Friday, March 31, 2017

Job Claims Down, GDP Revised Up, And 2017?

Financial FAQs

Initial weekly jobless claims for unemployment benefits, the best predictor of employment trends, continues downward, but with some upward blips of late that are probably due to still severe weather in the northeast (snow) and south (tornadoes). And the revised fourth quarter GDP growth estimate was up slightly, with signs that 2017 could be better.
Wrightson-ICAP says, “The number of unemployment insurance beneficiaries has fallen sharply in recent weeks, from an average of 2.064 million in January and February to 1.990 million in the week of March 11.  The combination of that slide and the dramatic improvement in the job-availability numbers in the Conference Board’s record consumer confidence report earlier this week suggests that the national unemployment rate might slip a notch from February’s 4.7 percent level.”

So we could finally be approaching full employment, last seen in early 2000 before the Great Recession bust, even though there are still some 7 million adult workers either working part time, or looking for work? Q4 GDP growth rose to 2.1 percent, but down from a 3.5 percent increase in Q3.
“The increase in real GDP in the fourth quarter reflected positive contributions from PCE, private inventory investment, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by negative contributions from exports and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased,” said the BEA report.
This is while corporate profits surged 22.3 percent year-over-year in Q4, another sign that growth should pick up this year. Why? Well, corporations will hopefully want to expand production, which means more jobs and capex investments. But that hasn’t happened yet, as business investment isn’t increasing at present, and hasn’t for more than 1 year.

Graph: Econoday

Capital expenditure among the 1,000 largest companies took a step back last year, declining $74 million from 2015, on average. The decline built on the $11 million average decline in 2015 after four years of spending growth ending in 2014. Much of it is due to the decline in oil and gas production, as there is already a glut of fossil fuel supplies which has kept oil prices at the $50/barrel level or lower for several years now.

What does all this mean for 2017 growth? At risk of sounding too repetitive, I maintain Congress and the Trump administration must be on the same page if they want to get anything done. Trying to push the repeal of Obamacare up front didn’t work. And tax reform may have the same problem if the tax breaks only go to the wealthiest, as would have happened with the repeal of Obamacare.

Nor will cutting back on environmental regulations, gas mileage requirements, scientific research and development spur growth, since most job growth and innovation these days is in the green industries. We know trickle-down economics has never worked. What is needed is more direct job creation with such as an infrastructure bill.

But is that possible with all the senseless bickering of Republicans because their cherished dream of repealing Obamacare didn’t happen?

Harlan Green © 2017

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Wednesday, March 29, 2017

A Greater Lawlessness—Part II, The Trump Presidency

Popular Economics Weekly

Rachel Maddow on last night’s MSNBC show provided evidence that the Trump White House has been lying from day-one of the Trump Presidency. The White House had denied it asked that tanks and other armaments be included in the inauguration parade, when Freedom of Information Pentagon documents surfaced recently that showed Trump officials had requested that military weapons be included in the parade.

This is but more evidence that the Trump campaign is determined to cover up and/or deny culpability for any of their misdeeds, whether real or imagined.

Rachel then concluded that the Trump White House could not be counted on to provide truthful information on any subject to the media, whom Trump had declared were “enemies of the people”, after all. So it is up to the public media to look for the facts elsewhere.

And now we know the Trump campaign, and possibly Trump himself, had done much more than that in its misinformation campaign during the run up to the November election, which in some ways puts Russia’s kompromat campaign of slander and fake news against Hillary Clinton to shame.

More-and-more evidence is surfacing that it was the compromising of FBI Director Comey that led to Hillary’s downfall. The so-called conspiracy was one of the misdeeds being investigated by South Manhattan Attorney General Preete Bahara when he was suddenly fired. It was about the collusion of Trump campaign officials with the NYPD, and Manhattan FBI officials that had possession of Anthony Weiner’s laptop in their investigation of his internet sexting escapades with women.

A January Huffington Post article documented what was a “domestic conspiracy” to elect Donald Trump. It in effect said information presently public and available confirms that Erik Prince, Rudy Giuliani, and Donald Trump conspired to intimidate FBI Director James Comey into interfering in, and thus directly affecting, the 2016 presidential election. This conspiracy was made possible with the assistance of officers in the New York Police Department and agents within the New York field office of the Federal Bureau of Investigation.

The report went on to say, “As reported by the New York Times, FBI Director James Comey released his now-infamous October 27th letter in substantial part because he had determined that “word of the new emails [found on Anthony Weiner’s computer]...was sure to leak out.” Comey worried that if the leak occurred at a time when the nature and evidentiary value of the “new” emails was unknown, he “risked being accused of misleading Congress and the public ahead of an election.”

By October 27th, the FBI had had access to Weiner’s computer—which it originally received from NYPD—since October 3rd, during which interval the Bureau had both the time and IT know-how to determine that the “new” emails in its possession were in fact duplicate emails from accounts already revealed to the Bureau by Clinton, her aide Huma Abedin, and the State Department.

However, when Comey was briefed on the case by agents from the New York field office on October 26th, he discovered that not only had this IT work not been done, but in fact no warrant to seize the full emails had been sought, no permission to read the emails had been requested from cooperating witnesses Weiner and Abedin, and indeed nothing but a summary of the emails’ “meta-data” (non-content header information) had been prepared by his agents.”

And when they discovered there were emails from Hillary to her aid Huma Abedin and Weiner’s wife that were also included on the laptop, they immediately began pushing Comey to reveal the links that might possibly be material evidence in his probe of Hillary’s use of a private email server.

