Bidenomics Is Working!

 Financial FAQs

Brad Delong

Why are Republicans denigrating Biodenomics, the economic policies passed by a bipartisan congress since 2021 that is causing 3 percent GDP growth and 4.0 percent unemployment, with 8 million job vacancies looking for workers, and inflation back to COVID-19 pre-pandemic levels?

Republicans are playing politics in this election year, of course, but Senator McConnell has touted President Biden for rebuilding some major bridges in Kentucky with the Infrastructure Act.

In fact, the U.S. has far outdistanced other developed countries in recovering from the COVID-19. Why? Because President Biden has pulled off a great renaissance of public-private investments with said bipartisan congress, the largest investments in renewing the U.S. economy since Roosevelt pulled off the New Deal during the Great Depression..

Time Magazine described what it is meant to do: “Bidenomics argues that a large and thriving middle class is the primary cause of economic growth. “When the middle class does well, everybody does well,” the President has repeatedly explained. This is the core proposition of Bidenomics: that prosperity grows from the bottom up and the middle out.”

Vice President Harris has echoed that slogan in her campaign, because very few Americans seem to understand Bidenomics at all. A major reason is that four decades of its predecessor; Reaganomics, or Trickle-down economic policies; have badly damaged the middle class, followed by the double-whammy of COVID-19,

A Monmouth University Poll finds that just under half the public gives President Joe Biden credit for this upturn, for instance, but few say his policies are helping the middle class, especially compared to his predecessor.

“The president has been touting ‘Bidenomics,’ but the needle of public opinion has not really moved. Americans are just not giving him a lot of credit when it comes to the economy,” said Patrick Murray, director of the independent Monmouth University Polling Institute.

The poll also finds that disapproval of Congress has hit a nominal record for the past decade.

Time Magazine cites a major reason for the pessimism in a new working paper by Carter C. Price and Kathryn Edwards of the RAND Corporation—the record inequality of the past four decades:

“…had the more equitable income distributions of the three decades following World War II (1945 through 1974) merely held steady, the aggregate annual income of Americans earning below the 90th percentile would have been $2.5 trillion higher in the year 2018 alone. “

The authors assert that since the 1970s, some $50 trillion in wealth has been transferred from workers to owners of capital with the massive deregulation of whole industries, including banking, the passing of anti-labor legislation that weakened union collective bargaining, and massive tax cuts for the wealthiest that practically halved the maximum income tax rate from 50 percent in 1980 to 28 percent today.

So, it is no wonder that workers in the Rust Belt Midwest want to return to the ‘good old days’ of post WWII, when income distribution was more equal (but with fewer Black and women’s rights)?

The problem is that has never been Republicans’ agenda, especially MAGA Republicans, still the party of the wealthy attempting to sell their credo that lower taxes and fewer government benefits will benefit all Americans.

Europeans love Bidenomics, however. “With a fast-growing economy, a strong labour market and falling inflation, the US has outpaced its counterparts in Europe and elsewhere, says a recent BBC article. That put the US at 2.5% over the course of the year, outpacing all other advanced economies and on track to do so again in 2024.”

What will it take for Americans to know and value what we have?

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Surprise Retail Sales Growth!

 Popular Economics Weekly

FREDretailsales

The New Year brought in another surprise. Sales at U.S. retailers such as Amazon and Best Buy jumped 3.8 percent in January. Americans bought more things: cars, furniture, consumer electronics in a sign that consumers are no longer fazed by the Omicron variant.

Why? The Omicron infection rate is fast returning to pre-Omicron levels.

Retail sales have tracked the pandemic, per the FRED graph. It plunged from May to November 2020 as the coronavirus did its worst, up and down with the Delta variant, then plunging again in March 2021 as Omicron hit. Sales began to recover again in December 2021.

The January increase in sales was the largest since last March, when Americans spent a good chunk of their stimulus money from the government.

Auto sales rose sharply for the second month in a row, the government said Wednesday. Auto sales account for about one-fifth of overall retail spending. Other than autos, retail sales still advanced a strong 3.3 percent last month. Sales also rose sharply at internet retailers (14.5 percent), furniture stores (7.2 percent), department stores (9.2 percent) and home centers (4.1 percent). 

 

CDC

And the CDC reported as of February 9, 2022 in its weekly update that the current 7-day moving average of daily new cases (215,418) decreased 42.8% compared with the previous 7-day moving average (376,855). A total of 77,179,255 COVID-19 cases have been reported in the United States as of February 9, 2022.

The surge in industrial production was another good sign. It increased 1.4 percent in January, largely because of unusually cold weather that boosted the output of utilities, reports the Federal Reserve. At 103.5 percent of its 2017 average, total industrial production in January was 4.1 percent higher than its year-earlier level and 2.1 percent above its pre-pandemic (February 2020) reading.

This could be a surprising year and the beginning of a surprising decade, I said last week; if President Biden, the EU, and Vladimir Putin work out their differences.

