump’s tax cuts would result in $6 trillion in lost revenue over the next decade, according to several independent analyses. His advisers disagree. They claim Mr. Trump’s entire program, including trade, regulation and energy, not just taxes, would generate so much growth there would be almost no increase in the deficit.

But their math doesn’t add up, says Ip. “It rests on aggressive, tenuous or flawed assumptions: that deficits caused by tax cuts don’t raise interest rates; that removing regulations adds directly to gross domestic product; that oil and gas companies will rush to drill on newly opened federal land regardless of energy prices; and that protectionism expands the economy even if U.S. companies and workers are already working flat out.”
We therefore should assume higher inflation will come with more stimulus spending, but that’s not always a bad thing if it creates enough new jobs in an economy already near full employment. But it also means the Fed may keep its promise to raise interest rates further next year.

Harlan Green © 2016

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Monday, December 12, 2016

Trump Voters and The Drug Epidemic

Popular Economics Weekly

Why should so many rust-belt citizens vote for President-Elect Donald Trump, who is patently against the interest of working class voters? I am speaking of his promise to revoke Obamacare, which will make the 20-30 million dependent on it poorer and sicker. And his selection of Oklahoma Attorney General Pruitt to run the EPA, who we know wants to roll back environmental regulations, making everyone warmer, or House Speaker Ryan, who really wants to abolish Medicare as we know it and turn it into a voucher plan.

A recent Penn State study tells us why so many of the poorest and displaced white, blue collar workers voted for him. It was the desperation of depressed families and communities rampant with drug and alcohol abuse, in part from the loss of jobs and the identities that went with holding a decent paying job, who would trust a strong white male with authoritative tendencies who made enough pie-in-the-sky promises more than a female President.

One can say that such desperation leads to an irrational kind of anger, against anything that looks like the old order. Yet it was the old, white male order that created both the Great Recession—because GW Bush’s trickle-down economics cut regulations as well as taxes of the wealthiest, frittering away the budget surpluses of President Clinton’s last 4 years in office—and obstructed a robust recovery by opposing almost any stimulus spending, even shutting down the government in 2011.

The Penn State study showed how hopeless was the situation to the inhabitants now isolated from the modern multi-ethnic, multi-racial, multi-national economy. Most of those industrial, high-paying blue collar jobs are gone, replaced by high tech machines and little effort was made to replace them or rebuild those communities.

The factory sector has been contracting since October 2014, but has recently shown signs of strength. Factory orders surged 2.7 percent in October. Both commercial and defense, were major positives, but the strength was well distributed with the monthly gain excluding all aircraft at a very strong 0.7 percent.
Donald Trump got significantly more votes in areas with high rates of drug addiction, alcohol abuse and suicide, according to the study done by Shannon Monnat, a Penn State researcher who specializes in rural issues.
"I think Trump's anti-free trade message resonated in these places and his rhetoric was very simple -- Make America great again," Monnat said. "And you have to understand that in some of these places that have experienced widespread decline in manufacturing and extraction and the types of jobs that pay livable wages, people there really feel like America is not so great anymore. I think the message that he was the change candidate really resonated with people in these places."
According to Swayne's article, the mortality rate from drugs, alcohol and suicide is 36 deaths per 100,000 people in the least economically distressed parts of the country. The rate is 49 deaths per 100,000 in the most economically distressed areas.

There is now some hope for the rust belt if Trump can carry through on his infrastructure rebuilding promise. After two years in contraction, factory orders year-on-year rates are again positive, at 1.3 percent, and for shipments, at 0.4 percent. October details included a useful 0.4 percent rise in shipments and a 0.7 percent jump in unfilled orders that ended a long run of contraction for this reading.

We hope the factory sector and manufacturing in general can recover in those areas most affected by high addiction rates.  The CDC reported in a 2007 report that more people now die from heroin overdose that gun homicides in those same rust-belt areas. And opioid deaths continued to surge in 2015, surpassing 30,000 for the first time in recent history, according to CDC data released Thursday. That marks an increase of nearly 5,000 deaths from 2014. Deaths involving powerful synthetic opiates, like fentanyl, rose by nearly 75 percent from 2014 to 2015.

Harlan Green © 2016

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Monday, December 5, 2016

Why Are Consumers Happier?

Financial FAQs

Why are consumers much happier during these holidays? The University of Michigan's consumer sentiment index for November jumped 6.6 points to a six-month high while the Conference Board's consumer confidence index jumped 6.3 points to 107.1 for its best reading of the cycle, since July 2007.

