Sunday, December 29, 2019

Christmas Isn't For Bullies

Popular Economics Weekly

This is how one of our political parties celebrates the Christmas spirit. Restrict as much aid to the poor and weak as possible—i.e., cut up to $1.5 billion in Medicaid and Medicare spending to ‘pay’ for their 2017 tax cuts, and build a wall while cutting back immigration quotas (even of family members) to keep out as many non-white peoples as possible.

Wait a minute, doesn’t President Trump need them to maintain his properties? Then create enough H2-B exemptions for low-skilled workers to benefit him personally, including 70 granted last year just for Mar-a-Lago, his Florida White House.

What was once the Republican Party is now the Trump Party, cleansed of all Christmas spirit. There’s not even a whiff of Christmas or Christian charity left—instead the Trump Party is tearing babies away from immigrant mothers seeking safe haven, and cutting some $1.4 billion from the food stamp programs that aid the poorest among US.

Why the malevolence towards the weakest who are least able to protect themselves? I have called it the Bully Mentality that tends to prevail during chaotic times a time of pervasive fear and paranoia. It is the prevailing psychosis of the American far right movement.

Bullying behavior manifests itself in many ways, but bullies come into the open when there are no leaders that will stand up to them to condemn the hate and cruelty bullies always manifest against those weaker than them. And today we have a leadership vacuum. There is no spiritual leader such as Martin Luther King, Jr., and no political leader since former President Obama has disappeared from the public sphere.

Such malevolence towards others shows in many ways and fits the definition of bully behavior. Psychology Today has posted a list of bullying behavior, a list that fits the Trump Party to a tea:
  • – Uncontrolled anger and unpredictable irritability, frequently directed at the weakest people (‘safe targets’) or those perceived as a future threat
  • – A sociopathic ability to control their own image – the selective ability to look like a different person to different audiences – for example, being aggressive to ‘subordinates’, while being charming and helpful to others
  • – Having little status outside of work, bullies wield the power that their job gives them with vicious zeal
  • – Running ‘witch-hunts’
  • – Gratuitous domineering behaviour – sometimes physical
  • – The ability to make the unreasonable seem reasonable, even to the victims
  • --Projecting their own inadequacies onto others
  • – Making irrational accusations
  • – Publicly putting people down
  • Sadistic enjoyment in humiliating others
Americans love to celebrate the Christmas spirit. It is the time to give aid and comfort to those less fortunate, to treat all with empathy and love, rather than hateful cruelty. Celebrating brotherhood is also one of the best ways to stand up to bullies. Remember, bullies are really cowards who only dare to prey on the weakest.

So Merry Christmas and Happy New Year to everyone in the spirit of love that is the best weapon against hate!

Harlan Green © 2019

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Friday, December 27, 2019

A New Year’s Wish—Greater Prosperity for All!

Popular Economics Weekly

Although this cannot happen until results of the 2020 presidential election overturn a Republican Senate, I wish for something that President Eisenhower has said best. With higher tax rates that prevailed in the 1950-1970s, corporations in the past chose to spend their wealth on investments for future growth that were tax deductible, rather than pay the government.

Corporate tax rates since then have dropped to a low of 21 percent today.  What have corporations done instead with their record profits? Rutgers Economic historian James historian has been sounding the alarm about the results:
” So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”
The architects of the Reagan revolution tried to reverse these trends as a cure for the stagflation of the 1970s, said Professor Livingston, but couldn’t. “In fact, private or business investment kept declining in the ’80s and after. Peter G. Peterson, a former commerce secretary, complained that real growth after 1982 — after President Ronald Reagan cut corporate tax rates — coincided with “by far the weakest net investment effort in our postwar history.”

There are many ways to look at the huge wealth disparities suffered by Americans whose household incomes have stagnated since the 1970s, when maximum tax rates were still in the 70 percent range. Americans wanted lower taxes so they could become voracious consumers, rather than pay for government services, which caused public investment to decline at the same time that it became the government’s job to create all the necessary public investments to protect consumers, and invest in their future.

It was public spending that in the past had enabled the building of our modern infrastructure of interstate highways and energy grid, as well as scientific research that led to the moon landing and Internet, for starters.

President George W. Bush’s tax cuts had similar effects between 2001 and 2007: real growth in the absence of new investment. According to the Organization for Economic Cooperation and Development, retained corporate earnings that remain uninvested were 8 percent of G.D.P. in 2000. 

They have reached a record 14 percent of G.D.P. since then, even with a looming $1 trillion annual federal budget deficit.

Sadly, corporations began to spend their growing wealth from lower taxation on themselves and their lobbyists that where able to push through legislation to strengthen their monopolistic consolidation (via deregulation) and labor unfriendly legislation,

It has resulted in the likes of such undemocratic lobbying entities as ALEC, the American Legislative Exchange Council, the advancer of red state policies such as voter ID laws that restrict voting rights, protector of NRA gun rights like Florida’s Stand Your Ground law that protects shooters rather than their victims, and the fossil fuel industry that has no interest in protecting our environment.

The ironic result is that consumers haven’t become wealthier with all the available and cheap consumer goods, haven’t really benefited from higher GDP growth, even with the increased employment we have today in lower-paying service jobs.

The decline in corporate tax rates to the current 21 percent has been disastrous for householders’ wealth and health. It is at the core of America’s record income inequality.

So let us wish for a greater prosperity for all in the New Year!

Harlan Green © 2019

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Saturday, December 21, 2019

Q3 GDP Unchanged

Popular Economics Weekly 

The Commerce Department’s final estimate of third quarter U.S. economic growth was unchanged at 2.1 percent, as strong consumer spending was offset by weaker business investment and shrinking inventories.

Consumers were the difference, as they kept up spending at a 3.2 percent annual pace, which was not quite as strong as the second quarter’s very strong 4.6 percent rate but enough to counteract the drop in business investment and inventories. Companies are not restocking their shelves as if they expect things to improve next year, in other words.

In fact there was a significant decline in spending that would create future growth. Q3 investments in structures fell 2.3 percent and spending on equipment declined 9.9 percent.

Why? Corporate profits are declining. Adjusted pretax corporate profits were revised in the final estimate to show a -0.2 percent decline instead of a +0.2 percent increase. Profits have fallen 1.2 percent in the past year, suggesting that business investment is unlikely to accelerate anytime soon.

The Business Roundtable on Wednesday said an index that measures CEOs’ outlook for the economy fell for the seventh quarter in a row, adding to doubts about future growth. The index slipped 2.5 points to 76.7, a bit below its historic average, reports MarketWatch.