We should still worry about emerging signs of irrational exuberance in the financial markets and with consumers, which former Fed Chair Greenspan also worried about more than two decades ago. It is pushing the inflation rate to uncomfortable levels.

But can we blame Americans for wanting to celebrate the looming end of more than two years of uncertainty due to the worst pandemic in 100 years?

Harlan Green © 2022

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

COVID-19—WHO Wins?

Popular Economics Weekly

https://twitter.com/jfkirkegaard

Conquering the pandemic really means depending on the cooperation across borders of races and ethnicities that separate regions and countries. COVID-19 is winning the battle in those countries and states that believe in isolation rather than cooperation; such as the red US states of Texas, Arizona, and Florida, or authoritarians that isolate their countries to maintain their power, such as Brazil and Russia.

Mother Nature’s latest Haymaker—COVID-19—will win in any encounter with the followers of an ideology choosing to ignore the safety measures in the name of self-reliance that protect them from COVID-19’s ravage (the US, for example, vs. European countries like Denmark and Norway that locked down their economies early and are recovering more quickly).

The best evidence that shows who wins the battle with this pandemic is to compare countries that believe in educating their populace in the scientific and economic advantages of cooperation during a pandemic—e.g., European countries with advanced social safety nets—with the Trump administration’s refusal to even acknowledge that this novel coronavirus is worse than the ordinary flu (see above graph).

“European countries have used a combination of lockdowns, public health guidance, tests and contact tracing to beat back the virus,” said NY Times’ David Leonhardt in a recent View column. “Large parts of Europe have begun reopening, including schools, so far without sparking major new outbreaks.”

It’s productive to look at the Nordic countries because Sweden is also an outlier in having chosen not to lock down its economy. Early results after three months of the pandemic show that Sweden didn’t benefit at all in economic growth by ignoring the safety measures, and suffered the consequences with its higher death rate, according to JF Kierkegaard of the Peterson Institute for International Economics.

Why? Sweden’s industries depended on supply chains for parts and equipment from other countries that were in lock down to protect their own citizens. Whereas Norway’s GDP, for example, is predicted to shrink -3.9 percent this year, Sweden’s GDP could have a -4.5 percent drop, according to their central banks.

The novel coronavirus can only be defeated by the sharing of wealth and knowledge. COVID-19 exposes those that refuse to share their wealth.

Sharing also means caring, as economic activities will return where shoppers feel safe in our modern consumer-dependent economies. That does not bode well for American consumers in particular who worry about the uncertain healthcare coverage provided by their employers if they have job to return to.

It doesn’t bode well for business confidence as well if the safety guidelines recommended by the World Health Organization (WHO) aren’t followed by all countries.

Senator Elizabeth Warren said it best at the beginning of her political career: “There is nobody in this country who got rich on their own. Nobody. ..You built a factory and it turned into something terrific or a great idea - God bless! Keep a hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”

 And there is no country that got rich on its own, a truth that is lost on those who won’t understand what Mother Nature is telling us.

Harlan Green © 2020

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What if No Brexit Deal?

Popular Economics Weekly

Equalitytrust.org

We know why the UK voted to exit the EU—UK working class anger at not gaining many of the benefits from joining the EU, while experiencing its downside with the influx of eastern EU citizens that displaced domestic workers. But leaving the EU without a negotiated treaty will make it even worse for all Brits, rich and poor. It could spell another recession like the Great Recession, or even worse.

Both the Great Depression and Great Recession were caused by excessive speculation in the financial markets that created massive asset bubbles—whether in overpriced stock values or housing—which then burst. And middle and lower income- earners suffered the most.
But there was another reason. Record income inequality underlay both Great Downturns when these earners continued to borrow beyond their means to spend.

There are no asset bubbles at present, but a high level of debt exists because of the various QE programs that kept interest rates low to enable consumers to keep borrowing. So European and U.S. stock markets aren’t anywhere near Great Depression or Great Recession P/E ratio levels. And there’s no housing bubble caused by excessive overbuilding (Too few dwellings being built—so much so that California’s new governor, for instance, has pledged to add 3.5 million residences to California’s housing stock during his term).

However, the EU’s Great Recession was made worse by misplaced austerity policies that cut welfare spending and taxes when it should have increased public subsides as Ben Bernanke’s Federal Reserve did in 2009 that mitigated some of its effects, and enabled a quicker U.S. recovery.

Can you imagine what could happen if the UK doesn’t beat an orderly retreat from the EU? The UK chancellor, Philip Hammond, has warned of a “bad-tempered scenario” in which neither side acts in their own best economic interests, said the Guardian recently:

“Many Europeans regard the dispute over money not as an early round of bargaining but as a matter of good faith. If the Brits cannot be trusted to settle their past promises, why bother striking future deals? Walking out could therefore be treated as a legal default, with litigation in the international courts and even asset confiscation. Never mind free trade talks, such an atmosphere could make it impossible to agree a replacement for all manner of existing arrangements governing travel, immigration and customs.”

This is while the UK and EU economies are already slowing, and President Trump’s looming trade wars with allies and enemies alike will cut back growth even further.