It has to be in part the record-low November unemployment rate of 4.6 percent for starters, and rising wages now that minimum wages are rising in major metropolitan areas, as well as whole states like California and Washington. Econoday says the second Q3 GDP growth estimate included a sizable upgrade for consumer spending, up 7 tenths to an annualized and inflation-adjusted 2.8 percent. This is down from the second-quarter's 4.3 percent rate but the average of these two is the best in nearly two years.

It’s in the service sector that employment is growing fastest. In another sign of strength for the economy, the ISM non-manufacturing index jumped 2.4 points in November to a 57.2 reading that tops most forecasts.

Employment for the ISM survey, where growth was soft in October, shot more than 5 points higher to an outsized 58.2. Averaging recent scores for this reading puts the trend at a softer but still very respectable mid-50s rate. New orders are very strong, at 57.0, with export orders also at 57.0 in a reminder of the importance of foreign demand for the nation's service sector. Business activity is a highlight of November's report at 6l.7.

This is one reason boosting minimum wages is so important. Most jobs are being created in the lower-paying service sector, which now employs some 80 percent of workers, and has been a major reason for the tepid 2 percent growth rate average of the economy since the end of the Great Recession.

Manufacturing has been hit hardest, and there is some doubt that Prez-elect Trump will be able to fulfill his promise to bring manufacturing jobs back that were lost. So we will have to rely on the non-manufacturing industries listed below for future growth in jobs and wages.
“The 14 non-manufacturing industries reporting growth in November in the survey said Anthony Nieves, CPSM, C.P.M., CFPM, chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee. — listed in order — are: Agriculture, Forestry, Fishing & Hunting; Retail Trade; Arts, Entertainment & Recreation; Transportation & Warehousing; Other Services; Management of Companies & Support Services; Construction; Finance & Insurance; Professional, Scientific & Technical Services; Accommodation & Food Services; Information; Health Care & Social Assistance; Wholesale Trade; and Mining. The two industries reporting contraction in November are: Real Estate, Rental & Leasing; and Public Administration.”
That’s why economists and the Fed believe it is more important to look at the personal income and consumption expenditure figures in such as the Econoday graph above to know where future growth in incomes (and higher demand) will come from.

Harlan Green © 2016

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Saturday, December 3, 2016

4.6% Unemployment--178,000 Payroll Jobs In November

Popular Economics Weekly

Nonfarm payrolls rose 178,000 in November to just beat out expectations with revisions no factor, says Econoday. A sharp downward revision to October, now at 142,000, was offset by a nearly as sharp upward revision to September, now at 208,000. And the unemployment rate fell a very sharp 3 tenths to 4.6 percent for the lowest reading in nine years, since August 2007.

But the dip in the unemployment rate is tied, not to greater growth in employment, but to a dip in the participation rate, down 1 tenth to 62.7 percent, and drop in the labor force of 226,000 (I.e., that many quit or stopped looking for work.)

And a headline negative in the report is a slight drop of 0.1 percent decline in average hourly earnings, the first negative reading of the year and more than reversing October's very strong 0.4 percent gain and driving down the year-on-year rate from a cycle high of 2.8 percent back down to 2.5 percent where it last was in August. But Wrightson-ICAP believes this was due to a shorter work month, whereas December’s longer month will probably boost it up to 3.0 percent.

Payrolls growth was led in November by another major gain for professional & services, up 63,000, and a 14,000 gain for the temporary help subcomponent. Gains in these readings point to demand for short-term labor in lieu of finding full-time labor. Construction is another positive, up 19,000 and reflecting strength in residential building. Construction over the past 3 months added 59,000 jobs, largely in residential construction.

This highlights the boost in new-home construction I wrote about in an earlier column. Housing starts surged 25.5 percent in October to a 1.323 million annualized rate. This is the best rate of the cycle since August 2007 with the monthly percentage gain the strongest since 1982. It and other recent good news, such as much higher retail sales, could mean something like a 4 percent GDP growth rate in Q4 this year.

As a side note, housing construction is booming because housing prices are accelerating, according to Zillow and the S&P Housing Price Index. The September Case-Shiller national index is expected to grow 5.7 percent year-over-year and 0.8 percent month-to-month (seasonally adjusted), even with the pace of monthly growth and up from 5.5 percent annual growth pace set in September.

And in the payrolls report, the so-called U-6 component of those that work part time but want to work fulltime declined to 5.7 million, the lowest total since 2008. And governments also added 22,000 payroll jobs, another sign of hiring strength, as governments haven’t yet made the 700,000 jobs lost in the Great Recession.