Once again CEOs are saying the trade fight with China is widely viewed to have weakened the global economy, dampened U.S. exports and hurt American manufacturers.
“CEOs remain cautious in the face of uncertainty over trade policy and an associated slowdown in global growth and the U.S. manufacturing sector, which is currently contracting,” said the Roundtable.
This is while another indicator of future growth was basically flat. 
“The US Leading Economic Index (LEI) was unchanged in November after three consecutive monthly declines. Strength in residential construction, financial markets, and consumers’ outlook offset weakness in manufacturing and labor markets,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “While the six-month growth rate of the LEI remains slightly negative, the Index suggests that economic growth is likely to stabilize around 2 percent in 2020.”
This is what happens when corporate profits decline. It has to mean CEOs will eventually cut back on hiring as well. Stocks are rallying to record highs on news that a Phase I trade agreement with China should be signed in January. But its details are extremely vague, as China says it doesn’t want to buy all the agricultural products that Trump is demanding to help him in his re-election, for starters.

That is to say, there are too many details to still be worked out. And there is so much geopolitical uncertainty that companies will have to deal with in the New Year—Brexit, the EU maybe in recession, Trump’s impeachment trial, Russian interference with the 2020 election, etc.

So lots to worry about. The CEOs are saying why not keep some cash on hand for the next rainy day?

Harlan Green © 2019

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Wednesday, December 18, 2019

Full Speed Ahead for Housing Construction, Sales?

The Mortgage Corner

The ultra-low interest rates are making a difference as homebuilder sentiment is soaring along with new building permits, which should boost new and existing-home sales as well. For instance, more new homes on the market encourage existing-home owners to move up or downsize, depending on their age and family.

Builder confidence in the market for newly-built single-family homes increased five points to 76 in December off an upwardly revised November reading, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. This is the highest reading since June of 1999.

This is making a small dent in the severe housing shortage since the Great Recession that has resulted in soaring rents and the current homelessness in communities that haven’t been building enough new housing.
“While we are seeing near-term positive market conditions with a 50-year low for the unemployment rate and increased wage growth, we are still underbuilding due to supply-side constraints like labor and land availability,” said NAHB Chief Economist Robert Dietz. “Higher development costs are hurting affordability and dampening more robust construction growth.”
All three components of that gauge -- present sales, future sales expectations and prospective buyers traffic -- improved, said Wrightson, but the biggest gain was a seven-point rise in current sales of new homes to a 21-year high of 84.  Regionally, the gains were more mixed, with the Midwest index improving sharply, the South rising marginally, and the West and Northeast declining.

Homebuilders also boosted construction on new homes in the U.S. at an annual pace of 1.37 million in November, the Commerce Department said today. This was a 3.2 percent (±10.0 percent) increase from a revised 1.32 million in October, 13.6 percent higher than a year ago.

And new building permits hit another post-recession high, up at a seasonally-adjusted rate of 1.48 million. That was 1.4 percent (±1.4 percent) above the pace of 1.46 million set in October and 11.1 percent above last year’s rate.

We know there is still a tremendous shortage of housing that came from the reluctance of builders to build for years after the Great Recession. Some of the shortage also came from Wall Street firms buying up housing abandoned from the busted housing bubble that were then turned into rentals.

A recent report by CBSN documented the carnage from the busted housing bubble and Great Recession. More than 9 million homes were foreclosed or sold at a loss after the bubble popped, leading to fears that tracts of abandoned neighborhoods would become "ghost towns."

This led government officials such as then Fed Chair Ben Bernanke to suggest foreclosed homes could be sold in bulk to private investors as rental properties. But that wasn’t enough, as there was very little government help to keep homeowners in their homes as happened during the Great Depression when the Home Owners' Loan Corporation (HOLC lent low-interest money to families in danger of losing their homes to foreclosure. By the mid-1930s, the HOLC had refinanced nearly 20 percent of urban homes in the country, allowing homeowners to stay in their homes with very lenient terms to enable them to weather the joblessness of the Great Depression.
“In the decade since the crash,” said the CBSN report, “7 million more households have become renters, while only 1 million more have become homeowners, according to Census data. And "institutional landlords," as the Wall Street investors are called, have become a major driver of the affordable housing woes many Americans are now facing—from steep rent payments all the way to eviction.”
The homeownership rate as a percentage of households that own vs. renting hasn’t recovered, dropping from its pre-recession high of 69 percent to 64.3 percent of households today. The U.S. has become a nation of renters at a time when rental rates are soaring due to the lack of new housing, resulting also in the more than one-half million homeless.

Another casualty of the Great Recession was lack of new household formation among the millennial generation children of the baby boomers who in fact outnumber their boomer parents; but alas, were without adequate available housing.

But now residential construction is beginning to meet the demand from new household formation that is back to the longer-term 1.2 million historical average, according to the U.S. Census Bureau. Millennials are paying down their college debt enough to move out of their rental or parents’ home, and forming more families.

There is more economic good news to report this week in upcoming columns. Industrial production has picked up in autos and trucks after the GM strike, according to the Federal Reserve, though not back to pre-recession levels. And job vacancies continue to soar with 1.4 million more vacancies than new job hires.

It means jobs are plentiful, so look for housing construction and home sales to keep this economic recovery afloat!

Harlan Green © 2019

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Friday, December 13, 2019

Why Are Consumers Buying Less?

Financial FAQs

President Trump tweeted this morning that U.S. and China were close to a “really big deal”, and stocks rallied with the S&P up as much as 30 points and the DOW 250 points higher in early trading. Yet both chief economic spokesman Larry Kudlow and OMB chief Mick Mulvaney said there was no agreement on reducing or eliminating the December  tariff increases on Chinese imports of consumer goods.

A report from the Wall Street Journal indicated U.S. trade negotiators are offering to cancel new China tariffs and reduce existing levies on Chinese goods by up to 50% on $360 billion worth of imports.

So there is no agreement of even a Phase I trade agreement with China, as I said yesterday, which is why inflation has remained moribund for so long. And today’s decline in the Producer Price Index for final demand—a term that describes the demand for wholesale prices that go into product prices—confirms that fact. That is the surest sign of falling prices, which is the real measure of economic growth.

The PPI is an index economists understand, but few others. It measures how much consumers and businesses want and are able to buy, because it filters into retail inflation, the market price consumers pay, which hasn’t risen much above 2 percent, either.
“The November results held the YOY increase in the headline final demand PPI steady at the October level of 1.1 percent,” said Reuters’ ICAP summary, “but trimmed the YOY rise in the narrow core index from 1.5 percent to 1.3 percent.  That is the smallest 12-month increase in the core measure since September 2017.
This tells us why predictions for Q4 GDP growth are now below 1 percent, when third quarter GDP growth was revised slightly upward to 2.1 percent. Falling final demand is a stark result of the toll from an erratic foreign policy that the Trump administration uses to play to public popularity rather than a foreign policy that serves the public interest.

It turns out that reducing tariffs on $360 million Chinese imports would be a good thing for consumers, since consumers are buying fewer imported goods, and Midwestern farmers’ bankruptcies have skyrocketed due to the lost revenues that combine with record floods decimating crop yields.