So it’s vital that the UK and EU find an amicable divorce. What would it look like? The Guardian reports that Brexiters believe the UK can use WTO rules to trade perfectly successfully with Europe, as does Britain when trading with non-EU members. Though WTO tariffs are high for food and cars, most manufactured goods would see little change in export duties. “Over time, the hope is that Britain could return to the negotiating table to agree on rules that would facilitate EU trade in services and find other ways to compensate for lost agricultural markets by looking to faster-growing markets abroad,” says the Guardian

But there is so much more to cross-border agreements, such as custom unions, citizenship barriers, and the like. The real lesson is that U.S. and European economies are too fragile to allow anything but an amicable Brexit divorce; or better yet, no divorce at all.

Tradingeconomics.com

How do we judge the fragility of any economy? By its underlying growth factors. The EU and UK are both suffering serious slowdowns, with just 0.2 percent GDP growth rates in the latest quarters. The Euro area’s overall unemployment rate has declined to just 8 percent since the end of the Great Recession, with Italy’s unemployment stuck at 10 percent and Spain’s at 14 percent.

Then question is how much support would US give to the UK, if UK economy collapses, and the EU is unable or unwilling to come to their aid?

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Jobs Report—Not Yet Full Employment

Popular Economics Weekly

The unemployment rate rose slightly to 5 percent for the first time since April, the government said Friday, though that was mainly because 444,000 people entered the labor force. There are still too many unemployed, in other words. A broader measure of unemployment that includes people who gave up looking for work or can only find part-time jobs was unchanged at 9.7 percent. And it was at 8 percent before the Great Recession.

Graph: Marketwatch

Some 3 million people have jointed the labor force in the past year, a clear sign that record job openings and steady hiring are enticing more Americans to seek work. An increasing number of companies even say they have trouble finding enough skilled workers. But there are still more than 7 million that have either stopped looking or can’t find full time jobs.

This is while total employment gains for August and July were 7,000 lower than previously reported in revisions. The government said 167,000 new jobs were created in August instead of 151,000. July’s gain was trimmed to 252,000 from 275,000.

The U.S. has added an average of 178,000 jobs a month this year, down from 228,000 in 2015 and 251,000 in 2014. Hiring was expected to taper off as it usually does when an economic expansion reaches maturity and the pool of jobless workers shrinks.

But the inflation hawks will now cry louder that it’s time to raise the Fed’s short term rates from 0.5 percent—because wages are now rising at 2.6 percent per year, though that isn’t enough to raise the inflation rate. In fact, it hasn’t been enough to raise economic growth, either, which is projected to remain in the 2 percent range this year as it has been for the last 2 years.

So any boost in the Fed’s interest rates will hurt growth by causing the US dollar’s value to rise against other currencies, which in turn hurts exports and so manufacturing, which barely expanding, according to the latest ISM manufacturing survey.

Graph: Econoday

The September ISM Manufacturing Index did bounce more than 2 points higher to a much better-than-expected 51.5, largely because the US Dollar has been weaker of late—due to the fact that the Fed hasn’t raise interest rate. So said higher growth isn’t assured.

New orders, the most important of all readings rose 6 points to a very solid 55.1. Export orders are respectable and steady at 52.0 while the draw in total backlog orders slowed, with this index up 4 points and nearly hitting breakeven 50 at 49.5. Production also improved in the month, up 1.4 points to 52.8, as did employment which, at 49.7, is also nearly at 50. This is a positive report, pointing to rising though no more than moderate strength for the nation's factory sector.

But beware of those inflation hawks if we want higher growth, and fuller employment for all who want to work. There are two reasons for the Fed to keep interest rates low. Firstly, the energy sector is just beginning to recover from its mini-recession, as crude oil prices inch up to $50 per barrel. And European bond prices are negative with the EU in trouble with Brexit, signaling the European Central Bank is still in an easing mode. So let’s give this economy a chance to really grow before beginning to raise the all-important Fed funds and overnight rates.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Brexit?

Financial FAQs

Brexit, the British vote to exit the European Union, was precipitated by many factors, including Brit’s fear of loss of sovereignty due to the Schengen requirement that it open its borders to citizens of other EU countries.  And it may lead to a breakup of the Eurozone.

It was a real fear—that eastern Europeans would deprive Britons of jobs by migrating from countries whose wages were lower. Great Britain’s minimum wage is more than double that of countries such as Poland, Czech Republic, and Romania, for instance, which has meant that some 1 million immigrants from other EU countries have migrated to Great Britain seeking better paying jobs, and pushing out many blue collar Brits in the process.

Graph: Trading Economics

So there was good reason for the Brexit vote. Great Britain’s unemployment rate only came down to 5 percent in 2016, after hovering at 8 percent since 2008, the end of the Great Recession, largely due to misguided economic policies.

Britain’s Prime Minister David Cameron was hoisted on his own petard when he called for the referendum that precipitated Brexit, in other words. He was a strong supporter of German austerity policies that led to two recessions in most of the EU, policies that advocated cuts in government programs combined with higher taxes for Eurozone countries.