And both polling, poll analysis, and internet meta-data (see below) confirm that the Comey Letter was sufficient to hand Trump the 77,143 combined votes in Wisconsin, Michigan, and Pennsylvania that won him the election. We know from the statements made by Giuliani, and from numerous statements made by Trump on the campaign trail, that both men believed the Clinton email server case could be leveraged to ensure Clinton’s defeat in November. It turns out they were correct.

I first began writing about the greater lawlessness among Republicans wanting to maintain power in the face of a declining party membership in 2002, when it became obvious that the GW Bush administration was cooking the CIA findings on Iraq’s weapons of mass destruction to justify their invasion and coopting of Iraq’s oil fields. The underlying reason was once again greed, led by Vice President Cheney’s oil company friends who thought they would be able to control Iraq’s vast oil reserves.

Then they turned the Iraqi economy into a conservative dream, a tariff-less free enterprise entity that allowed cheaper US imports to put many Iraqi companies out of business, and was a major reason for the Sunni-led uprising and civil war that ensued.

We now know that on January 12th, the DOJ announced that the Inspector General would be investigating the sequence of events comprising the Prince-Giuliani-Trump conspiracy. Inspector General Horowitz noted that within his brief was investigation of the series of leaks that occurred between the NYPD, the FBI, and outside entities—including, we can surmise based on context, the Trump campaign.

Harlan Green © 2017

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Tuesday, March 28, 2017

Consumer Confidence Highest In 16 Years

Financial FAQs

The Conference Board’s Consumer Confidence Index soared to its highest level in 16 years. Its Consumer Confidence Index®, which had already increased in February, improved again in March. The Index now stands at 125.6 (1985=100), up from 116.1 in February. The Present Situation Index rose from 134.4 to 143.1 and the Expectations Index increased from 103.9 last month to 113.8.

“Consumer confidence increased sharply in March to its highest level since December 2000 (Index, 128.6),” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current business and labor market conditions improved considerably. Consumers also expressed much greater optimism regarding the short-term outlook for business, jobs and personal income prospects. Thus, consumers feel current economic conditions have improved over the recent period, and their renewed optimism suggests the possibility of some upside to the prospects for economic growth in the coming months.”
But the survey was completed before Republicans pulled the Obamacare repeal bill. And if Congress can’t agree on passage of tax reform legislation, which will be just as controversial, then such optimism could turn into pessimism that has haunted past deadlocked Congresses.

And interest rates are falling, even with the Federal Reserve predicting it might continue to boost short term rates. For instance, the 10-year Treasury yield has dropped to 2.35 percent, unheard of except when economic growth has slowed to a crawl, or a recession is looming.

This is what happens when the so-called Treasury yield curve flattens. Then there is less room for banking profits, since short term rates the Fed controls are basically banks’ cost of doing business, and longer term rates are what they earn when they lend money.

Consumers were significantly more optimistic about the short-term outlook. The percentage of consumers expecting business conditions to improve over the next six months increased from 23.9 percent to 27.1 percent, while those expecting business conditions to worsen declined from 10.5 percent to 8.4 percent.

Consumers’ outlook for the labor market was also more upbeat. The proportion expecting more jobs in the months ahead increased from 20.9 percent to 24.8 percent, while those anticipating fewer jobs declined from 13.6 percent to 12.2 percent. The percentage of consumers expecting their incomes to increase improved from 19.2 percent to 21.5 percent, while the proportion expecting a decrease declined from 8.1 percent to 7.0 percent.

But these heightened expectations can only be fulfilled with a Trump team that knows what it is doing, which President Trump will eventually realize requires skilled and knowledgeable people to run the various government agencies, rather than the ideologues he has been appointing to date that are intent on “de-constructing” government, to use the words of Breitbart’s Steve Bannon, now his chief White House strategist.

Harlan Green © 2017

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Monday, March 27, 2017

New Home Sales Surge, Existing Sales Not So Much

The Mortgage Corner

New-home sales shot 6.1 percent higher in February to a 592,000-annualized rate and is near the 600,000 top estimate of economists. Sales appeared to have gotten a boost from builder concessions as the median price fell a monthly 3.9 percent to $296,200 for a year-on-year rate that's suddenly in the negative column at minus 4.9 percent.

And existing home sales were down 3.7 percent in February to a 5.480 million annualized rate, below January’s 5.55 million rate. Details are mostly weak including a 3.0 percent decline for single-family sales to a 4.890 million rate and a sharp 9.2 percent drop for condos to a 590,000 rate. But that could be the end-of-winter blahs, as year-on-year, single-family sales are up 5.8 percent with condos up just 1.7 percent.

Graph: Econoday

Strength in new-home sales was centered in the Midwest where the sales rate surged 21,000 to 89,000 and easily surpassing 11,000 gains for the both the West, at 157,000, and the South at 313,000. Sales in the Northeast fell sharply in last week's existing home sales report and are down 9,000 to a very low 33,000 annualized rate in today's new-home report.  But that could also be due to the month’s severe storms, including at least one Nor’easter that brought up to 2 feet of snow to some parts of New England.

What is happening with some conforming prices from FHFA financed homes not rising at all in February? In a note by Econoday, the Federal Housing Finance Authority’s house price index came in unchanged in January with year-on-year appreciation falling a steep 5 tenths to 5.7 percent. This is the weakest month-to-month result in more than 4 years and the weakest year-on-year rate since August 2015, and at a time when supply is pointing to very strong conditions, at only 3.8 months for resales which is down 6 weeks from this time last year.