A negative is an 8,000 decline in retail which indicates that retailers are not gearing up much for the holidays. But that may be because of higher online retail sales. Thus far in 2016, employment growth has averaged 180,000 per month, compared with an average monthly increase of 229,000 in 2015.

The pundits are saying we now can expect the Fed to raise their short term rates at least 0.25 percent this month. Stay tuned for their next and last FOMC meeting this year, on December 13-14, or it may even be sooner, in the coming week?

Harlan Green © 2016

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Tuesday, November 29, 2016

GDP Growth, Consumer Confidence Soar

Financial FAQs

The economy grew at the fastest pace in over two years in the third quarter, as consumers, business investment and government increased spending.

Gross domestic product expanded at a 3.2 percent annual rate in the Commerce Department’s second reading, released Tuesday. That’s the strongest pace since the second quarter of 2014. It beat the consensus estimate of a 3.1 percent growth rate among economists surveyed, reports MarketWatch.

Consumer spending rose 2.8 percent in the quarter, stronger than the original estimate of 2.1 percent and the strongest pace since 2002. Another big contribution to the economy was business investment in structures like offices and factories, which expanded at 10.1 percent, faster than the initial estimate of a 5.4 percent.

This is huge, needless to say, as corporate profits also soared 6.6 percent in the third quarter, the main reason corporations were able to increase business investment in plants and equipment, a much better performance than the 0.6 percent decline in the second.

And, consumer confidence is soaring because we are so close to full employment, which Friday’s unemployment should confirm. But rising confidence could also be due to the Trump promise of more economic stimulus, as consumer confidence rose sharply following the November 8 election, up 6.3 points to 107.1 for by far the best reading of the cycle, since July 2007. November's current conditions component is up 7.2 points to 130.3 and is led by strong gains in the assessment of business conditions and those saying jobs are plentiful.

 All-in-all, it could mean an even stronger GDP in Q4. But inflation as measured by the GDP Price Index is up just 1.4 percent, still below the Fed’s target inflation goal of 2 percent, as are all of the other inflation indexes, except the CPI.

But the Fed will still probably raise their interest rates in December, if Friday’s unemployment report continues to look strong, which means a 4.9 percent unemployment rate or better and more workers continue to enter the labor force.

Harlan Green © 2016

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Monday, November 28, 2016

Conforming Mortgage Limits Rise for 2017

Financial FAQs

The Federal Housing Finance Authority, or FHFA, just announced it is increasing the limit for conforming mortgages from $417,000 to $424,100 in most regions of the United States starting Jan. 1, 2017—the first such increase since 2006.

The approximately 1.7 percent bump in the baseline conforming loan limit follows the FHFA’s announcement that  the average U.S. home price has returned to its pre-decline peak, which it hit in the third quarter of 2007. The FHFA bases the loan cap on its quarterly Housing Price Index, which gauges average single-family home prices. The index rose 1.5 percent during the third quarter of 2016 and is up 6.1 percent over the past year, enough to push it above its previous high point.

The FHFA is the supervising entity of conforming loans guaranteed by Fannie Mae and Freddie Mac.
FHFA house price index eased slightly in September and was up 0.6 percent after increasing 0.7 percent in August. On the year, the FHFA index surged to plus 6.1 percent, down from August's gain of 6.4 percent. In the third quarter, house prices were up 1.5 percent and were 6.1 percent higher than the third quarter in 2015. 

Eight of nine census divisions posted monthly gains in September ranging from plus 1.3 percent in the in the Pacific with the Northeast declining 0.2 percent. On the year, the Pacific region was up 8.1 percent with New England in the rear at 2.9 percent.

Conforming loan limits are significant because they apply to home loans that meet the underwriting guidelines of Fannie Mae or Freddie Mac, the government-sponsored entities that acquire mortgages from lenders and ensure a steady flow of money to the mortgage market.
Interest rates for nonconforming, or jumbo mortgages, are generally higher than rates for loans that fall under the cap, and these types of mortgages can be more difficult to obtain.
“Today’s conforming loan limit increase is a much-needed recognition of rising home prices in high-cost markets, and a help to first-time and lower-income borrowers looking to utilize an FHA mortgage,” said NAR President William E. Brown. “Credit remains tight, but this decision will help more qualified buyers address the hurdles and high costs standing between them and the dream of homeownership.”
Conforming loan limits are higher than the baseline cap in parts of the country where home prices are especially high, but cannot be more than 150 percent of the baseline limit—$636,150 for 2017—for the contiguous U.S. Exceptions are established for Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where loan limits in specific locations may exceed that amount.