Poor job prospects in many of those countries hardest hit by the Great Recession prompted the flight to countries least affected, such as Great Britain, even though Great Britain was still suffering from job losses. The Guardian has been trumpeting this truth since Cameron’s austerity policies were instituted in the Conservative Party’s 2010 ascent to power.

“Austerity – which has affected the living standards of many working people – was not imposed by the EU, but was a choice by the current government. When public finances are tight, the economic contribution made by migrants ought to be welcomed. But the climate of cuts allowed migrants to be blamed and Britain’s contribution to the EU – at £8bn, just 1.2 percent of public expenditure and outweighed by our economic gains from membership – to take on disproportionate significance.”

Many major economists have written about the failure of austerity policies since the end of the Great Recession, including Nobelist Paul Krugman.

Graph: Slate.com

“Since the global turn to austerity in 2010, said Krugman in the Guardian, “every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.”

Maybe we should also mention it is the reason why the Eurozone is in danger of breaking up, all because of not knowing how to deal with the huge amount of debt incurred during and by the Great Recession. All countries suffered, as they did after WWII. But the western world had visionary leaders then, willing to rebuild those European countries in particular with something called the Marshall Plan—some $17 billion in loans and grants—one quarter of which went to Great Britain.

It was also a time when 50 percent of German debt was forgiven—that is, cancelled. But are there any such leaders today that might help Greece and Portugal, at the very least? Unfortunately, we are instead harking back to WWI history, and the punitive demands made on Germany for war reparations that precipitated Hitler and WWII.

London School of Economics Professor of Economic History Albrecht Ritschl conducted research into how Germany was able to pay off its debts after the two World Wars. Ritschl looked in detail at the financial assistance that was paid to Germany under the Marshall Plan, in which the US gave that $17 billion – around $160 billion in today’s values – in economic support to help rebuild European economies. He showed that while the transfers were tiny, the cancellation of debts was worth as much as four times the country’s entire economic output in 1950 and laid the foundation for Germany’s fast post-war recovery.

If we had such leaders today, could it have prevented Brexit and the possible breakup of the Eurozone—and maybe the European Union, as well?

Harlan Green © 2016

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The Divided States of America

Financial FAQs

It is now becoming obvious that we are not a United States of America. There are many states that restrict voting rights, abortion rights, immigration, even the collective bargaining rights of workers that are no longer able to negotiate for their own living wages.

This is when the media is lamenting the possible breakup of the European Union with Great Britain’s Brexit vote to depart from the EU. But the US is breaking up in far more serious ways, even without the influx of millions of Muslim refugees that Europe has to deal with and is causing its drift to xenophobia and the fear of foreigners.

The US in many ways is still fighting the Civil War of 150 years ago, with the defacto apartheid of poor vs. wealthy neighborhoods, and the police killing of blacks at traffic stops. A recent study by the New York based Center For Policing Equity showed that African Americans are more than 3 times as likely to be beaten, bitten by police dogs, pepper sprayed, Tasered, or shot, according to the New York Times.

There are now 26 right-to-work states that either don’t allow workers to join unions, or pay dues, or bargain collectively for their wages, even when their workplace may be under a union contract. This has resulted in those states having the greatest income inequality and lowest wage-earners.

Graph: Wikipedia

There are a very similar number that restrict abortions—even in the case of rape for women—and restrict voting rights when the Voting Rights Act was gutted by a 5-4 Supreme Court vote in 2015.

And it is many of those same states that don’t allow convicted felons that have served their time from voting—as many as 30 percent of voter-age African Americans in southern states, thanks to the War on Drugs, according to Michael Moore’s movie, Where To Invade Next. GW Bush probably only won Florida because some 80,000 ex-felons were stricken from the voting roles—mostly in Democratic-leaning counties.

This is why African-Americans now comprise 50 percent of our 2.3 million prison population when they are 12 percent of our population. It provides the cheap labor that prison factories have used to generate products for most large corporations plus the military—another form of slave labor.

Florida leads the pack in the number of citizens excluded. According to Desmond Meade of the nonprofit Florida Rights Restoration Coalition, "Over 1 million people in Florida right now are disenfranchised. Nearly 1 in 3 of them are African American men.” If these people were able to vote, Meade continues, "Florida would no longer be a swing state."

But according to the Brennan Center for Justice, 48 states (exceptions: Maine and Vermont) prohibit current prisoners with felony convictions from voting and 29 of them also bar those on probation or parole. All told, felony disenfranchisement prevents more than from voting. And of the four states that permanently bar voting by former felons—Kentucky, Florida, Iowa, and Virginia—the latter three are battleground states.

Then there are the gun laws. Only 6 states restrict or outright ban the sale of military-style assault weapons, when more than 30,000 gun deaths are recorded every year, and Orlando-style massacres occur because of unlimited magazine sizes of those same assault weapons.

