Q3 GDP Unchanged

Popular Economics Weekly 

FRED

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

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

Homeowners Preserve Rising Equity

The Mortgage Corner

Graph: MarketWatch/Black Knight

American homeowners have amassed a record $6 trillion in equity in their properties, according to a study by real estate data firm Black Knight, a figure boosted by surging home prices and a trend of owners staying put longer. But rising interest rates and caution resulting from the housing troubles of a decade ago are limiting how much of that equity is getting tapped.

“As the second quarter came to a close, the total amount of tappable equity available to homeowners with mortgages surpassed the $6 trillion mark for the first time in history,” said Ben Graboske, executive vice president of Black Knight’s Data & Analytics division. “There is now $636 billion more tappable equity available than at the start of 2018, and nearly three times as much compared to the bottom of the market in 2012.”

Homeowners are staying in their homes longer in part because of fears of another housing bust that was part of the Great Recession, in other words. In 2016 and 2017 sellers had stayed in their homes a median 10 years, up from a median of six years all the way back to 1985. This is also because there are fewer homes to buy as housing inventories have shrunk drastically.

Inventory of starter and tradeup homes were down 12-13 percent compared to a year ago, one of the biggest drops in years, Trulia chief economist Ralph McLaughlin said. McLaughlin is hoping that rising home prices will entice more owners to sell, even though mortgage rates have risen from their low of 3.5 percent to 4.25 percent for a 30-year fixed conforming loan with a 1 point origination fee. But that is still historically low, when fixed mortgage rates were in the 6 percent range just a few years ago, and even as high as 16 percent in the mid-1980s.

Existing-home sales are still strong, however, according to the National Association of Realtors. Total existing-home sales, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, did not change from July and remained at a seasonally adjusted rate of 5.34 million in August. Sales are now down 1.5 percent from a year ago (5.42 million in August 2017).  

Lawrence Yun, NAR chief economist, says the decline in existing home sales appears to have hit a plateau with robust regional sales. “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum,” he said. “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.”

Graph: Calculated Risk

Higher interest rates aren’t stopping new homes from being built, either. August Housing starts jumped 9.2 percent to a 1.282 million annualized rate which is well above July's upwardly revised 1.174 million rate, according to the U.S. Census Bureau. But permits, which are the forward looking component of the report, fell 5.7 percent to a 1.229 million rate.

Looking at starts, multi-family construction that has slowed 29 percent to a 406,000 rate for year-on-year growth, which had been in the negative column, was up 38 percent. Single-family homes, which are the more important of the readings, rose 1.9 percent to an 876,000 rate that, however, is fractionally lower than a year ago, down 0.2 percent.

Where do interest rates go from here? The Conference Board has predicted economic growth could average 3 percent or higher for the rest of this year, which will continue to boost interest rates somewhat. Their leading economic index rose 0.4 percent in August following even stronger gains in the prior two months, the Conference Board said Thursday. The LEI is a gauge of 10 economic indicators meant to signal peaks and valleys in the business cycle and the broader economy.

But our take is there just isn’t enough consumer demand to push rates much higher. Consumers have been paying down their overall debt as a percentage of household income, as well as borrowing less. It is corporations that loaded up on easy money the past several years and now have to worry about paying it back if there is a downturn.

Harlan Green © 2018

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

Housing Construction Rebounds, For How Long?

The Mortgage Corner

The Conference Board’s Index of Leading Indicators (LEI) that predicts future growth says it is being boosted by a rebound in housing starts, which means more badly needed new homes being built. Its June report posted a 0.6 percent gain. Permits had been soft through most of the spring before gaining sharply in this week's housing starts report.

But there’s concern over how long this might last, though I predict full employment and the prospect of low interest rates for the rest of this year could prolong the trend.

Starts for all homes jumped 8.3 percent in June to a 1.215 million annualized rate with permits up 7.4 percent to a 1.254 million rate. As weak as the details were in the prior report, is how strong they are in the latest. Single-family permits rose a huge 4.1 percent to an 811,000 rate with multi-family permits up 13.9 percent to 443,000. Permits are strongest in the Midwest followed by the West and South.

Graph: Econoday

Actual starts for single-family homes rose 6.3 percent in June's report to 849,000 with multi-family up 13.3 percent to 366,000. The Northeast is in front followed by the Midwest. Starts in the West are up slightly and are down noticeably in the South, probably due to all the errant weather, including floods and a few tornadoes.

The LEI tracks 12 indicators of growth, including interest rates spreads and hours worked. The fact that housing permits provided the biggest boost to the LEI means that housing is probably a leading indicator of future growth as it has been in past recoveries. So why has it taken so long for housing construction and sales to catch fire? The busted housing bubble left millions of vacant homes first had to be reabsorbed into the housing market.

Then all those homeowners that lost their homes had to reestablish their credit bonafides. This is while Fannie Mae and Freddie Mac haven’t sufficiently lowered their credit and loan qualifying requirements that would add some 1 million prospective homebuyers to the list of eligibles, according to the Urban Institute.