Harlan Green © 2016

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Wednesday, November 23, 2016

The Real Donald Trump—Part II

Popular Economics Weekly

President-elect Donald Trump is about to move into the White House. This is the man who has become a case-study and text book model of Narcissism for Psychotherapists. Narcissistic personality disorder (NPD) as defined by Wikipedia, ‘is a long-term pattern of abnormal behavior characterized by exaggerated feelings of self-importance, an excessive need for admiration, and a lack of understanding of others' feelings.”

 Or, a Narcissist can also be defined as one who has to believe he cannot do wrong, cannot admit he has ever been wrong or apologized for any of his failings. So it could be helpful to understand President-elect Trump’s failings, in order to understand and perhaps influence (as President Obama says he wants to attempt), just how he might behave as ‘our’ next President.
In fact, that is why Trump doubles down on any who would question him, accusing the accuser of the same misdeeds. Maria Konnikova implied that Trump was a classic Con Artist in her now famous New Yorker article: “A grifter takes advantage of a person’s confidence for his own specific ends—ends that are often unknowable to the victim and unrelated to the business at hand. He willfully deceives a mark into handing over his trust under false pretenses. He has a plan.”
That has to be why Trump maintained during the campaign that he would convene a special prosecutor to prosecute and jail Hillary Clinton for her “crimes”, when in fact Trump himself has been prosecuted for outright criminal behavior, such as the three Trump University lawsuits that he had to settle. Whereas, Hillary was cleared of all criminal charges for use of a private email server by FBI Director Comey.  We need need not compare their Trusts, as the Trump Family Foundation has just admitted to the IRS that it was ‘self-serving”, meaning it it broke IRS regulations that govern a foundation.

Or, he accused President Obama of not being born in the US for six years, in the face of overwhelming evidence to the contrary. Was Trump being stupid? No, he was currying favor with the birther movement to gain their support; mainly white male, racist Tea Partiers still fighting the Civil War who wanted to cast doubt on Obama’s legitimacy as the first African American President.
“What ultimately sets con artists apart is their intent,” says Konnikova. “To figure out if someone is a con artist, one needs to ask two questions. First, is their deception knowing, malicious, and directed, ultimately, toward their own personal gain? Second, is the con a means to an end unrelated to the substance of the scheme itself?”
It is the classic definition of a con game. Distract from the actual behavior by misdirecting our attention elsewhere—preferably to something even more sensational. Mitt Romney, Senators Marco Rubio, Ted Cruz and many others have called him a classic con-man.

But no one seems to be asking why he has had to perpetuate so many cons, broken so many contracts, filed multiple bankruptcies, and been involved in so many lawsuits—some 4,000 at last count—on his way to become the celebrity billionaire? The toll on supporters—even his family—must be devastating to maintain that image of success with overwhelming evidence to the contrary.
A major reason has to be his very short attention span. Tony Schwartz, ghost writer of Trump’s “The Art of The Deal”, has described him best: “Trump has been written about a thousand ways from Sunday, but this fundamental aspect of who he is doesn’t seem to be fully understood,” Schwartz told Jane Mayer, author of a New Yorker article. “It’s implicit in a lot of what people write, but it’s never explicit—or, at least, I haven’t seen it. And that is that it’s impossible to keep him focussed on any topic, other than his own self-aggrandizement, for more than a few minutes, and even then . . . If he had to be briefed on a crisis in the Situation Room, it’s impossible to imagine him paying attention over a long period of time,” said Schwartz
Trump in fact may only be able to focus on what is in front of him at the moment, hence his need for advisors more capable than he to pay attention, to analyze and make intelligent decisions. It has to be why he has lost so much money in his various ventures (such as the Trump Casinos), stiffed so many investors, walked away from so many debts, so that all the major banks now shun him.

We can now know the reason for his admiration of Vladimir Putin, for instance, who Trump has been trying to cultivate since his 1980 Miss Universe contest held in Moscow. It was really an attempt to buy a Moscow hotel. He has had to turn to Russian oligarchs and Mafia figures in order to fund many of his real estate ventures. How’s that for a classic conflict-of-interest as President?

So the question: if once a con-artist, always a con-artist? He’s 70 years old, and one doesn’t change their behavior at that age. But can he use such talents for the good of US, as he has promised; or once again, for his own self-aggrandizement and wealth?

Harlan Green © 2016

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Tuesday, November 22, 2016

Housing Starts, Home Sales 'Yuge'

The Mortgage Corner

Housing starts surged 25.5 percent in October to a 1.323 million annualized rate. This is the best rate of the cycle since August 2007 with the monthly percentage gain the strongest since 1982, says Econoday. It and other recent good news, such as much higher retail sales, could mean something like a 4 percent GDP growth rate in Q4 this year.