Yet Trump seems to be holding out for China to agree to $60 billion in agricultural purchases from farmers, whereas it has historically never been higher than $20 billion per year and is currently just $8 billion. Meanwhile China has gone to Brazil and other countries that grow lots of corn and soybeans to replace that from Trump’s Midwestern constituents. Will those farmers ever recover from their lost revenues that Trump has been replacing with taxpayer money, and that contributes to the $1 trillion annual budget deficit?

So in the end it is Americans who are really paying for the tariff wars that are not in the public interest; which has been obvious for a long time.

Harlan Green © 2019

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Wednesday, December 11, 2019

Why Our Endless Tariff Wars?

Popular Economics Weekly


POTUS and the Trump administration can’t end their trade wars, although House Speaker Nancy Pelosi just announced they had reached agreement with Republicans on a new NAFTA accord with Canada and Mexico—now called the USMCA, or U.S. Mexico Canada Agreement—because it gives more protections to U.S. workers. She said there’s nothing wrong with a win for President Trump “when it’s the right thing to do (sic).”

But there is no agreement with even a Phase I trade agreement with China, and Trump has basically neutered the World Trade Organization that settles trade disputes by blocking any new appointment to its arbitration panel, which will not only prolong trade disputes but create new ones, since there’s no longer a mechanism for resolving them.

The result has been declining labor productivity and manufacturing output, which puts future economic growth in jeopardy. Productivity declined in mid-2019 after several years of acceleration, in part because companies reduced investment in manufacturing and production in response to the U.S. trade fight with China and the EU. The dispute has also undermined exports and made it harder for businesses to plan ahead.

Labor Productivity, or output per hour worked, declined for the first time since 2015. It fell at a 0.2 percent annual rate from July to September, the government said Tuesday. This means that the hours worked increased faster than output, so that it is increasing just 1.5 percent annually, which means workers will have difficulty improving their standard of living within their working lifetime. They haven’t been able to increase their median income since the 1980s, and trickle-down economic theory prevailed.

This was the theory that lower taxes and less government services lifted all boats, when it fact it only lifted the most expensive yachts. The cutback in government investments in such as infrastructure, education, and R&D, which all serve to increase productivity and efficiency, was another reason for the productivity decline.
And, “Productivity is likely to continue to lag unless there’s a rebound in business investment,” said MarketWatch’s Jeffery Bartash, “but that probably won’t happen unless the trade dispute is largely resolved.”
Higher productivity is the key to a rising standard of living, resulting in higher pay, more profits and low inflation. Low productivity is a sign of an inefficient economy.Productivity in the U.S. has risen at an average rate of just 1.3 percent since 2007, compared with a 2.1 percent average since the end of World War II.

There are better ways to settle trade disputes, such as remaining in trade alliances like the Trans-Pacific Partnership that Trump withdrew from. The other 11 Asian trade partners then drew up their own agreement to better bargain with China, in particular; whereas the U.S. has been unable to reach any agreement by going it alone.

So we know another path to increased productivity is the ability to get along with our economic friends and find a way to work with our enemies.

Harlan Green © 2019

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Friday, December 6, 2019

Big November Employment Boost

Financial FAQs

Total nonfarm payroll employment rose by 266,000 in November, and the unemployment rate was little changed at 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in health care and in professional and technical services. Employment rose in manufacturing, reflecting the return of workers from a strike.

What happened to the slowing economy, especially in manufacturing since last year’s sugar high from the 2017 Republican tax cuts? Manufacturing added 54,000 jobs, but it was mostly GM workers returning to work after their successful strike that gave them some of the enormous profits GM has been generating. It showed labor unions are finally taking back their power to negotiate higher benefits for their workers, after years of decline.

Though in fact, it was the 74,000 new jobs in Leisure and Hospitality highlighting strong consumer spending in restaurants and hotels that is sustaining economic growth.

Consumers are still optimistic, per the University of Michigan sentiment survey that rose to a preliminary December reading of 99.2 from a final November reading of 96.8. Consumers’ views on current conditions rose to 115.2 in December from 111.6 in November, while a barometer of their expectations rose to 88.9 from 87.3.

The only caveat was the slight drop in average hourly pay to 3.1 percent, down from 3.4 percent earlier in 2019. Why? It’s all the lower-paying jobs that benefit from consumer spending; like Transportation and warehousing (15.5k new jobs), and the aforementioned Leisure and Hospitality jobs.

Longer-term inflation expectations fell to 2.3 percent, matching a record low in the U. of Michigan survey. Federal Reserve policy makers watch this figure closely and have cited below-target inflation as one of the reasons behind the three interest- rate cuts this year. The Fed, which holds a meeting next week, has signaled it will keep rates on hold barring a material shift in the outlook.

There is little wage growth, and therefore little inflation, which means consumers can keep spending through the holidays. The ongoing trade wars aren’t yet boosting import prices enough that would bring on higher inflation, while energy prices have also fallen, keeping gas prices low.

These are all reasons to keep the economy afloat, with the additional caveat that importers can’t keep absorbing the tariff increases forever.

Harlan Green © 2019

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Wednesday, December 4, 2019

Economic Growth...Watch Out--Part II

Popular Economics Weekly

It is obvious from the above graph that manufacturing activity is contracting, whereas the service industries continue to grow.  Exports that depend mostly on manufactured goods are therefore declining, while imports that depend on consumers are increasing. This also means slowing economic growth, since shrinking exports add less to GDP growth, while much larger import totals actually subtract from growth.
November was the fourth consecutive month of PMI® contraction, at a faster rate compared to the prior month, said Timothy R. Fiore, Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee. “Demand contracted, with the New Orders Index contracting faster, the Customers’ Inventories Index remaining at ‘too low’ levels and the Backlog of Orders Index contracting for the seventh straight month (and at a faster rate). The New Export Orders Index returned to contraction territory, likely contributing to the faster contraction of the New Orders Index.”
Manufacturing is in recession, in other words. The Philadelphia Inquirer reports that Kentucky’s steel industry has suffered because of steel and aluminum tariffs that have in fact slowed demand for its products. The result is steel prices have dropped by more than 40 percent since last summer.

“They have been hurt by tepid domestic demand for steel production amid a U.S. manufacturing recession and a global slowdown in economic growth, among other things,” reports the Inquirer.
Demand for steel in the U.S. grew 2.1 percent in 2018. But this year, a slowdown in American construction and automobile production helped diminish demand to just 1 percent, and it is projected to grow just 0.4 percent in 2020, the World Steel Association said this month, per the Inquirer.
And “Global trade remains the most significant cross-industry issue,” said ISM’s Fiore. “Among the six big industry sectors, Food, Beverage & Tobacco Products remains the strongest, while Fabricated Metal Products is the weakest. Overall, sentiment this month is neutral regarding near-term growth,” says Fiore.
Why the decline in manufacturing? It has to be the Trump administration’s trade policies, as manufacturing depends on foreign trade for many of its components, and foreign demand for many of its products.

This is while the Trump administration has just announced new tariffs on steel and aluminum products from Brazil and Argentina, further hurting global trade.