And days on the market are very tight, at 45 vs 59 days a year ago. A highlight of the coming week will be Case-Shiller's report which tracks resale prices and which, in another housing puzzle, now appears to be violently converging with FHFA.

Another indicator of housing sales, the Pending Home Sales Index, a forward-looking indicator based on contract signings, decreased 2.8 percent to 106.4 in January from an upwardly revised 109.5 in December 2016. Although last month's index reading is 0.4 percent above last January, it is the lowest since then.

It was insufficient supply levels that led to a lull in contract activity in the Midwest and West, which dragged down pending home sales in January to their lowest level in a year, according to the National Association of Realtors.

Lawrence Yun, NAR chief economist, says home shoppers in January faced numerous obstacles in their quest to buy a home. "The significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would-be buyers at bay," he said. "Buyer traffic is easily outpacing seller traffic in several metro areas and is why homes are selling at a much faster rate than a year ago. Most notably in the West, it's not uncommon to see a home come off the market within a month."

All this means that rather than a housing bubble, we are still in a housing shortage with affordable housing the main victim. And any improvement in supply largely depends on mortgage rates remaining low, despite further Federal Reserve rate hikes and a Trump administration spending spree. So I predict we have no more than a one year window for such low rates to remain.

Harlan Green © 2017

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Sunday, March 26, 2017

A Greater Lawlessness—Self Interest vs. The Common Interest

Popular Economics Weekly

Are we at the beginning of an era of Greater Lawlessness, or nearing the end with the greatest law breaking we may have seen in our lifetime? And are we at the beginning or end of the greatest wealth accumulation by the wealthiest, of another Gilded Age that last happened in 1900, at the beginning of the Industrial Age?

In a potentially bombshell report, CNN reported Wednesday night that the FBI has information that suggests members of President Donald Trump’s team may have colluded with Russian operatives to coordinate the release of damaging information in an effort to torpedo Hillary Clinton’s presidential campaign.

FBI Director James Comey had already testified in televised House hearings that the Trump campaign team was under criminal investigation for collusion with Russian intelligence operatives in trying to undermine the legitimacy of US elections and democracy in general.

Such interference by Russian and even Wikileaks has led to the election of possibly the most corrupt President in US history, with his refusal to divest himself of his assets that are creating countless conflicts of interest, as well as blatantly ignoring the emoluments clause of the US Constitution that prohibits presidents from being compensated by foreign governments.

How did the US, leader of the free and democratic world since WWII, become so weak and vulnerable that Russian hackers could help to elect Donald Trump, an openly pro-Putin ally who wants to implement the Kremlin’s own foreign policies and subvert those of the democratic western world?

We have had major lawbreaking by Presidents before with Nixon’s Watergate, which was a break into Democratic National Committee headquarters to steal their election plans. Sound familiar?

Then there was President Reagan and the Iran-Contra Affair in the 1980s, which entailed the secret shipping of some $8 million in weapons to Khomeini’s Iranian government to aid them in their Iraq war, and more than 250 criminal convictions of Reagan era office holders for law breaking.

This was in part because President Reagan considered government the problem, and therefore its laws and regulations to be subverted or ignored when inconvenient to his goals.

What were those goals? It’s in fact a long story, but one that can be summarized easily. Such a greater lawlessness of elected representatives and presidents in particular, began with the concerted push to transfer greater wealth to the already wealthy begun in the 1970s and catalogued best in Jacob Hacker & Paul Pierson’s Winner-Take-All Politics. It was the beginning of massive tax cuts, and gutting of labor protection laws, the backbone of middle class prosperity, which weakened labor’s ability to both organize and bargain collectively, and resulted in the massive globalization of the labor force.

These policies were implemented under the rationale that self-interest trumped the common interest championed by governments, and therefore those laws that supported public interest should be subordinate to private interests. Its ideologues and supporters advocated an economic program called trickle-down economics that maintained the owners of capital knew best how to run a country and create the greatest prosperity for all with only the most minimal government regulations and protections, in order to maintain US leadership as a world power.

This led to the abuses of the housing bubble and wholesale loss of middle class wealth from overleveraged Wall Street, a shadow banking system, and failure of financial institutions such as Lehman Brothers that bankrupted millions of ordinary workers.

It led to the Great Recession, which did as much damage to the US economy as the much longer Great Depression, but without the leadership of an FDR and Francis Perkins, his Labor Secretary, who created most of the modern social safety net, including social security and the Fair Labor Standards Act, the first minimum wage and overtime laws for American workers.

It has also led to the greatest income inequality since the beginning of the Great Depression in 1929, which in turn led to the polarized electorate we have today. There is very little left of the middle class created after WWII that grew due to New Deal legislation that protected unions and collective bargaining, funded early education and government research that gave US the technological edge.

Under the aegis of a revolt against globalization, we have instead elected those who believe healthcare should be restricted only to those that can afford it, a government so diminished that it no longer is able to protect the environment, educate all in public schools and tuition-free public universities, or protect the public from Wall Street excesses, (which means another recession is inevitable).

All this could only have happened with the greater lawlessness we have today that a president and White House make no attempt to hide. President Trump seems to believe in the Mafia code, a code that trusts only his family and closest associates, where the only honor is the honor among thieves, some of whom are turning out to be Russian oligarchs whose stolen wealth he is more than happy to launder in his various real estate holdings.