What is behind the defacto civil war still raging? Many economists says it’s the globalization and export of good jobs to developing countries with cheaper wages that have hurt those blue collar workers in the poorer states.  But too many blame immigrants, or nonwhites, or anyone not belonging to their tribe. But we also have to look at the monopoly power of corporations that have pushed such free trade treaties, suppressing their employees’ wages while paying their executives record incomes.

In fact, these states have in many ways already withdrawn from the United States of America in trumpeting state and local rights over inalienable rights. It is just a modern incarnation of our ongoing Civil War.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

A Good Jobs Report

Financial FAQs

Should we push back the first Fed rate hike to the presidential election year of 2016, because of June's softer-than-expected employment report? Nonfarm payroll growth came in at 223,000 vs expectations for 230,000 and above. It included downward revisions totaling 60,000 to the two prior months (May revised to 254,000 from 280,000 and April to 187,000 from 221,000), said the Bureau of Labor Statistics report.

I doubt the Fed will wait that long, as the most recent economic data shows boom times—from rising home prices, as well as construction spending, and manufacturing activity on the rise again. This could be a temporary softness, in other words, as the US economy approaches full employment.  And it is a good jobs report, given all the uncertainties affecting economic growth these days.

Softness in payroll growth was combined with softness in wage pressures with average hourly earnings unchanged in the month and the year-on-year rate moving down to 2.0 percent from 2.3 percent. But that can be deceptive. Median household wages are now rising 3 percent, which means the income ‘bar’ for 50 percent of the families doing well is rising faster than inflation.

Graph: Marketwatch

But there is still a lot of labor slack in our job market that Fed Chair Yellen has been talking so much about. This is most evidenced by part-timers who would rather work fulltime, according to the BLS. Their numbers are declining, from 6.65 million to 6.51 million in one month, but would still have to drop by one-third to return to the range that prevailed from the 1970s until the start of the Great Recession in this Calculated Risk graph.

Graph: Calculated Risk

And the labor force participation rate just declined to 62.6 percent, from its historical 67 percent in the Calculated Risk graph that dates from 1960. Economists are not sure of the reasons. It may be the working age population is not growing as fast—just 0.5 percent, instead of historical 1 percent, according to the latest census figures, but that shouldn’t affect the participation rate of those actually looking for work.

It could be that while more of the older workers are dropping out, the newest generation aged 16 to 35 years, now the largest segment, is just entering the work force. This is why the actual unemployment rate fell to 5.3 percent. More dropped out of the labor force (432,000 seasonally adjusted) than were newly employed, according to the household survey that also tracks the self-employed.

So look for a Fed rate increase before the end of 2015—but only one—maybe in September. That means 2016 might be a wild year, with both economic growth and politics dependent on so many factors—such as the dollar strength, inflation, the price of oil, the Eurozone, and even geopolitical uncertainty.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

March New-Home Sales A Dud

"Sales of new single-family houses in March 2015 were at a seasonally adjusted annual rate of 481,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.4 percent below the revised February rate of 543,000, but is 19.4 percent above the March 2014 estimate of 403,000."

Graph: Calculated Risk

The March result was a disappointment, mainly in the south, where sales fell 15.8 percent. And because builders continue to build—housing starts are close to the million unit mark again—housing inventories are rising and prices are falling. The supply of new homes rose to 5.3 months, while the median price fell to 1.5 percent to $277,400. Year-on-year, the median price to down 1.7 percent while sales are up 19.4 percent, a discrepancy that points to price discounting by builders, says Calculated Risk.

What is behind the up and down gyration in sales? Winter is still with us, for one thing. And many of the southern and Midwest states are being pounded by tornadoes, as well as torrential rains. Lower oil prices could also be hurting an area heavily dependent on the oil and gas industries.

We will know next week if job creation will resume from February’s low numbers, and so consumer confidence remains high. Mortgage activity is high, highest level in years, what with interest rates still at record lows. (The 10-year Treasury yield is back down to 1.91 percent, and Eurozone bonds now have negative interest rates, meaning banks have to pay their clients to borrow money, because there is so little demand for loans.)

Mortgage applications increased 2.3 percent from one week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending April 17, 2015.  The Market Composite Index, a measure of mortgage loan application volume, increased 2.3 percent on a seasonally adjusted basis from one week earlier.  The seasonally adjusted Purchase Index increased 5 percent from one week earlier to its highest level since June 2013.  The unadjusted Purchase Index increased 6 percent compared with the previous week and was 16 percent higher than the same week one year ago.

"Purchase applications increased for the fourth time in five weeks as we proceed further into the spring home buying season. Despite mortgage rates below four percent, refinance activity increased less than one percent from the previous week," said Mike Fratantoni, MBA's Chief Economist.  

The fact that purchase mortgage applications now comprise 44 percent of all applications, the highest in years, as we said, means the Fed’s policy of keeping interest rates as low as possible until household incomes begin to rise again is the right policy to kick start the housing market, and bring in those first time homebuyers who have been renting until know.