We also know overall Industrial Production is declining. Total industrial production was 1.1 percent lower in October than it was a year earlier. Capacity utilization for the industrial sector decreased 0.8 percentage point in October to 76.7 percent, a rate that is 3.1 percentage points below its long-run (1972–2018) average.

Last week’s revised Q3 GDP report was upped to 2.1 from 1.9 percent, with a slight increase in consumption and inventories. But it won’t help an even weaker Q4 GDP which is predicted to barely grow due to declining exports, as I said last week.

Manufacturing and consumer spending are really the two main components of economic growth. Stock prices of the largest steel companies have declined as much as 50 percent, also according to the Inquirer. And with steel prices down, their earnings have begun to decline.

So trade wars seem to be wreaking as much havoc to economic growth as other geopolitical concerns, such as growing civil unrest in the Middle East and Asia (Hong Kong). Continuing to wage trade wars in the name of national security is really becoming a danger to our national security, as well as economic growth.

Harlan Green © 2019

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Sunday, December 1, 2019

Consumer Confidence Is Boosting Housing

The Mortgage Corner

New-home sales are now back to the long term average in the above graph that dates back to the 1960s, and consumers are still reasonably confident of their future.
"Sales of new singlefamily houses in October 2019 were at a seasonally adjusted annual rate of 733,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.7 percent below the revised September rate of 738,000, but is 31.6 percent above the October 2018 estimate of 557,000."
This was the first time since 2007 that the annual pace of single-family home sales remained above 700,000 for three consecutive months, according to Calculated Risk. New-home sales were nearly 32 percent higher on an annual basis in October.

This means that residential construction is also increasing the supply of new homes, as I said last week; at the same time as there is a significant housing shortage and housing construction isn’t yet back to historical levels.

Whereas, “Consumer confidence declined for a fourth consecutive month, driven by a softening in consumers’ assessment of current business and employment conditions,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The decline in the Present Situation Index suggests that economic growth in the final quarter of 2019 will remain weak. However, consumers’ short-term expectations improved modestly, and growth in early 2020 is likely to remain at around 2 percent. Overall, confidence levels are still high and should support solid spending during this holiday season.”
So, although consumer confidence is down a bit from last year, it is still enough to cheer consumers for the holidays.

I said I was also going to say something about interest rates trends last week. We only have to look to Japan and the EU to see that U.S. interest rates could continue downward; but only if our government doesn’t step in with public investments that are sorely needed—such as in our energy network, infrastructure, education, environmental protection and the like that we have been discussing ad nauseum.

As of now, the opposite is true. Republicans rammed through tax cuts that have run up a $1 trillion dollar annual deficit. But the windfall went into corporation profits rather than into public spending programs that would have produced more productive workers and sustained growth.

It meant that financial engineering has created a huge savings glut—both here and in Europe—that is driving down interest rates to zero or below. EU countries are so desperate to put their excess savings to work that they are willing to pay investors to use their savings with negative interest rates. The same could happen here if we don’t find a way to use those savings productively.

This came out of so-called austerity measures in an overreaction to the Great Recession. Conservative ‘austerians’ as they were called worried more about budget deficits than investments that would stimulate more spending by domestic consumers and businesses that would in turn boost future growth.

This is what happens with the savings glut we have now. Too many policymakers and investors are obsessed with saving—in fact, hoarding wealth—rather than putting it to productive use that would lower public debt over the long term.

Though it’s really rational financial behavior when individuals hold on to savings for a rainy day. But that’s not the case for governments that won’t spend what’s needed for the future. It will bring on the rainy days sooner. Lord John Maynard Keynes knew it in the 1930s. He was the creator of Keynesian economics and a government that gave us the New Deal.

Harlan Green © 2019

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Sunday, November 24, 2019

Start of a New Housing Boom?

The Mortgage Corner

We should be careful in announcing a new housing boom. It can be a two-edged prophesy, since a housing bust followed the last housing boom and precipitated the Great Recession.

But it certainly looks like residential construction is one sector on a tear at present; at the same time as there is a significant housing shortage and housing construction isn’t yet back to historical levels, per the above single-family starts graph.

Housing construction is booming per the latest U.S. Census Bureau report on housing starts and permits, but is far below the peak of some 1.7 million units just prior to the Great Recession.
October starts are at a 1.314 million annual rate, the strongest showing since May last year. Permits are the big positive in today's report, well above expectations at a 1.461 million rate which is the strongest since the subprime housing bubble bust in 2007.

The National Association of Home Builders (NAHB) Chairman Greg Ugalde said, “Home builders are seeing more building opportunities as market conditions remain solid. Builder sentiment remains strong, and we are seeing an uptick in buyer traffic.”

The October 1.31 million starts is the number of housing units builders would begin if they kept this pace for the next 12 months, explained the NAHB in their press release. Within this overall number, single-family starts increased 2.0 percent to 936,000 units. The multifamily sector, which includes apartment buildings and condos, increased 8.6 percent to a 378,000 pace.
“Led by lower mortgage rates, the pace of single-family permits has been increasing since April, and the rate of single-family starts has grown since May,” said NAHB Chief Economist Robert Dietz. “Solid wage growth, healthy employment gains and an increase in household formations are also contributing to the steady rise in home production.”
Three-month averages for the key single-family category confirm the construction and future permits strength. Starts are running at a 923,000 rate on the average which is another 12-year high and up sharply over the last two months. Single-family permits are at an 888,000 rate which is likewise pivoting higher and also the strongest in 12 years.

But longer term, single-family construction has consistently been at or above one million annualized units since the 1970s with a much smaller U.S. population. So there is a lot of catching up from the housing bust and Great Recession.

FRED’s Personal Income graph shows that most Americans are in fact still recovering from the Great Recession. And to even begin to approach the historical starts’ average it needs record-low interest rates to continue, given the depressed earnings picture for most Americans since the Great Recession.

Personal incomes have been consistently lower because most new jobs created today are in the lower-paying service sector, such as warehousing, health care, transportation, and the like, even in our fully-employed economy.

But the prognosis for interest rates is they could even go lower, which should continue the housing ‘boom’, or whatever we end up calling it. EU countries such as Denmark are already offering negative fixed interest rate mortgages, believe it or not. Can that happen here?

It will be the subject for a future column.

Harlan Green © 2019

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Monday, November 18, 2019

Q4 Economic Growth…Watch Out Below!

Popular Economics Weekly

We might have a problem with economic growth in the fourth quarter, thanks in part to Republicans’ 2017 tax cuts that were to stimulate longer term growth and jobs, believe it or not. The New York and Atlanta Federal Reserve estimate seasonally adjusted Q4 GDP growth to drop to just 0.3 to 0.4 percent, from Q3’s initial estimate of 1.9 percent growth, Merrill Lynch has a slightly more optimistic forecast of 1.5 percent.

This is a terrible number, if accurate. These are so-called early “nowcasts” based on very preliminary data, so much could change by Q4. But there has been a steady decline in growth from last year’s tax cut-fueled surge that is mirrored by the latest retail and industrial production figures.