CNN, basing its report on unnamed U.S. officials, said the evidence is largely circumstantial and is not yet conclusive, though the investigation is ongoing and is now focusing on the possibility of that collusion. The FBI’s information is based on “human intelligence, travel, business and phone records and accounts of in-person meetings,” CNN said.

Rep. Adam Schiff (D-Calif.) went a step further Wednesday, telling MSNBC “there is more than circumstantial evidence now” of collusion with Vladimir Putin’s Russia.

So is this the beginning, or the end of an era of rampant lawlessness that began almost 50 years ago, and that few of the lawbreakers have paid for, from Presidents to Wall Street financiers?

Maybe the various investigations will help is to understand what has happened to the no longer United States of America?

Harlan Green © 2017

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Thursday, March 23, 2017

Housing Sales Continue To Increase

The Mortgage Corner

New home sales shot 6.1 percent higher in February to a 592,000 annualized rate that easily beats the Econoday consensus for 565,000 and is near the top estimate of 600,000. Sales seemed to have a boost from builder concessions as the median price fell a monthly 3.9 percent to $296,200 and down 4.9 percent year-on-year.

Strength is centered in the Midwest where the sales rate surged 21,000 to 89,000 and easily surpassing 11,000 gains for the both the West, at 157,000, and the South at 313,000. Sales in the Northeast fell sharply in yesterday's existing home sales report and are down 9,000 to a very low 33,000 annualized rate in today's report.
"February's increase in new home sales is consistent with builders' growing confidence in the housing market," said Granger MacDonald, chairman of the National Association of Home Builders (NAHB). "Builders are encouraged by heightened consumer activity and by the expectation that regulatory costs will decline in the year ahead."
And mortgage rates have continued to fall of late in the face of pessimism that Trump’s campaign promises, including tax cuts and infrastructure investments, might not be enacted anytime soon. The 30-year fixed conforming rate has dropped to 3.75 percent for 1 origination point.

In fact, House Speaker Paul Ryan has admitted the infrastucture makeover may not come up for a vote until 2018, and any tax reductions seem to be dependent on repeal of Obamacare, which now has even more opposition as Repubs keep eliminating more benefits to please their Libertarian Freedom Caucus members.

This is while existing home sales were down 3.7 percent in February to a 5.480 million annualized rate, also below the Econoday consensus for 5.555 million. Details are mostly weak including a 3.0 percent decline for single-family sales to a 4.890 million rate and a sharp 9.2 percent drop for condos to a 590,000 rate.

But we have just ended the winter season, and year-on-year, single-family sales are up 5.8 percent with condos fading and barely over zero at 1.7 percent. Overall year-on-year sales are up a solid 5.4 percent with the median price of $228,400 up a healthy 7.7 percent. Supply has been very thin but is improving, with 1.750 million resales on the market for a 4.2 percent gain from January.

But existing-home inventories are very low at 3.8 months vs January's 3.5 months. Days on the market are very short, at 45 vs 59 days a year ago. This means there is no housing inventory in many parts of the country, so the surge in new-home construction should continue as homebuilders race to fulfill the rising demand for housing.

Harlan Green © 2017

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Monday, March 20, 2017

Leading Indicators Signal Strong Growth Ahead, If...

Popular Economics Weekly

The Republican Congress needs to abandon its obsession with repealing Obamacare, since Republicans will never agree on a replacement, and many Senate Republicans have just announced they oppose the current Republican House Trumpcare proposal.

Instead they need to focus on passing an infrastructure bill that will rebuild public and private infrastructure that the American Society of Civil Engineers (ASCE) says is now behind more the $4.5 trillion in maintenance alone, such as highways, harbors, wastewater facilities and bridges.

Graph: CBO

The Conference Board’s Index of Leading Economic Indicators is one of several anecdotal surveys (i.e., opinions) that aren’t yet borne out by actual activity. The Conference Board said its leading economic index rose 0.6 percent in February — the third straight gain of that magnitude — to reach its highest level in more than a decade.

“Widespread gains across a majority of the leading indicators point to an improving economic outlook for 2017, although GDP growth is likely to remain moderate,” said Ataman Ozyildirim, director of business cycles and growth research at The Conference Board.

The improvement in the LEI over the past several months is said to be due to optimism that Congress can pass a massive infrastructure bill, as well as reducing regulations. But can Trump keep his promise to invest in infrastructure, when his new proposed budget cuts road spending by nearly half a billion dollars, and includes no new infrastructure spending?

The American Society of Civil Engineers (ASCE) estimates the US needs to spend some $4.5 trillion by 2025 to improve the state of the country's roads, bridges, dams, airports, schools, and more in its 2017 Infrastructure Report Card.

For instance, out of the 614,387 bridges in the US, more than 200,000 are more than 50 years old. The report estimates it would cost some $123 billion just to fix the bridges in the US, and many of the one million drinking water pipes have been in use for almost 100 years. The aging system makes water breaks more prevalent, which means there are about two trillion gallons of treated water lost each year.

And even more important to our security and economic well-being, the majority of the transmission and distribution lines were built in the mid-20th century and have a life expectancy of about 50 years, meaning that they are already outdated. So between 2016 to 2025, there's an investment gap of about $177 billion for infrastructure that supports electricity, like power plants and power lines, reports the ASCE. 

Need we say more about the importance of a major infrastructure bill, which is far more important to Americans that the ideological debate over Obamacare and healthcare in general?