It also means some overbuilding of new homes is necessary to build up housing inventories for sale, and thus keep home prices in the affordable range.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Germany’s Failed Austerity Policies

Financial FAQs

One would think by now the debate has been resolved on which economic model created the better recovery for this Great Recession or Lessor Depression, as P Krugman has called it. But no, Germany’s Finance Minister Wolfgang Schauble keeps pounding the drum for his, and the eurozone’s failed austerity policies.

And this is happening with a new Hitler looming on Europe’s border who is taking advantage of their weakness and threatening to repeat its history.

“The financial crisis broke out seven years ago and led many countries into an economic and debt crisis,” said Schauble recently. “A pervasive set of myths — that the European response to the crisis has been ineffective at best, or even counterproductive — is simply not accurate. There is strong evidence that Europe is indeed on the right track in addressing the impact, and, most importantly, the causes of the crisis.”

Really? One has only to compare Europe to U.S. economic growth since the Great Recession. The U.S. response by the Federal Reserve was to do everything possible to stimulate demand by keeping interest rates as low as possible, as long as possible, to pump more money into the system, rather than hoard it.

It is not even a matter of degree, but orders of magnitude. The U.S. has grown as much as 5 percent in a quarter, whereas Europe has grown no more than 0.3 percent since 2012. (Does Schauble even bother to look at economic data?)

One thinks that most economists should have learned from the 1930’s Great Depression, Roosevelt’s New Deal, etc., etc., that it takes a very active and proactive government to bring back the fallen ‘animal spirits’, as JM Keynes called the loss of confidence that kept consumers in the 1930s’ economy from completely recovering, until WWII government spending brought back fully employed economies.

But no, Schauble, has turned Keynes on his head in maintaining that it is the loss of investors’ confidence, not that of public consumers, which powers 70 percent of economic growth these days. He seems to have absolutely no concept of the meaning of aggregate demand, another Keynesian concept that spells out exactly what drives economic growth.

I.e. investors lose confidence in investing when the demand for their products and services declines, as it did drastically during the past two depressions. It is a basic misunderstanding of how economies work. Consumers ran out of money to spend, due in large part to the record income inequality that happened in 1929, and again in 2008.

Graph: Mother Jones

When almost all wealth flows to the top, the wealthiest enact policies to prevent it from being redistributed downward to those that spend it, where it would encourage and strengthen a recovery.

Then money is hoarded, rather than spent, as is still happening worldwide (particularly in Germany with the largest budget surplus in the developed world). That’s why economic growth has resumed in the U.S., but not in Europe, Which is currently teetering on the edge of its third recession since 2008.

But isn’t Putin’s Russia threatening war, even a nuclear war, if Europe doesn’t cave in to its demands? That is a wakeup call for Europeans to throw out their austerity policies, if they want to build the strength to oppose him. Europe is fractured because of their poorly functioning economies. Otherwise history is about to repeat itself. Only instead of a Hitler, we have a Putin.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Will 2015 Interest Rates Remain This Low?

The Mortgage Corner

Record low interest rates are holding, in spite of the latest stock market selloffs, and may remain low throughout 2015. Why? Oil prices are still below $50/barrel, and overall prices are falling throughout the developed world. The Eurozone in particular has fallen into such deflationary times that some euro bonds have negative interest rates. That means holders of those bonds have to literally pay interest to hold them (i.e., government issued bonds), believe it or not.

Graph: Trading Economics

This is while the U.S. inflation rate has fallen to 1.3 percent, below the Fed’s 2 percent target that would mean prices are rising enough to sustain economic growth—in part because of those plunging oil prices. And because low oil prices will probably be sustained for at least 2 years, according to energy analysts, Janet Yellen’s Fed shouldn’t be tempted to raise their rates until later this year, if at all.

Oil prices are likely to stay at $60 a barrel or lower for the next two years as US shale extraction continues to suppress prices, according to the International Energy Agency’s latest report. After plunging from $115 a barrel in June to little more than $45 in January, the price of Brent crude has rallied recently, but the IEA said price pressures could have further to go.

“Despite expectations of tightening balances by end-2015, downward market pressures may not have run their course just yet,” the IEA, which advises mainly developed economies on the oil market, said in a monthly report.

There’s another reason for the Fed not to raise rates anytime soon, even though the so-called “confidence fairies” (P Krugman’s term) demand it; which are mainly deficit hawks that see inflation right around the corner, even when there’s none.

Graph: P Krugman

Because we are still not close to full employment, in spite of February’s 5.5 percent unemployment rate. Annual household median incomes after inflation have plunged 7.42 percent since the Great Recession, from $68,931 to $63,815. And history both here and in Europe has shown that tightening credit when household incomes haven’t recovered (either by raising interest rates, or otherwise restricting credit) can stop an economic recovery in its tracks.