Why were the tax cuts a bust? Fedex’s 2018 $1.6 billion tax “windfall” is a good example of what happened to that windfall, according to the New York Times. Fedex promised that the U.S. economy would see a “renaissance of capital investment” from the huge capital gains tax cut. But it never happened.

“If anything, the companies that received the biggest tax cuts increased their capital investments by less, on average,” said the Times article. The result was increased CEO salaries and massive stock buybacks, which benefited stockholders, but not their employees that received no salary boosts, or bonuses from the largesse.

“Fedex reaped big savings, bringing its effective tax rate to less than zero in fiscal year 2018 from 34 percent in fiscal year 2017,” continued the Times. The result was more financial engineering, rather than productive investments that would boost growth.
The Atlanta Fed nowcast said, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2019 is 0.3 percent on November 15, down from 1.0 percent on November 8. After this morning's retail trade releases from the U.S. Census Bureau, and this morning's industrial production report from the Federal Reserve Board of Governors, the nowcasts of fourth-quarter real personal consumption expenditures growth and fourth-quarter real gross private domestic investment growth decreased from 2.1 percent and -2.3 percent, respectively, to 1.7 percent and -4.4 percent, respectively.”

The steady decline in retail and food service sales ex-gasoline—a more reliable indicator of sales volume—is worrisome because it mirrors consumer behavior, which is the main driver of economic growth at present. Consumers have been saving more and spending less this year. Sales slowed to a 3.9 percent annual increase from what has historically been in the 5-6 percent range since 2011. This is even though consumers have remained optimistic about future prospects in the latest consumer sentiment surveys.

Industrial Production is also declining. Total industrial production was 1.1 percent lower in October than it was a year earlier. Capacity utilization for the industrial sector decreased 0.8 percentage point in October to 76.7 percent, a rate that is 3.1 percentage points below its long-run (1972–2018) average.

Small businesses that answer the National Federation of Small Business survey are still upbeat. “The small business optimism index showed modest but wide improvement in October, at 102.4 which is at the high end of expectations and up 6 tenths from what was an unexpectedly weak September. Eight of the index's 10 components improved in October led by plans to increase inventories and including increased plans to make capital outlays. Earnings trends, however, fell sharply and current job openings edged lower. And continued earnings decline is a problem."
Industrial production and consumer spending are really the two main components of growth.

Earnings have begun to decline, in a word, and who knows how much more earnings may fall with declining capital investment, which is the seed corn of future growth?

Harlan Green © 2019

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Friday, November 15, 2019

Where Are the Leaders?

Answering the Kennedys’ Call

The congressional impeachment hearings illustrate one overwhelming fact; America has a leadership problem. President Trump is a very weak leader. He asked the newly-elected Ukrainian President Volodymyr Zelensky (extortion or bribery are the legal terms) to publicly announce that the Ukraine would investigate Joe and son Hunter Biden for potential conflicts of interest; in order to aid his reelection campaign.

Multiple sources reported he did so reportedly at the suggestion of former Campaign Manager and convicted felon Paul Manafort’s former business partner, Konstantin Kilimnik, a Russian operative.

Where is an American leader that will stand up to Russian oligarchs and Putin, instead of Trump’s open support of Putin’s foreign policy objectives; such as Trump’s reluctance to enforce sanctions first imposed under President Obama for Putin’s invasion of the Ukraine, or the weakening of our foreign alliances, including NATO that protect the peace?

This has further endangered a young democracy invaded by a Russian-backed army that has cost some 13,000 Ukrainian lives to date, and weakened their position in any negotiated peace settlement.

It is a perhaps disconcerting fact that America’s greatest leaders only came forward at the time of our greatest perils; whether it was George Washington winning the Revolutionary War, or Abraham Lincoln leading us through the Civil War, or Franklin D Roosevelt who led us through the Great Depression and World War II.

It is an even sadder thought to imagine what would have happened to the United States of America without these and other leaders that have grown American democracy? Our best leaders have always attempted to keep us united and the world at peace.

In a recent essay, Thomas Caruthers, Sr. Vice President for Studies at the Carnegie Endowment for International Peace write how the U.S. has kept the peace:
“In the late Cold War and early post–Cold War years, the United States took the lead in projecting a vision of global democracy and making it a core foreign policy priority. Successive U.S. administrations devoted significant diplomatic capital to supporting the spread of democracy, often building coalitions among governments and within multilateral organizations to help mobilize support for democratizing governments or pressure backsliding ones.
This is while our weakest leaders—from Lincoln’s successor Vice President Andrew Johnson to Donald Trump—have intentionally or inadvertently increased our divisions. Johnson was impeached by allowing cronyism and the corruption of his officials that prevented implementation of the post-civil war Reconstruction effort, or Trump’s outright appeal to the worst of our natures that has divided Americans.

It is therefore no coincidence that Johnson was impeached, and Trump is about to be impeached for the abuse of their Presidential powers. Whether Trump will be removed from office depends on a very partisan, Republican Senate that doesn’t see such weak leadership right in front of them that will weaken the Republican Party as well.

There is also a growing danger that democracy is in decline in many other parts of the world. Chess Grand Master Gary Kasparov and Thor Halvorssen of the Human Rights Foundation detailed the current sad state of participatory democracies in a recent Washington Post article:
“At present, the authoritarianism business is booming. According to the Human Rights Foundation’s research, the citizens of 94 countries suffer under non-democratic regimes, meaning that 3.97 billion people are currently controlled by tyrants, absolute monarchs, military juntas or competitive authoritarians. That’s 53 percent of the world’s population. Statistically, then, authoritarianism is one of the largest — if not the largest — challenges facing humanity.”
Are we now approaching another period of greater peril for America and participatory democracy in general? It has called forth great leaders in the past. What about today? We know the requirements of great leadership from our history—the requirement above all that to survive as a democracy and not become an autocracy ruled by the few, we are all in this together.

Harlan Green © 2019

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Thursday, November 14, 2019

What’s Happening To Interest Rates?

Popular Economics Weekly

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in October on a seasonally adjusted basis after being unchanged in September, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.

There is still no inflation to worry about, in other words. This is why the Fed hasn’t succeeded in pushing inflation higher to combat deflationary expectations with its interest rate cuts. Prices are barely rising for everything but the daily fluctuations of energy prices—gasoline, in this case.

The energy index increased 2.7 percent in October after recent monthly declines and accounted for more than half of the increase in the seasonally adjusted all items index. The gasoline index in particular rose 3.7 percent in October and the other major energy component indexes also increased. 

So don’t look for increasing interest rates anytime soon, even though the 10-year benchmark Treasury yield has topped 1.9 percent, up from its 1.55 percent recent bottom. It's only happened because market investors are selling safe-haven bonds and buying stocks at present, in anticipation of a tariff agreement with China.

But Trump just announced that he hasn’t agreed to reducing or eliminating any tariffs just yet, though they “are close” to a deal.