But we still have a housing shortage. The jump reflects a 10.7 percent rise to an 869,000 rate for the report's key component, single-family homes which follows an 8.4 percent surge in September. And multi-family homes snapped back from September's odd 39 percent decline, rising 69 percent in October to a 454,000 rate, which should mitigate surging rental prices.

Actual sales of new homes have also been trending higher all year and would be higher still if not for the lack of supply. The surge in mortgage rates which jumped 18 basis points in the November 11 week to 3.95 percent (for conforming loans $417,500 or less) could begin to restrict sales, however. New home sales for October, which will not have been affected by November's jump in mortgage rates, will be one of the coming week's highlights (released Wednesday, November 23).

This is while October existing home sales jumped 2.0 percent to an annualized rate of 5.6 million. September's sales were revised slightly higher to an annualized rate of 5.490 million from 5.470 million. On the year, sales were up 5.9 percent from the same month a year ago. October sales were the highest since February 2007, which could be due to buyers rushing in ahead of a well-publicized, possible Federal Reserve decision to raise short-term rates in December.

So how can we mitigate the shortage of available workers and land that is holding back home sales? NAR chief economist Lawrence Yun mused in a recent Forbes article how the Donald Trump Presidency might affect housing over the next 4 years..
“There could be less regulatory land-use and zoning burden for home construction, and thereby lower the cost of building,” says Dr. Yun. “In recent years, newly constructed home prices have been much higher than existing home prices. Homebuilders say that is due to all the extra cost of regulation and not necessarily from higher input cost of lumber, cement, and worker wages.”
And, mortgage standards are too strict, which is restricting first-time homebuyers, in particular that used to be 40 percent of existing-home sales. So Fannie Mae and Freddie Mac, the main guarantors for conventional mortgages, should continue to be supported in some way.
“Washington’s instinct is to eliminate Fannie and Freddie because of their past sins from past managers,” says Yun, “then mortgages will be much more expensive with 30-year fixed rate products disappearing from the market place. We should view supporting Fannie and Freddie in the same way as we view supporting FDIC deposit government guarantee at banks – to help smooth the financial market.”
“Multifamily production bounced back after an unusually weak reading last month while single-family starts exhibited unusually strong growth as well,” said NAHB Chief Economist Robert Dietz. “Though October’s single- and multifamily production rates are clearly unsustainable, we expect continued growth in the housing sector in the months ahead.”
But home supply was down 0.5 percent to 2.02 million or a 4.3 month’s supply in October. We are still not building enough homes, in other words, which is why housing prices continue to rise faster than inflation, and there are fewer affordable, entry-level homes.

Harlan Green © 2016

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Friday, November 18, 2016

Record Retail Sales, Higher Growth Ahead?

Financial FAQs

It looks like Q4 GDP could be higher than the Third Quarter’s initial estimate of 2.9 percent growth. That’s because retail sales and wholesale inventories, both major contributors to growth, are surging.
Retail sales jumped 0.8 percent in October with September revised 4 tenths higher to plus 1.0 percent. The consumer started the fourth-quarter better than expected and finished the third-quarter even stronger than that, according to BEA’s revision.

The data show wide gains for both months led by the most important component of all, autos which rose 1.1 percent in October on top of September's 1.9 percent surge. Building materials & garden equipment are also very strong, up 1.1 percent following September's 1.8 percent gain with both pointing to strength for residential investment. Non-store retailers are also a standout and reflect strength in e-commerce, up 1.5 percent and up 0.9 percent in the two months.

And manufacturing activity was also strong, Year-on-year, all vehicle production is up a very solid 5.0 percent and eclipsed only by the 6.7 percent gain for the selected hi-tech component which rose 1.0 percent in October to extend its run of impressive gains, according to Econoday. Another positive is a 0.2 percent gain for business equipment which has otherwise been weak most of the year.

Midwest manufacturing is also doing better. Kansas City Federal Reserve manufacturing activity report said, “This was the second consecutive month of rising factory activity in the Tenth District, the first time that has happened in nearly two years,” according to Kansas Fed chief economist Chad Wilkerson.

But what will happen with rising interest rates and a stronger dollar? Long term bond rates have jumped almost 1 percent since P-Elect Trump announced his very ambitious infrastructure upgrades, but which Fed Chair Yellen threw some cold water on yesterday in congressional testimony. She asked, Where will the workers come from to build it when we are already at full employment?