Harlan Green © 2017

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Thursday, March 16, 2017

Single-Family Construction Exploding

Popular Economics Weekly

Starts on new houses climbed 3 percent in February to the second-highest level since 2007, reflecting pent-up demand in a steadily growing economy that builders are aiming to address. And builder optimism continues to rise to new levels.

In a sign that first-time homebuyers may finally find more affordable housing, the NAHB/Wells Fargo housing market index is up a very sharp 6 points in March to 71 for the best reading of the economic cycle, and a 12-year high. Home builders peg current sales at an index of 78, up 7 points from February, and see future sales also at 78, for a 5 point gain.

“While builders are clearly confident, we expect some moderation in the index moving forward,” said NAHB Chief Economist Robert Dietz. “Builders continue to face a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor.”
The pace of so-called housing starts rose to an annual rate of 1.29 million last month, with construction on single-family homes also hitting the highest level since before the Great Recession. And permits for single-family homes, where building costs and sale prices are the highest, rose 3.1 percent in February to an 832,000 rate that, in good news for a thinly supplied new home market, is up 13.5 percent year-on-year. This is offset, however, by a downturn in multi-family units where permits fell 22 percent in the month to a 381,000 rate that is down a yearly 11.2 percent.

And we will be seeing supply relief for single-family homes even though completions, in a detail that home builders will note, fell 6.5 percent to a 754,000 rate. Nevertheless, new supply is coming as homes under construction rose 1.3 percent to 1.091 million for the highest reading since the great bubble in October 2007, said the NAHB in it press release.

In a sign that job availability is still tight, initial jobless claims remain low. Initial jobless claims are holding at trend, down 2,000 in the March 11 week to 241,000, reports Econoday. The 4-week average, little changed at 237,250, is down nearly 10,000 from mid-February in what offers a favorable signal for the March employment report that comes at the end of the month.

So we have a surging housing market for single-family homes in particular, a sign that homebuyers—including first timers—are feeling more confident about their jobs.  In fact, job openings in the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) came in at 5.626 million in January and remain strong and right at their 2-year trend.

But there was an acceleration is hiring, which rose 2.6 percent in the month to 5.440 million for one of the best readings of the economic cycle. This is while the quits rate, up 1 tenth to 2.2 percent, hints at improved confidence among workers while the layoff rate remains low and unchanged at 1.1 percent.

No wonder the Federal Reserve has turned optimistic as well. Janet Yellen in her latest press release after the Fed raised its fed funds rate another one-quarter percent said we were entering a virtuous cycle of robust growth that was neither too hot (i.e., inflationary), nor too cold (more jobs were being created).

Harlan Green © 2017

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Wednesday, March 15, 2017

Retail Sales, Inflation, Interest Rates Rising

Financial FAQs

Gasoline prices pulled down February's retail sales, falling 0.6 percent after rising 2.1 percent in January. But when excluding volatile autos and gasoline prices, sales rose 0.2 percent vs January's very strong 1.1 percent. And control group sales, which are another core measure, inched only 0.1 percent in the month but follow an outstanding 0.8 percent gain in January, one that initially posted at 0.4 percent, says Econoday.

And strong retail sales are helping to push retail inflation higher, with the Consumer Price Index for retail goods and services now at 2.7 percent. This has to be why the Federal Reserve on Wednesday just increased its benchmark short-term interest rate for the second time in three months and signaled two more rate hikes this year. The Fed policy committee voted 9-to-1 to raise interest rates to a range of 0.75 to 1 percent.

Graph: Econoday

The overall year-on-year CPI rate continues to climb, at 2.7 percent that is well above the general 2 percent Federal Reserve target rate that was last matched nearly 5 years ago, in March 2012. But the core rate, which excludes energy, is steady at 2.2 percent.

So inflation is hardly a problem, and the Fed may be acting too quickly when economies will only grow more with higher prices, hence higher inflation. Because this means companies can raise their prices, hence profits. They can then expand their production of goods and services. This should be a no-brainer, so it is puzzling why the Fed is acting now, when it’s not even clear when and how the Trump administration will be able to enact their growth agenda.

In fact, it is mainly because gas and energy prices are stable that inflation hasn’t been rising faster. Energy prices fell a very sharp 1.0 percent in the month of February with gasoline down 3.0 percent.
Yet year-on-year rates are still very strong, at plus 15.2 percent for overall energy and plus 30.7 percent for gasoline. These are the gains that are pushing up the headline year-on-year inflation rate.

Harlan Green © 2017

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Tuesday, March 14, 2017

Homeownership Is Rising

The Mortgage Corner

An improving economy, multiple years of strong job growth and the notable increase in home values in most markets fueled a greater share of purchases from Generation X households over the past year, says the National Association of Realtors in a recent survey.

And that is helping to boost the all-important household formation of younger generations, which is what ultimately precipitates home sales, especially among those young adults who are forming families.

This is according to the National Association of Realtors® 2017 Home Buyer and Seller Generational Trends study, which evaluates the generational differences of recent home buyers and sellers. The survey additionally found that a growing number of millennials and younger boomer buyers have children living at home; student debt is common among Gen X and boomer households; more millennials are buying outside the city; and younger generations are more likely to use a real estate agent.

A notable shift in the relative household growth rates after 2007 reflects declines in “headship” rates, that is, the share of the population identified as heads of households, according to a report by the San Francisco Federal Reserve. It is mostly the result of the Great Recession that decimated the earning power of so many young adults, in particular. This means that for over five decades headship rates in the United States had increased on average before falling off in the wake of the financial crisis after 2007.