That also means today’s long term mortgage rates, such as for the conforming 30-year fixed rate—should remain at or below 4 percent for the rest of 2015. Today, the 30-year conforming rate is 3.75 percent, still a very affordable mortgage.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Fed Chair Yellen Still Dovish, Economy Still “Sluggish”

Popular Economics Weekly

Federal Reserve Chairperson Yellen wants to keep interest rates as low as possible for at least the “next couple of FOMC meetings”, even as there are signs that economic growth is accelerating. This is in the face of the newly Republican-dominated Congress threatening to curb its powers, because their deficit hawks want to raise rates sooner, and we know what happened in Europe and Japan when this happened—their 2^nd and 3^rd recessions since 2008.

Why? Because raising rates too soon could stop many consumers from spending, because income growth is poor and consumers are only beginning to feel confident enough to spend. Whereas the deficit hawks see inflation where there is none at the moment, since they are mainly creditors that see any deficit as endangering the value of the debt they hold.

Yellen said inflation measures still show inflation too low to sustain growth, and wage pressures are still not enough to sustain higher household incomes, which is the main driver of inflation. Or, in her words, the Fed doesn’t want to raise rates “until the economy is fully healed”

However, “If economic conditions continue to improve,” said Dr. Yellen, “as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. …However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings.”

The most recent measures do show accelerating growth. For instance, the Chicago Fed National Activity Index (CFNAI), a proxy for nationwide growth, edged up to +0.13 in January from –0.07 in December. It is one of the broadest measures of economic activity, outside of the Gross Domestic Product quarterly report. Three of its four broad categories of indicators that make up the index increased from December, and only one of the four categories made a negative contribution to the index in January.

Graph: Calculated Risk

Too low inflation still remains a problem, you say? Yes, and is the main reason Yellen wants to keep interest rates at their lowest level. It’s now negative for the first time in the year, and even since 2009. There was another huge drop in energy prices. Overall consumer price inflation fell sharp 0.7 after declining 0.3 percent in December. Energy plunged 9.7 percent after dropping 4.7 percent in December.

Gasoline plummeted 18.7 percent, following a 9.2 percent fall in December. Food prices were unchanged, following a rise of 0.2 percent in the previous month. Core inflation excluding food and energy was just 0.2 percent after a modest 0.1 percent rise December, and is up 1.6 percent in a year.

Graph: Trading Economics

That is the main reason the Fed wants to keep rates low as long as possible. Low interest rates boost both housing prices and sales, lower debt levels, and higher valuations enable more homeowners to sell, refinance, and move, if necessary. So Yellen’s last two days of testimony should encourage those fence sitters, as well as give all consumers more confidence in their future economic well-being.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

The Economic Ruination of Greece

Popular Economics Weekly

It is now beyond a reasonable doubt that Germany and its austerity cohorts want to drive Greece out of the Eurozone by insisting that it adhere to its agreement to pass most of its meager budget surplus to service its foreign debt, rather than invest it back into the Greek economy. It is insisting that Greece cut government spending enough so that it carries what is called a huge ‘primary’ budget surplus of 4.5 percent (a surplus before its bills are paid—ie, largely interest to its creditors).

The EU, led by Germany, had crafted several agreements that gave Greece large loans to service that debt, while forcing it to submit to severe austerity and wage cuts.

“The results have been catastrophic, said the Guardian in a 2013 article: “cumulative economic contraction approaching 25 percent, adult unemployment at nearly 30 percent, youth unemployment close to 65 percent, unprecedented poverty, destruction of the welfare state and humanitarian crisis in the urban centres. Greek debt, meanwhile, is currently higher than in 2010, standing at €321bn and, since the economy has collapsed, its ratio to GDP approaches an exorbitant 180 percent. This is the background to the current debate.”

But to do so would in effect drive Greece even further into its depression, since it means lower tax revenues, which means even more debt. The consequence is the layoff of more workers and further reduction of average household incomes. Paul Krugman put up a graph of the cutbacks in spending that in turn have made Greece’s debt burden worse, compared to other countries that agreed to the EU’s austerity terms.

 

Greece has already paid the piper, in other words, while Germany now has the largest budget surplus of all western countries. “Greece has done a lot more austerity than those countries cited as supposed success stories,” says Krugman, “(which is another issue — success being defined as “not total collapse, and slight recovery after years of horror” — but that’s a different story).”

Graph: Trading Economics

So Greece has little choice but to exit the euro currency, unless some last minute compromise with the EU is possible. Its unemployment rate is currently 25.8 percent, the worst in the Eurozone (slightly more than Spain’s 23.7 percent), as it has been in a deflationary spiral, further depressing its economic activity.

Graph: Trading Economics

Although Greece mostly lived up to the terms of the bailout, the promised growth never materialized. As Greek Prime Minister recently said: "We are not negotiating the bailout; it was cancelled by its own failure.” Calculated Risk tabulated the difference between the forecasted results of its austerity cutbacks and the actual result.

Greece: Annual GDP, Forecast and Actual

Year Promised      Actual

· 2009 -2.0            -4.4

· 2010 -4.0            -5.4

· 2011 -2.6             -8.9

· 2012 +1.1             -6.6

· 2013 +2.1             -3.9

The only choices are to allow Greece to run a smaller primary surplus (currently 1.5 percent), leaving more of its revenues to benefit its own citizens, or for Greece to leave the Eurozone and default on all their debt. What will it be?