This tells you just how uncertain are predictions of a phase I tariff reduction agreement. It seems both sides are playing to the press rather than coming up with anything substantial. Why else would talks be dragging on with all the starts and stops along the way? It says to me that nothing substantial will be achieved until after the 2020 election, when China can be more certain which administration they will be dealing with.

There’s also more we can read into today’s inflation data. Fed Chairman Powell just announced no more Fed rate cuts are contemplated at present. This has to be because the Fed is now fearful that record low short term rates have pushed stock prices to record highs, thus causing a potential asset bubble.

And Americans just endured a Great Recession because of a busted housing asset bubble.

We mentioned last week that irrational exuberance seems to be creeping back into the stock market with price-to-earnings ratios above historical norms—usually a sign that stock buyers are counting on stocks continuing to rise; yet corporate profits are declining from their recent highs.
I quoted a Forbes Magazine article thusly: “On a cautionary note related to the earnings skid,” says Forbes, “the S&P 500’s price-to-earnings ratio has been on the rise and now stands near 18 times projected earnings over the next 12 months. That’s way above the 14 level where we started the year, and it exceeds the long-term average of around 16. Remember, it’s harder to grow the “P” side of that equation when the “E” side is on the decline.”
Although consumer spending is keeping economic growth from falling too far below 2 percent (Q3 GDP initially estimated up 1.9 percent), consumers are also saving more for a rainy day with a personal savings rate of +8 percent.

It is a sign that many consumers are sitting on the fence, waiting to see which way the political winds will blow next year. Consumers will keep spending as long as interest rates remain this low.

Federal Reserve Chair Powell in his latest report to Congress worried about future growth:
“…However, noteworthy risks to this outlook remain. In particular, sluggish growth abroad and trade developments have weighed on the economy and pose ongoing risks. Moreover, inflation pressures remain muted, and indicators of longer-term inflation expectations are at the lower end of their historical ranges. Persistent below-target inflation could lead to an unwelcome downward slide in longer-term inflation expectations. We will continue to monitor these developments and assess their implications for U.S. economic activity and inflation.”
And the 30-year conforming fixed rate mortgage rate is still below 3.50 percent for the most credit-worthy borrowers, which is keeping residential construction and sales at their current highs. The Mortgage Bankers Association just reported November 8 week applications jumped 13.0 percent for refinancing and 5.0 percent for the purchases, with purchase applications up 15 percent in a year.

Low inflation and low interest rates are good news for housing, given the endemic under supply of affordable housing, and growing homeless population. But it isn’t good news for overall economic growth, if it leads to falling prices—i.e. actual deflation and another recession.

Harlan Green © 2019

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Tuesday, November 12, 2019

The Historical Decline in US Growth

The Mortgage Corner

Nonfarm business sector labor productivity decreased 0.3 percent in the third quarter of 2019, first decline in 5 years, the U.S. Bureau of Labor Statistics reported, as output increased 2.1 percent and hours worked increased 2.4 percent…From the third quarter of 2018 to the third quarter of 2019, productivity increased 1.4 percent, reflecting a 2.3-percent increase in output and a 0.9-percent increase in hours worked.

This almost arcane statistic followed by professional economists is one of two major reasons US economic growth has slowed to a crawl, as seen in the graphs. Individual workers are no longer producing as much per worker as they did through 2000, even with a fully employed economy and the introduction of modern technologies that boost production.

Another reason is declining population growth, as American mothers no longer produce enough replacement babies. A main contributor to the falling population growth rate is the decreasing fertility rate. The fertility rate has fallen from 3.7 in the 1960s to 1.9 today, when 2.1 births per mother is the natural replacement rate, leading to a lower increase in the US population (excess of births over deaths).

In fact, the national birth rate (12/1,000) still remains higher than the national death rate (8/1,000), which means more people are being born in the U.S. each year than are passing away. Additionally, the arrival of immigrants with larger families, has kept the U.S. population steadily increasing, albeit slowly.

I suggest that lower fertility is just the tip of the melting economic iceberg, because populations also increase with new immigrants. So we shouldn’t be cutting back on immigration quotas as the current administration is doing—to some 700,000 last year from the 1.3-1.4 million per year in recent decades.

And combined policy missteps—such as spending less on capital investments that would increase labor productivity and not introducing policies that would enhance birth rates; also better health care, family leave, more liberal vacation and sick leave policies are a start—as European countries have been doing.

This has kept U.S. GDP growth averaging 2 percent since the Great Recession, but no higher. EU countries have declining birth rates, unfortunately, which has knocked down EU GDP growth rates to around one percent.

But they also have greater longevity and better healthcare outcomes than the U.S., which is ranked 37th in health outcomes by the World Health Organization. As in example, French residents now live an average 4 years longer than Americans, says Nobel economist Paul Krugman in a recent NYTimes Op-ed. “Why? Universal healthcare and policies that mitigate extreme inequality are the most likely explanations.”

There is much more that can be done to boost economic growth and income equality, in other words. Fixing schools would boost educational levels, switching to alternative energy sources would inject $trillions into new technologies and bring down pollution costs, fixing our infrastructure would boost productivity immediately by cutting down on commute times and lost work hours, and better enforcement of environmental regulations would decrease healthcare expenses as well as job losses due to ill health.

The list goes on and on. Maybe we do need a Green New Deal to make all this happen?

Harlan Green © 2019

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Wednesday, November 6, 2019

Do We Want to Save the Planet?

Answering the Kennedys’ Call

President Trump just announced the U.S. will withdraw in one year from the Paris Accord of almost 200 countries that have agreed to significantly limit Greenhouse Gas (GHG) Emissions.

This happened within a day of a report from the Alliance of World Scientists endorsed by more than 11,000 scientists that says the world is facing a climate emergency.
“Scientists have a moral obligation to clearly warn humanity of any catastrophic threat and to “tell it like it is.” On the basis of this obligation and the graphical indicators presented below, we declare, with more than 11,000 scientist signatories from around the world, clearly and unequivocally that planet Earth is facing a climate emergency.”
Is it a coincidence Trump announced the withdrawal from the Paris Accord on the same day satellite data shows that last month was the warmest October on record ?

I think not. Trump’s announcement took the headlines, thereby preempting the far more important climate news to back pages. The withdrawal is to take effect one day after the 2020 Presidential election.

His administration is full of lobbyists and former executives of the fossil fuel industry in what will ultimately prove to be a vain attempt to further enrich themselves in the face of looming environmental disasters.
The total of 11,253 scientists from 153 countries affirm that” if we do not act or respond to the impacts of climate change by reducing our carbon emissions, reducing our livestock production, reducing our land clearing and fossil fuel consumption, the impacts will likely be more severe than we've experienced to date," said lead author Dr Thomas Newsome, from the University of Sydney.
In fact, "That could mean there are areas on Earth that are not inhabitable by people," said the report.