The patterns in headship rates over the housing cycle differ considerably across age groups. Specifically, in recent years most of the changes were among young adults. For two groups—ages 18 to 24 and ages 25 to 29—headship rates have declined appreciably in recent years. Headship rates among older age groups have been more stable.

Also apparent in the SF Fed’s chart is that headship rates among young adults rose considerably from the mid-1990s up to the financial crisis. That was the period of the strong housing market, rapidly rising house prices, and booming homeownership rates, including among young adults. Indeed, the movements in shares of young heads of household closely track the rise and decline in homeownership ratios.
"Gen X sellers' median tenure in their previous home was 10 years, which puts many of them selling a property they bought right around the time home values were on the precipice of declining," said NAR chief economist Lawrence Yun. "Fortunately, the much stronger job market and 41 percent cumulative rise in home prices since 2011 have helped a growing number build enough equity to finally sell and trade up to a larger home. More Gen X sellers are expected this year and are definitely needed to ease the inventory shortages in much of the country."
The uptick in purchases from Gen X buyers this year (28 percent) was the highest since 2014 and up from 26 percent in 2016. Millennials were the largest group of recent buyers for the fourth consecutive year (34 percent), but their overall share was down slightly from a year ago (35 percent). Baby boomers were 30 percent of buyers, and the Silent Generation made up 8 percent.

This year's survey also brought to light how the soaring cost of rent in many areas is likely influencing the decision of middle-aged parents to buy a home with their young adult children in mind. Younger boomers were the most likely to purchase a multi-generational home (20 percent; 16 percent in 2016), and the top reason for doing so was that children over 18 years old either moved back home or never left (30 percent; 27 percent in 2016).
"The job market is very healthy for young adults with a college education, but repaying student debt and dealing with ever-increasing rents on an entry-level salary are forcing many to either shack-up with several roommates or move back home," said Yun. "This growing trend of delayed household formation is one of the main contributors to the nation's low homeownership rate."
Similar to previous years, roughly two-thirds of millennial buyers are married. One aspect of their household that has changed is the number of children in them. In this year's survey, 49 percent of millennial buyers had at least one child, which is up from 45 percent last year and 43 percent two years ago.

With more kids in tow, the need for more space at an affordable price is increasingly pushing millennial buyers outside the city. Only 15 percent of millennial buyers bought in an urban area, which is down from 17 percent last year and 21 percent two years ago.
"Millennial buyers, at 85 percent, were the most likely generation to view their home purchase as a good financial investment," added Yun. "These strong feelings bode well for even greater demand in the future as more millennials settle down and begin raising families. A significant boost in new and existing inventory will go a long way to ensuring the opportunity is there for more of them to reach the market."
But that isn’t yet the case. Inventories are still in the 5-month range with current sales rates. So something must happen to increase housing inventories of existing homes, such as the sale of tens of thousands of foreclosed homes hedge funds purchased at fire sale prices when the housing bubble burst that are rental units.

The Blackstone’s Invitation Homes subsidiary, under the auspices of Blackstone's real estate leadership, began purchasing homes in 2012 and eventually amassed more than 60,000 homes, investing $1.2 billion in renovations. At one point it was reportedly spending $150 million per week on homes.

And now the Dallas-based single-family rental real estate investment trust, one of the largest in its class, raised $1.54 billion in an initial public offering this January. It priced 77 million shares at $20 each, well within its previously stated range of $18 and $21, said the press release.

So until hedge funds decide it’s no longer lucrative to hold rental properties, we may continue to experience a housing shortage, which means prices will continue to rise above the inflation rate for the foreseeable future.

Harlan Green © 2017

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Friday, March 10, 2017

Strong February Jobs Report = Rising Interest Rates

Popular Economics Weekly

Economists are almost unanimous that the Fed will raise their short term rates at next week’s FOMC meeting. This is because total nonfarm payroll employment increased by 235,000 in February, and the unemployment rate dropped slightly to 4.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment gains occurred in construction, private educational services, manufacturing, health care, and mining.

This is while Federal Reserve Chair Janet Yellen indicated last Friday that if the economy stays on track for the next few weeks, a rate hike would likely come when Fed leaders meet March 14-15.
"At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," Yellen said in the Chicago speech.
It’s now the 8th year of the post-Great Recession growth cycle, with a total of almost half a million jobs in the first two months of 2017, the best back-to-back performance since last summer. The unemployment rate dipped to 4.7 percent from 4.8 percent.

Yet Treasury yields retreated today, even after official data showed that U.S. employers created more jobs than expected in February, but wage growth remained unexpectedly weak. In February, average hourly earnings for all employees on private nonfarm payrolls increased by 6 cents to $26.09, following a 5-cent increase in January.

Over the year, average hourly earnings have risen by 71 cents, or 2.8 percent, which is still not enough to cause substantial inflation, and that is what worries bond traders that have an almost knee-jerk reaction to any sign of increased inflation. In February, average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $21.86 in February. The yield on the 10-year Treasury note was off nearly three basis points at 2.580 percent in recent trade, while the 30-year yield was down two points at 3.173 percent.

And lower inflation expectations will keep mortgage rates from rising as well, which means the construction industry—and housing—will continue to boom. Which is why sales of newly built, single-family homes rose 3.7 percent in January to a seasonally adjusted annual rate of 555,000 units, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

In February, construction employment increased by 58,000, with gains in specialty trade contractors (+36,000) and in heavy and civil engineering construction (+15,000). Construction has added 177,000 jobs over the past 6 months.