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Low Inflation Everywhere Is Shrinking Growth

Popular Economics Weekly

Deflation is a rising risk for the U.S. economy based on import and export price data where contraction is at its most severe since the 2008-2009 recession, as well as for the rest of the world. U.S. import prices fell 2.8 percent in January alone for year-on-year contraction of 8.0 percent. And it's much more than just the impact of the strong dollar as export prices are also in contraction, at minus 2.0 percent for the month and minus 5.4 percent on the year, reports Econoday.

Graph: Econoday

Another sign of deflationary tendencies is that U.S. consumer spending barely rose in January as households cut back on purchases of a range of goods, suggesting the economy started the first quarter on a softer note. Sluggish spending came despite cheap gasoline and a buoyant labor market, leaving economists to speculate that consumers were using the extra income to pay down debt and boost savings.

 

Graph: Thomson-Reuters

The Commerce Department said retail sales excluding automobiles, gasoline, building materials and food services edged up 0.1 percent last month. But overall retail sales slipped 0.8 percent in January, declining for a second straight month as falling gasoline prices undercut sales at service stations. This is after consumer spending, which accounts for more than two-thirds of U.S. economic activity, expanded at its quickest pace since 2006 in the fourth quarter.

Graph: Trading Economics

But even falling gas prices are a sign of deflation, as it means there is lower demand for energy products everywhere in the world, as I said. In fact, consumer prices are already falling in the Eurozone, -0.2 and -0.6 percent, respectively, in the past 2 quarters, signaling an outright recession. Paul Krugman has even said the Eurozone is now in their Second Great Depression.

Graph: Calculated Risk

So why are consumers paying down debt with their extra pocket money? The preliminary University of Michigan consumer sentiment index for February was at 93.6, down from 98.1 in January. Higher gasoline prices are probably the reason for the decline in February, and that’s enough to make consumers more cautious with their spending.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Deflation Is Now Major Concern

Popular Economics Weekly

We wrote recently about the Eurozone in danger of becoming Japan, which has suffered through some 2 decades of a deflationary spiral, before Prime Minister Abe opened the stimulus spigots. Why is deflation (or disinflation, which is lower inflation but not falling prices) such a bad thing?

Because it deflates everything, including profits, incomes and so job creation.   This starts a vicious circle of more job cuts and shrinking household incomes, which is what causes a recession, or depression. That danger is now slowly creeping into the U.S. economy, though the U.S.  is growing faster than almost all other developed countries at the moment.

Pundits, and even Fed Vice Chair Stanley Fischer are beginning to voice fears that the slowdown in the Eurozone in particular could slow U.S. growth. Why? Because it lowers the demand for U.S. goods and services.

Fischer said in a speech on Saturday that, “if foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise.”

• Europe’s growth engine slashed its growth forecasts for this year and next.
• German economic sentiment turned negative for the first time in nearly two years
• U.K. inflation data also surprised to the downside, taking pressure off the Bank of England to raise rates.

This means the Fed would have to keep interest rates at the so-called zero bound longer than it wants to. That’s because too much cheap money feeds asset bubbles, as happened with the housing bubble. So the European data added to a slew of fears that growth could be slowing across the world.

U.S. growth at present is doing very well with 4.6 percent growth in Q2 after the 2.1 percent shrinkage in Q1, and third quarter growth could exceed 3 percent based on recent inventory rebuilding numbers.

Graph: Trading Economics

But there are headwinds, as interest rates continue to plunge, which signals worries of slower worldwide growth that is hurting stock prices. The 10-year Treasury note yield dropped below 2 percent for the first time in 16 months. But the good news is it will stimulate more housing sales, as 30-yr conforming fixed mortgage rates have plunged to 3.75 percent with 0 origination points, and the Hi-Balance conforming fixe rate is just 3.875 percent with 0 points. So the worries of slower U.S. growth, at least, have no basis.

Graph: Econoday

In fact,U.S. industrial production is approaching its historical average. Industrial production jumped an outsized 1.0 percent in September after a decline of 0.2 percent in August. Forecasts were for 0.4 percent. Overall capacity utilization jumped to 79.3 percent from 78.7 percent in August, close to its 80.1 percent long term average.

Manufacturing was solid, rebounding 0.5 percent in September after a 0.5 percent decline the month before. Within manufacturing, the production of durable goods increased 0.4 percent in September, led by the aerospace and miscellaneous transportation equipment. The production of nondurable goods also moved up 0.5 percent in September. With the exception of petroleum and coal products, each of the major components of nondurables posted gains in September.

So the warnings are real, but somewhat exaggerated. Europeans cannot allow prolonged slow growth policies that emphasize deficit reduction over job creation programs for long. And Fed Vice Chairman Fischer just emphasized that job creation is more important for Fed policy makers, and why the Fed will keep interest rates low for as long as possible, given almost no inflation, to spur more job creation.

Harlan Green © 2014

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