How so? Because it is already happening. We know great swaths of North Africa and the Middle East have experienced mass population exoduses from an increasing frequency of droughts that are causing outright civil wars (Syria), and anti-immigrant xenophobia in many countries.

BBC News summarized the report’s recommendations:
  • · Energy: Politicians should impose carbon fees high enough to discourage the use of fossil fuels, they should end subsidies to fossil fuel companies and implement massive conservation practices while also replacing oil and gas with renewables.
  • · Short-lived pollutants: These include methane, hydrofluorocarbons and soot - the researchers say that limiting these has the potential to cut the short-term warming trend by 50% over the next few decades.
  • · Nature: Stop land clearing, restore forests, grasslands and mangroves which would all help to sequester CO2.
  • · Food: A big dietary shift is needed say researchers so that people eat mostly plants and consumer fewer animal products. Reducing food waste is also seen as critical.
  • · Economy: Convert the economy's reliance on carbon fuels - and change away from growing the world's gross domestic product and pursuing affluence.
  • · Population: The world needs to stabilise the global population which is growing by around 200,000 a day.
But there’s more. It can cause irreparable economic damage that results in geopolitical unrest; even wars, as countries compete for limited resources. The U.S. Pentagon has been warning of this outcome for years, because it has labeled climate change a direct threat to our national security.

A summary of its latest January, 2018 report to congress showed that it was also harming military preparedness in future conflicts, so much so, that a US News & World Report in a 2017 report said,
 “During his confirmation process for the post as secretary of defense this spring, Gen. James Mattis wrote in the question/response period: "Climate change can be a driver of instability and the Department of Defense must pay attention to potential adverse impacts generated by this phenomenon."
From shifting temperatures to desertification, environmental changes have the potential to significantly affect the movement of populations, the availability of resources and the stability of governments. The results can be famine, drought, disease and a rise in global conflict.

Then the question must be asked: Why on earth is the Trump administration denying climate change and withdrawing from the Paris Accord when we now know it is causing  the suffering of millions, and is a threat to our national security?

Harlan Green © 2019

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Tuesday, November 5, 2019

Irrational Exuberance Is Back!

Financial FAQs

Fed Chairman Alan Greenspan said in a memorable 1996 speech, “…how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

He was then talking about the penchant for investors to act irrationally in ignoring very high stock valuations accompanying very low interest rates that could show a stock market, and maybe the overall economy, about to enter a down cycle.

Does that sound familiar? We have today the S&P index of 500 top stocks with a price-to-earning ration above 18—i.e., it’s price is 18 times annual earnings, after expenses (EBITDA---earnings before interest, taxes, depreciation, and amortization) when the historical long-term P/E earnings ratio is 15, according to Nobel economist Robert Shiller in his 2000 best-seller, Irrational Exuberance; and which increases the odds of a recession.

For instance, the irrational behavior that Greenspan was warning about in 1996 wasn’t manifested until the Dot-com bubble bust of 2000 and following 2001 recession, when the P/E ratio reached 44 times earnings. In other words, stock prices were way out of whack with earnings that had been declining—so much so that stock prices had flattened and corporations were barely issuing any dividends at all—a sign that their earnings were depressed.

And what depresses an economy more than depressed corporate earnings, which then depress job formation, consumer incomes, and overall economic growth?

Professor Shiller gave the 100-year history of stock market P/Es in his book. The last time it had reached great heights was in 1929, and the beginning of the Great Depression.

So irrational exuberance is something to worry about when looking at stock valuations. We are in similar, but not identical circumstances today. The S&P P/E ratio is 18, according to Forbes Magazine.
“On a cautionary note related to the earnings skid,” says Forbes, “the S&P 500’s price-to-earnings ratio has been on the rise and now stands near 18 times projected earnings over the next 12 months. That’s way above the 14 level where we started the year, and it exceeds the long-term average of around 16. Remember, it’s harder to grow the “P” side of that equation when the “E” side is on the decline.”
Why such irrational exuberance today, after past history tells us what happens when investors act irrationally in the face of reality?
Professor Shiller explains it thusly: “(President) Trump has for decades touted a glamorous narrative of his life by “surrounding himself with apparently adoring beautiful women, and maintaining the appearance of vast influence,” Shiller said in a recent op-ed in Britain’s the Guardian newspaper. “The end of confidence in Trump’s narrative is likely to be associated with a recession,” Shiller warned.
Shiller goes much deeper into human behavior in Irrational Exuberance. Human beings have a natural inclination to listen to hearsay and word-of-mouth stories when they make financial decisions, such as buying a home, or stocks. This is in part because of the complexity of modern financial markets, but also because such research is difficult and requires some expertise.

The busted housing bubble is the best example of irrational exuberance, when consumers believed that housing prices could never fall, because they hadn’t in modern history—at least since WWII—so they kept elevating housing prices with the aid of so-called liar loans, because interest rates had fallen far below inflation rates at the time.

Inflation was so far above interest rates that there was a zero cost to borrowing mortgages, in particular, since rising inflation devalued loan principal faster than the actual loan payments over a 15 or 30-year mortgage.

This could happen again today, in other words. Although corporate profits are still at record highs, they may have already begun their descent to more historical levels, and maybe even lower, if consumers become disillusioned with the Trump ‘success’ narrative, as Professor Shiller has said.

Harlan Green © 2019

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Saturday, November 2, 2019

October Employment No Big Deal

Popular Economics Weekly

Total nonfarm payroll employment rose by 128,000 in October, and the unemployment rate was little changed at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in food services and drinking places, social assistance, and financial activities.

But most were not the good-paying jobs that will support a household, or buy a home. Restaurants and bars led the way in hiring by adding 48,000 jobs. Professional jobs rose by 22,000, social-assistance providers added 20,000 jobs, and financial companies increased employment by 16,000.

Payrolls fell by 36,000 in manufacturing that mostly reflected the GM strike, and government employment slipped by 3,000.

Just the 22,000 Professional jobs are considered middle-class, white collar jobs. In fact, most consumers and jobs are stuck with low-paying service sector jobs in retail, warehousing, and even healthcare.

This is a major reason U.S. economic growth is gradually slowing, as many economists reported last week. Hence the uncertainty about an upcoming recession, since consumers are still optimistic about job prospects and flush with earnings from the very low unemployment rate.

But ‘very low’ unemployment has been masking the real problem with this recovery. Wages and salaries have not been rising fast enough, in jobs that support an adequate standard of living, to bring back anything close to boom times again for most Americans.
Why not? We have to look at the history of economic recoveries.

The Obama administration’s one-time American Recovery and Reconstruction Act of 2009 (ARRA) put some $850 billion back into governments to end the Great Recession, which boosted a flurry of infrastructure improvements, and helped to balance some state budgets, but it didn’t even begin to catch up to the $2 trillion plus shortfall in outmoded infrastructure that included not only roads and bridges, but airports, the energy grid, water and sanitation facilities (e.g., Flint, Michigan and Newark, NJ), and a K-12 elementary education system ranked at the bottom in the developed world.