Employment in private educational services rose by 29,000 in February, following little change in the prior month (-5,000). Over the year, employment in the industry has grown by 105,000. Manufacturing added 28,000 jobs in February. Employment rose in food manufacturing (+9,000) and machinery (+7,000) but fell in transportation equipment (-6,000). Over the past 3 months, manufacturing has added 57,000 jobs.

Health care employment rose by 27,000 in February, with a job gain in ambulatory health care services (+18,000). Over the year, health care has added an average of 30,000 jobs per month.

Employment in mining increased by 8,000 in February, with most of the gain occurring in support activities for mining (+6,000). Mining employment has risen by 20,000 since reaching a recent low in October 2016. Employment in professional and business services continued to trend up in February (+37,000). The industry has added 597,000 jobs over the year.

Economists and bond traders don't seem to agree with Yellen's Fed and the inflation hawks, which is why longer term interest rates, and bond yields shouldn't rise substantially this year.  There just isn't enough inflation to justify more than one Fed rate hike in 2017.  Time will tell, of course, as will any substantial rise in the budget deficit due to increased federal spending.

Harlan Green © 2017

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Thursday, March 9, 2017

U.S. Will Badly Need Immigrants

Popular Economics Weekly

For most of the past half-century, adults in the U.S. Baby Boom generation – those born after World War II and before 1965 – have been the main driver of the nation’s expanding workforce, reports the PEW Research Center. But as this large generation heads into retirement, the increase in the potential labor force will slow markedly, and immigrants will play the primary role in the future growth of the working-age population (though they will remain a minority of it).

The stakes are enormous if Republicans succeed in removing most of the estimated 11 million undocumented worker (only half of which are from Mexico and the Latin countries), and cut legal immigration in half, as they have promised to do. Economic growth will plummet, since it is mainly based on growth of the working age population, as well as labor productivity, which has also fallen since 2000.

The causes of the drop in labor productivity are largely because of the fall in capex spending, the investment in new plants and equipment, which has fallen by half since 2010, in large part because of the Great Recession, but also because corporations have chosen to move so many jobs overseas where labor is cheaper, rather than investing domestically to improve the productivity of American workers.
Graph: Econoday

The plunge in capex has been most noticeable last year, perhaps because of uncertainty over economic growth in what is the 7th year of this long growth cycle, or uncertainty about results of the President election. Such expectations can be self-reinforcing in these anecdotal surveys, of course, given the poor 1.9 percent GDP growth in 2016.

The ISM manufacturing survey, which tracks anecdotal assessments from a national sample of purchasers, made big headlines in the week with a 4.7 point jump in its new orders index to 65.1. This level of order growth was last exceeded in August 2009 and follows two prior 60 readings.

The number of adults in the prime working ages of 25 to 64 – 173.2 million in 2015 – will rise to 183.2 million in 2035, according to Pew Research Center projections. That total growth of 10 million over two decades will be lower than the total in any single decade since the Baby Boomers began pouring into the workforce in the 1960s. The growth rate of working-age adults will also be markedly reduced, says the study.

So the Trump administration has to be careful of what they wish for, if they want to boost economic growth domestically.

Harlan Green © 2017

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Wednesday, March 8, 2017

A Gangbusters Jobs Report Tomorrow?

Financial FAQs

It looks like tomorrow’s unemployment report could be the best of the New Year.  That’s because ADP's February private payroll estimate is 298,000, a yuge number. This would make tomorrow’s jobs report the biggest gain since October 2015 and one of the very largest of this recovery from what was the Great Recession, let us not forget. ADP isn't always followed closely but its call last month for outsized growth in January payrolls did prove correct with January’s 227,000 payroll growth, says Econoday.

The reason? It may be rising factory orders, a major component of the even stronger manufacturing sector. The ISM, which tracks anecdotal assessments from a national sample of purchasers, surprised economists this week with a 4.7 point jump in its new orders index to 65.1.

This level of order growth was last exceeded in August 2009 and follows two prior 60 readings as tracked by the green line of the graph, said Econoday. This is rare strength. Among regional reports, the most closely watched one, the Philly Fed, has been making similar headlines with its new orders index surging 12 points to a 38 level that was last witnessed way back in 1987.

But such anecdotal evidence may not be enough to boost overall GDP growth, as the stronger dollar is holding down exports. Data on goods trade show a major widening in the deficit, to $69.2 billion during January. Foreign buyers showed little interest in U.S. goods in the month as exports of capital goods fell sharply and pulled total exports down 0.3 percent to $126 billion as tracked on the graph, said Econoday.

Whereas imported goods jumped 2.3 percent to $195 billion and once again were fed by America's appetite for foreign consumer goods and foreign vehicles, which subtracts from GDP growth. So ongoing strength in the dollar, as tracked in reverse by the red line, will hold back exports by making

U.S. products more expensive to foreign buyers and lift imports by making foreign products less expensive to U.S. buyers.

Is this all about the ‘Trump’ enthusiasm effect, which to date has nothing to show for it but executive orders and Tweet storms? He has historically low approval ratings for a new president (at least among Democrats and Independents), and has been unable to start his term with a burst of substantial legislation, as Barack Obama did, and as I said last week.

So the jobs surge may be temporary, unless the Trump administration begins to focus on jobs legislation, rather than attacks on their perceived enemies. That is still the question, with so many intelligence scandals and conflicts of interest surrounding him. President Trump has to first prove he can lead his own party.