Another economic indicator reported the U.S. is growing at a moderate pace and is likely to do so through early 2017, according to the Conference Board’s Index of Leading Economic Indicators (LEI). The LEI is an index that measures the nation’s future economic health. It rose 0.1 percent in November after a 0.2 percent gain in the prior month, the Conference Board said Friday.

“Although its six-month growth rate has moderated, the index still suggests that the economy will continue expanding into early 2017,” said Ataman Ozyildirim, economist at the board. Its measure of current economic conditions rose 0.1 percent, the “lagging” index of past activity increased 0.2 percent, meaning current activity has slowed.

We therefore believe that Q4 will shape up to have perhaps 3 percent plus GDP growth. Will this extend into next year? It depends on how extensive and expensive will be the Trump infrastructure plans, because it will certainly boost long term rates and inflation.

But rising interest rates and higher inflation are actually signs of higher economic growth.  Fed Chair Yellen seemed to remain cautious about the need to boost Federal Reserve short term rates in her latest congressional testimony, even though higher inflation and growth seem inevitable.

Harlan Green © 2016
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Thursday, November 17, 2016

Will Prez-Elect Trump Now Settle His Federal Racketeering Charges?

Popular Economics Weekly

Donald Trump, among his many court battles, has three civil lawsuits that accuse him, his eponymous school, the university’s former president, and an LLC behind the venture of fraud, breach of contract, false advertising and racketeering, a pattern of illegal activity — specifically mail and wire fraud — designed to defraud the public.

Judge Gonzalo Curiel, the U.S. judge overseeing two of the lawsuits against President-elect Donald Trump and his Trump University told both sides they would be wise to settle the case "given all else that's involved," reports Reuters.

Given that he is now President-elect, some are wondering why he doesn’t settle before the November 28 trial, which would reveal in detail that Trump University was a shell game—literally. It was a university in name only that didn’t confer degrees, for example, and Donald Trump is accused of running a criminal organization under RICO, The Federal Racketeer Influenced and Corrupt Organizations Act.

The latest development from a source familiar with the discussions says the White House-bound mogul’s legal team wants a global settlement that would end all three complaints, including a lawsuit brought by New York Attorney General Eric Schneiderman, according to the New York Daily News.

But “We are not going to settle this case out cheaply,” Patrick Coughlin, an attorney for the plaintiffs, told reporters last Thursday. So Trump’s allegedly fraudulent behavior could seriously damage his pocketbook, as well as he reputation.

The Trump University fraud trials have a 6-year history. Lawyers for the president-elect are squaring off against students who claim they were lured by false promises to pay up to $35,000 to learn Trump's real estate investing "secrets" from his "hand-picked" instructors. 

Instead, they were lured into maximizing their credit cards in what was characterized as a classic Bait and Switch scheme. Instead of professional courses in real estate investing that were personally supervised by Donald Trump, they were handed materials copied from other courses, and taught by instructors with no record of success, or any other qualifications.

And Donald Trump walked away with $millions. The underlying civil lawsuit names Trump as a defendant and claims his now-defunct Trump University defrauded students out of $40 million in course fees. The case was first filed in 2010 and covers a class of some 7,600 students in New York, Florida and California–that included veterans, retired police officers and teachers–but Trump personally received approximately $5 million of it, despite his claim, repeated in the Time Magazine interview, “that he started Trump University as a charitable venture.”

So Trump has good reason to fear the lawsuits over Trump University: They put a lie to a central plank of his campaign. The disappointed students suing him argue that Trump is not a wildly successful entrepreneur or a canny dealmaker but rather a fraudster who made promises he couldn't keep, said Time Magazine. The legal proceedings have already revealed the details of the Trump University scam. Thanks to an order from Curiel, they could also reveal a closely guarded secret: Trump's net worth.

And now President-elect Trump is asking for Top-Secret clearances for his two sons and son-in-law Jared Kushner, who are being tasked to run his more than 200 business connections. No conflict of interest there? And when President, he will be in a position to appoint the next IRS Director, while his tax returns are being audited.

USA TODAY reports the overall ugly picture of his business practices that emerges goes far beyond Trump’s use of bankruptcy court, where debts can be forgiven or restructured depending on their category and type of federal bankruptcy filing. What’s most provocative about USA Today’s reporting, is how Trump has a longstanding pattern of ignoring his bills and walking away from debts owed contractors and employees.
“At least 60 lawsuits, along with hundreds of liens, judgments and other government filings reviewed by the USA Today Network, document people who have accused Trump and his businesses of failing to pay them for their work,” the newspaper wrote recently. “Among them: a dishwasher in Florida. A glass company in New Jersey. A carpet company. A plumber. Painters. Forty-eight waiters. Dozens of bartenders and other hourly workers at his resorts and clubs, coast to coast. Real estate brokers who sold his properties. And, ironically, several law firms that once represented him in these suits and others.”
It’s almost two weeks before his trial on the RICO charges is scheduled to begin on November 28. Trump probably will attempt to stall it into his Presidency, though Judge Curiel has said he is not inclined to do so. So we will get to see in more detail the sordid portrait of this man that some 60 million have elected to be our next President, or we may not, if he agrees to a settlement before then.
Either way, we hope it provides some justice to the 7,600 plaintiffs—many of whom lost valuable life savings—in chasing his con game.