This is what any responsible governance policies should continue to do. The current economic recovery has benefited just the top 10 percent in income-earners, which is the reason for so much discontent among blue collar, working folk.

It was called the New Deal when we had a leader capable of answering the call, as did a President named Roosevelt, who said just prior to his reelection in 1936: "the old enemies of peace: business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism…are unanimous in their hate for me — and I welcome their hatred." 

In fact, President Roosevelt did falter in 1937, when Republican’s won a congressional majority and he agreed to attempt to rebalance the federal budget while the Federal Reserve reduced the money supply as it had in 1930; which helped to precipitate the original downturn. The U.S. economy then dropped back into a second recession, which is why it was called the Great Depression; before Roosevelt reinstituted New Deal spending programs that brought growth back to pre-Great Depression levels.
“The New Deal ushered in a Golden Age for public works, as Washington at last took a leading role in funding infrastructure,” said one study of the New Deal. “The federal government, working hand-in-hand with state and local agencies, financed (and provided relief labor for) a huge array of projects. These emphasized the newest forms of technology and infrastructure, including highways, airports, dams, and electric grids, as well as more traditional public works, such as libraries, schools and parks.”
Those same policies need to be enacted today to bring back this recovery from the Great Recession, and keep it from becoming another Great Depression.

Harlan Green © 2019

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Wednesday, October 30, 2019

Weaker Q3 GDP = Slowing Economy

Popular Economics Weekly

Real gross domestic product (GDP) increased at an annual rate of 1.9 percent in the third quarter of 2019, according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent.

U.S. economic growth is gradually slowing; how much is still uncertain, since consumers are still optimistic about job prospects and flush with earnings from the very low unemployment rate.
“The mismatched trends in personal finances and buying conditions have resulted in the lackluster pace of consumer spending throughout the expansion, said U of Michigan’s chief economist, Richard Curtin. “Earlier in the expansion, dismal growth in household incomes and jobs were matched with record favorable references to prices and interest rates on home and vehicles, while in the later part of the expansion very favorable incomes and job prospects were matched with the fewest favorable references to prices and interest rates in decades-with those lows becoming the expected norm.”
The mismatch has kept consumer indebtedness (aside from education loans) at manageable levels, said Curtin, and positive finances have recently buoyed spending so as to ensure the continuation of the expansion.

The BEA report said the increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), federal government spending, residential fixed investment, state and local government spending, and exports that were partly offset by negative contributions from nonresidential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

There is more to this story, of course; in this case the almost total lack of any inflation. The Fed’s preferred measure of inflation, the PCE implicit price deflator, fell to 1.5 percent, down from 2.4 percent last quarter, which is not a healthy sign of demand, but sliding into disinflationary territory. Steadily declining inflation is usually a precursor to deflation, the most visible sign of shrinking GDP growth—and a possible recession.

The housing industry also contributed to the economy’s growth for the first time in nearly two years. Residential investment climbed 5.1 percent. And ultra-low mortgage rates have drummed up more demand and spurred builders to boost construction.

The NRA’s just-released pending home sales report also showed higher home sales ahead.
Pending home sales grew in September, marking two consecutive months of increases, according to the National Association of Realtors. The Pending Home Sales Index (PHSI),, a forward-looking indicator based on contract signings, rose 1.5 percent to 108.7 in September. Year-over-year contract signings jumped 3.9 percent. An index of 100 is equal to the level of contract activity in 2001.
Historically low mortgage rates played a significant role in the two straight months of gains, according to Lawrence Yun, NAR’s chief economist. “Even though home prices are rising faster than income, national buying power has increased by 6% because of better interest rates,” he said. “Furthermore, we’ve seen increased foot traffic as more buyers are evidently eager searching to become homeowners.”
Consumers could remain optimistic through the holidays, but I doubt much beyond that. There is too much uncertainty from businesses, where capital investments have plunged. Although consumer spending didn’t match the second quarter’s 4.6 percent increase, outlays still rose 2.9 percent. Consumer spending accounts for about 70 percent of all U.S. economic activity.

Harlan Green © 2019

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Friday, October 25, 2019

We Need New Jobs Deal

The best picture we have of current and future job trends is the Labor Department’s JOLTS report (i.e., Job Openings and Labor Turnover Survey). Calculated Risk’s colorful graph shows Job Openings (yellow line) hasn’t yet dropped below 7 million openings in August, though it is falling.
This is a given while there were 5.8 million Hires (dark blue line), so there are still 1.2 million job vacancies searching for employees.  It gives a good picture of the huge labor turnover rate in the $20 trillion U.S. economy.
It is also why it is so difficult to predict the next recession, or depression. I maintain we need another New Deal that boosts public spending on health care, education, infrastructure, R&D, and the environment, if we want to continue the longest economic recovery ever.
How low must the number of Job Openings fall—maybe 1-2 million?—for anyone to begin to worry that a lack of available jobs that promotes real productivity might begin to hurt growth?  The yellow line of the Job Openings tally dipped to some 2.4 million op enings in 2009 at the bottom of the Great Recession.
 The red and blue columns show Layoff, Discharges and other, and Quits (light blue column), which are basically flat, which means we are at the top of this business cycle.  The only hint of a downward trend in job formation is the downward curve in the number of Job Openings (yellow line).
We really must look for any downward trend in retail sales, and consumer spending to tell us the direction of economic growth.  Retail sales dropped 0.3 percent last month as households slashed spending on building materials, online purchases and especially automobiles, the first spending decline since February.
What else should we look for?  Nobel prize-winning behavioral economist Robert Shiller believes consumer spending is holding up this longest economic upturn since WWII because of the Trump presidency.  The fact that he touts himself as a successful businessman creates a general sense of optimism about jobs and the economy.
“Trump has for decades touted a glamorous narrative of his life by “surrounding himself with apparently adoring beautiful women, and maintaining the appearance of vast influence,” Shiller said in a recent op-ed in Britain’s the Guardian newspaper. “The end of confidence in Trump’s narrative is likely to be associated with a recession,” Shiller warned.
So such optimism can be a two-edged sword.  While Trump’s affluent lifestyle has been “a resounding inspiration to many consumers and investors … a severe recession may be his undoing,” Shiller warned.
What else could cause such an outcome?  The Great Recession that ended in June 2009 could have been a second Great Depression; but for the Obama administration’s passage of the $850 billion American Reinvestment and Recovery Act emergency aid package that gave states as well as Washington enough dollars to stop the losses.
But, alas, the religiously right wing Tea Party that resisted almost all public spending took over the house in 2010, sharply cutting back further government programs. The focus turned to austerity measures that hurt the Midwest and southern states depending on government largesse to support them, after the loss of all those manufacturing jobs.
The result is the discontent we see today.  We need another New Deal that will invest in our future generations--those roads, bridges, schools; need we say more?--rather than a “glamorous lifestyle”, to sustain this recovery.

Harlan Green © 2019

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