Harlan Green © 2017

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Thursday, March 2, 2017

2017 Manufacturing Off To Good Start

Popular Economics Weekly

What is happening with manufacturing? The ISM manufacturing index jumped 1.7 points in February to a 57.7 level that beats the consensus by 1.3 points. This is the strongest rate of monthly growth in composite activity since August 2014. So does it mean Trump can keep his promise of bringing back those blue collar jobs lost to the likes of China?

It’s in spite of higher dollar exchange rates that have boosted consumer spending because of cheaper import prices, which dropped GDP growth in Q4 and the year, to 1.9 percent. (Import sales subtract from GDP growth.) So what gives? Is it the Trump euphoria over his promise to cut taxes and regulations?

The report in fact is filled with superlatives led by a 4.7 point jump in new orders to 65.1. This rate of monthly growth was last matched in December 2013 and last exceeded in August 2009. Backlog orders jumped 7.5 points to 57.5 in a reading last exceeded in March 2014. Production is also very strong, up 1.5 points to a 62.9 level that is the best since March 2011.This is while consumer confidence index continues to make new post-election highs and new cycle highs at a 114.8 February level, which beats consensus estimates and makes for a strong 3.2 point gain from January.

But beware, says Econoday, “This report perhaps is the greatest expression yet of post-election strength in anecdotal surveys, strength that has yet however to find its way to actual government data on the factory sector which have been consistently soft.”

The data includes just released auto sales, softer at 17.5 million units. Wrightson ICAP had estimated a seasonally adjusted annualized sales pace of 17.7 million.  That would still be a little below the December/January average of 17.9 million, but would represent an increase of roughly 1 percent in both month-to-month and YOY terms.  And it would be about 1.4 percent above the actual 2016 total of 17.46 million, which was a record high.

Then there is the January durable goods report for items that last 3 or more years. It shows the usual volatility behind which are sagging numbers for key readings, said Econoday. Aircraft, both domestic and defense, skewed durable goods orders sharply higher in January, up 1.8 percent to hit the consensus. Not hitting the consensus, however, are orders that exclude aircraft as well as all other transportation equipment. This reading fell 0.2 percent to come in well below Econoday's low estimate for a 0.2 percent gain.

The worst news in the report is a 0.4 percent decline in orders for core capital goods (nondefense ex-aircraft). This ends 3 months of strength for this reading and pulls the rug out from expectations for a first-quarter business investment boom as indicated by business confidence readings.

And longer term investments happen when core capital expenditures are on the increase. So will the manufacturing boom continue?

Harlan Green © 2017

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Wednesday, March 1, 2017

Slower Q4 Growth, (But) Higher Consumer Confidence

Financial FAQs

The growth in the U.S. economy in the final quarter of Barack Obama’s presidency remained at 1.9 percent, held down by a bigger trade deficit even as consumer spending rebounded strongly. In fact, Q4 GDP growth slowed in part because consumers are spending more, thus boosting imports (which is subtracted from GDP), while exports have been weaker due to the stronger US dollar.

This is while the Conference Board's consumer confidence index continues to make new post-election highs and new cycle highs at a 114.8 February level, which beats consensus estimates and makes for a strong 3.2 point gain from January.

But how long will this ‘Trump’ enthusiasm effect last, with his historically low approval ratings for a new president (at least among Democrats and Independents), as well as his failure to start his term with a burst of substantial legislation, as Barack Obama did, writes New York Times Op-ed columnist David Leonhardt?
“The political scientist Matt Glassman in a recent tweetstorm had the best summary I’ve seen,” said Leonhardt. “First, it is radically unusual that party Senators are opposing the President AT ALL. It’s basically unprecedented,” Glassman wrote. “In a normal presidency, party Senators would be on TV constantly, pushing the President’s message and defending his policies.”
The government’s second look at gross domestic product in the fourth quarter showed a bigger increase in purchases by consumers than initially reported: 3 percent vs. 2.5 percent. What Americans spend has the biggest influence by far on GDP (as much as two-thirds of GDP), and the official scorecard for the U.S. economy.

Yet the increase in what consumers spent was offset by somewhat smaller gains in business investment and local and state spending, revised government figures reveal. As a result, GDP was unchanged from the original estimate.

Consumer confidence is rising in tandem with retail sales. Retail sales are making a breakout of their own. It's an upward revision to what was already a strong December, now at a 1.0 percent surge. This goes in the books as the best December since 2004, reports Econoday. Retail sales have now posted five straight monthly gains in a streak that was last matched 3 years ago, back in early 2014.

Graph: Econoday

The Conference Board’s Consumer Confidence report included an 8 tenths dip in those saying jobs are currently hard to get to a very low 20.3 percent, a reading that points to strength for the February employment report coming this Friday. Expectations for future jobs are also strengthening with more, 20.4 percent, more opening up and fewer, at 13.6 percent, seeing less jobs ahead.

Strength in jobs sentiment also makes for strength in income expectations where the spread between optimists and pessimists (18.3 vs 8.2 percent) is a very healthy 10.1 percentage points.

Other details include an uptick in buying plans for autos and no change in inflation expectations, which are at 4.9 percent, soft for this particular confidence reading. Higher confidence has to be the major reason consumers have opened their pocket books, but how long will this last? Much of it is due to initial enthusiasm that President Trump can carry out his agenda announced in last night’s congressional speech.

That is the question, with so many intelligence scandals and conflicts of interest surrounding him. He has to first prove he can lead his own party, which isn’t the case so far.

Harlan Green © 2017

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