Harlan Green © 2016

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Tuesday, November 15, 2016

What Is the Future of Interest Rates?

The Mortgage Corner

The deficit is moving to the back burner with Donald Trump and congressional Republicans in charge of Washington, and that is causing interest rates to rise quickly. Republicans leaders on Capitol Hill are now papering over divisions with Trump and deficit hawks are sounding the alarm, reports Politico.

“There is now a real risk that we will see an onslaught of deficit-financed goodies — tax cuts, infrastructure spending, more on defense — all in the name of stimulus, but which in reality will massively balloon the debt,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
So it's no longer a secret that bond yields are rising, with the 10-year bond yield now at 2.25 percent up from 1.71 percent just one week ago. But this is still far below the 4-6 percent yields in mid-2000, when 4 percent inflation and 6 percent fixed rates prevailed.

Calculated Risk’s Bill McBride predicts higher mortgage rates ahead, though still at historic lows. “With the ten year yield rising to 2.25 percent today, and based on an historical relationship, 30-year rates should currently be around 4.1 percent,” he said.

The 30-year conforming mortgage rate is already approaching that rate, with 30-year fixed rates @3.625 percent for a 1 pt. origination fee (3.875 percent for 0 pts.), and the Hi-Balance conforming fixed rate now 3.875 percent for 1 pt. origination, up ¼ percent just from last Friday.

So we know part of the reason the 10-year Treasury--the main determinant of mortgage rates--is rising so quickly, after staying below 2 percent for most of this year. It’s also partly because we are at full employment while incomes are rising, and rising wages are two-thirds of product costs. Hence companies will raise their prices in response to such rising costs.

But that alone can’t account for such a quick rise. It has to be because investors and the financial markets are anticipating that President-elect Trump will be able to push through a massive, possibly $1 trillion plus infrastructure rebuilding with little thought to the budget deficit, as Politico reports.  It was a campaign promise, and he also wants to cut taxes.

This happened in 2001, when GW Bush pushed through massive spending to pay for his Wars on Terror, while also cutting taxes. His budget deficit therefore increased, and bond markets in particular don’t like large deficits, as it means too many bonds are in circulation to pay for those deficits, which reduces their price—and bond yields rise in inverse proportion to falling bond prices.

There’s also the anticipation that this will cause future inflation with so much money flooding into the economy at once. The above Calculated Risk graph shows the historical relationship between the 10-year bond yield and 30-year fixed mortgage rates.

We are therefore lucky at this late stage of a recovery to still see 4 percent fixed mortgage rates. One can see when the 10-year yield returns to a more normal 3.5 to 4 percent yield, fixed mortgage rates could almost double.

That’s why the 30-year fixed rate mortgage rose as high as 6.48 percent in 2006 at the top of the housing bubble. Will this hurt first-time homebuyers in particular? Not if inflation and housing prices don’t rise as fast, and construction can keep up with the rising demand for new homes.

Harlan Green © 2016

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Saturday, November 12, 2016

What, Now A Trump Recession?

Popular Economics Weekly

Economists are already warning that if President-elect Trump’s policies are enacted, such as initiating trade wars, or the wrong tax cuts, or even cutting back on social security and Medicare benefits, we could see another recession, similar to the Great Recession that occurred during GW Bush’s term.

Whether his policies can be enacted depends on several things, including his unpredictable behavior, and perhaps the outcome of his November 28 RICO trial in San Diego for running Trump University as a criminal enterprise. Judge Gonzalo Curiel has just ruled that Trump’s inflammatory campaign statements can be admitted as evidence in his trial.

The Bush recession was caused by too lax regulations that caused the housing bubble (by allowing excessive bank leverage), tax cuts that increased the budget deficit while we were fighting two wars, and then Greenspan’s Federal Reserve decision to raise interest rates 16 consecutive times to bust the housing bubble.

It’s terrifying what President-elect Trump will be able to do when he controls all three branches of government (as soon as he appoints a ninth Supreme Court Justice) and carries out his campaign pledges.

Carrying out his pledge to deport all aliens when there is already an outflow of immigrants will devastate agriculture, construction, and any other industry that relies on low-cost labor, for instance.

His promise to ‘fix’ Obamacare (or abolish it outright) will endanger health benefits for the 20 million now covered by it. This makes healthcare much more expensive, since it puts the uncovered back in Emergency Room care for serious illnesses, which puts the cost of their care back on the hospitals.
And as the New York Times reports, “This is going to be a president who will be the biggest regulatory reformer since Ronald Reagan,” Stephen Moore, one of Mr. Trump’s economic advisers said in an interview on Wednesday. “There are just so many regulations that could be eased.”
It could be everything from repeal of Dodd-Frank, the successor to the Glass Steagall Act that protected federally insured depositors from risky investment banking, to repealing environmental regulations that combat global warming, and not only abolishing Obamacare, but the current Medicare system as House Speaker Paul Ryan is threatening to do.

And we are reaching full employment levels, which will surely mean the Fed will begin to raise short term rates in December. This is happening already in the bond markets, as evidenced by rising longer term interest rates in anticipation of a soaring budget deficit, if Trump’s plan to increase both infrastructure and military spending while cutting taxes is implemented.
The central issue, though, maybe Trump’s misbehavior in dissing those elements that made American great. “Trump’s bigotry, dishonesty and promise-breaking will have to be denounced,” said David Brooks today. “We can’t go morally numb. But he needs to be replaced with a program that addresses the problems that fueled his ascent.
“After all, the guy will probably resign or be impeached within a year. The future is closer than you think.”
But President-elect Trump’s destruction of almost all decency in his grab for overwhelming power has let that Genie of discontent out of the bottle. We know what happened in the 1930s and even earlier when such ruthless tactics were used.

Harlan Green © 2016

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Tuesday, November 8, 2016

Full Employment Reached—161,000 Payroll Jobs

Popular Economics Weekly

Average hourly earnings are up 2.8 percent annually, a recovery high. Nonfarm payroll growth was up 161,000 with upward revisions adding a net total 44,000 to September (191,000) and August (156,000). The unemployment rate is down 1 tenth to 4.9 percent and, for some, is already signaling full employment for the labor market, said the Bureau of Labor Statistics.

We are reaching full employment levels, in other words, which will surely mean the Fed raises short term rates in December. Rising wages are two-thirds of product costs, which means the Fed Governors believe higher inflation has to be immanent.

But where is it? The overall PCE price index is up just 1.2 percent annually. This is the strongest yearly showing since November 2014 and is 2 tenths closer to the Federal Reserve's 2 percent target. Yet employment costs aren’t rising with the so-called Employment Cost index, the sum of benefits and salaries, no higher than 2.5 percent in a year.

The increase in hiring last month, along with stronger job gains in August and September than previously reported, shows the seven-year-old economic recovery still has plenty of life despite a slowdown in growth earlier in the year, says Marketwatch.

Q3 GDP growth rose to 2.9 percent, and fourth quarter growth looks to be strong, as well. Health care companies, white-collar professional outfits, and financial firms led the way in job creation, all in the service industries, while mining and manufacturing payroll employment declined.

Better news was that a broader measure of unemployment fell to 9.5% from 9.7%, touching the lowest level since May 2008. The so-called U6 rate includes part-timers who can’t find a good full-time position and discouraged jobseekers who’ve recently given up looking for work.

Also 19,000 new government jobs were added. Health care employment rose by 31,000 in October. Over the past 12 months, health care has added 415,000 jobs. Employment in professional and business services continued to trend up in October (+43,000) and has risen by 542,000 over the year. Over the month, a job gain occurred in computer systems design and related services (+8,000). Employment in management and technical consulting services continued to trend up (+5,000).

U.S. Manufacturing is also strong, according to the ISM’s Manufacturing Index. "The October PMI® registered 51.9 percent, an increase of 0.4 percentage point from the September reading of 51.5 percent, “ said Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee. . “The New Orders Index registered 52.1 percent, a decrease of 3 percentage points from the September reading of 55.1 percent. The Production Index registered 54.6 percent, 1.8 percentage points higher than the September reading of 52.8 percent. The Employment Index registered 52.9 percent, an increase of 3.2 percentage points from the September reading of 49.7 percent.”

So employment, production and deliveries were up, though new orders dropped slightly. This all has to mean the Fed will shortly (i.e., after the Presidential election) probably raise their short term rates another 0.25 percent, which means the Prime Rate of 3.50 percent that controls revolving credit rates for starters, is due to rise at least 0.25 percent.

Harlan Green © 2016

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