Then there is the millennial generation saddled with all that student debt that the current administration doesn’t want to forgive or amend terms. The list goes on and on, in other words, for what needs to be done to make housing more affordable.

The NAHB, or National Association of Home Builders, also puts out a builder sentiment index that attempts to predict future activity, but which may lag housing starts data. The report cites the effects of high lumber costs on home builders in showing construction, for instance, but shows slower activity evenly divided among the 3 components in its index.

Higher future sales still lead for 73 percent of respondents with higher present sales at 70 percent of those polled. But only 48 percent report higher traffic, which is below the breakeven 50 percent for the 2nd month in a row. Regionally, the West remains the strongest for homebuilders followed by the Midwest and South and the Northeast far behind. So is optimism leading reality, if fewer buyers are lookng?

These are still terrific numbers, however, and it looks like lower interest rates are here for the rest of this year, with the conforming 30-year fixed rate holding at 3.50 percent for one origination point in California.

Why are rates still at such record lows with the Fed having already raised their overnight rate 3 times to 1.25 percent? Consumers aren’t borrowing more, which would increase loan rates.

Graph: Econoday

For instance, retail sales are still stuck below what is considered to be a robust demand for more goods and services. Annual sales are under 3 percent for the first time since August last year with the 3-month average below 4 percent. And 6 percent annual sales increases have been the norm during past recoveries.

This really means a certain middle and upper segment of income earners are doing well, but not the rest of US. The boosting of the minimum wage in the more prosperous cities and states is a start, but that is happening in only a handful of states, as I’ve said.

Much more needs to be done, in other words, to help the still record income inequality that haunts this laggard recovery from the Greatest Recession since the Great Depression.

Harlan Green © 2017

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

Record Retail Sales, Higher Growth Ahead?

Financial FAQs

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

Graph: Econoday

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

Graph: Econoday

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

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

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

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

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

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

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

Harlan Green © 2016

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

How Extreme Is Bernie's Vision?

Major progressive economists are protesting Bernie Sanders predictions of robust economic growth and jobs if his policies are enacted.  What are his policies?  Policies he claims will give Americans what the other developed countries already offer to their citizens, including a higher minimum wage, tuition-free public university education, universal health care, and better retirement benefits.

Then why are progressive economists protesting, who presumably have similar goals?  Because we are not like other developed countries, and so shouldn’t be exaggerating the benefits of such assertions, says Paul Krugman.

“On Wednesday four former Democratic chairmen and chairwomen of the president’s Council of Economic Advisers — three who served under Barack Obama, one who served under Bill Clinton — released a stinging open letter to Bernie Sanders and Gerald Friedman, a University of Massachusetts professor who has been a major source of the Sanders campaign’s numbers,” said Krugman. “The economists called out the campaign for citing “extreme claims” by Mr. Friedman that “exceed even the most grandiose predictions by Republicans” and could “undermine the credibility of the progressive economic agenda.”

Why are the Sanders-Freidman claims so extreme?  Because Dr. Friedman claims he can achieve those goals in just ten years, if the body politic will back Bernie.  The late Supreme Court Justice Antonin Scalia over some 30 years led conservative attempts to turn the clock back at least one century to a time when the white male patriarchy still ruled. 

Whereas Senator Sanders wants to move the economic clock into the next century.  “Like the New Deal of the 1930s, Senator Sanders’ program is designed to do more than merely increase economic activity: the expenditure, regulatory, and tax programs will increase economic activity and employment and promote a more just prosperity, “broadly-based” with a narrowing of economic inequality,” says Professor Friedman in his economic analysis.

Graph: CBPP

The increase in income concentration since the 1970s reverses the prior, long-term downward trend in concentration, says the non-partisan Center For Budget Policies and Priorities.  “After peaking in 1928, the share of income held by households at the very top of the income ladder declined through the 1930s and 1940s.  Consistent with the shared prosperity found in the Census data on average family income, the share of income received by those at the very top changed little over the 1950s, 1960s, and early 1970s.  The sharp rise in income concentration at the top of the distribution since the late 1970s was interrupted briefly by the dot-com collapse in the early 2000s and again in 2008 with the onset of the financial crisis and deep recession.” 

So Sanders and Friedman have a point—what economic policies will catch US up to those benefits that the citizens of all other developed countries have?  In fact, but for the record income and wealth inequality, we could already offer many of those same benefits.  We still have the worst income inequality since 1929, the beginning of the Great Depression, and it has not improved since the end of our Great Recession.

Can we blame our young for supporting his vision?  It could take more than ten years, as the so-called Reagan trickle-down revolution prevailed for more than 30 years, policies that created the record income inequality by the massive transfer of wealth upward; via the combination of lower tax rates with higher deficit spending that caused major cutbacks in government benefits and programs.

So really, the outcome of Bernie’s economic vision is very dependent on the “broad-based” support of his policies by independents voters, as well as Democrats.  The Nevada caucus and South Carolina primary should provide that answer. 

Harlan Green © 2016

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

Record Post-Recession Home Sales, Construction, Case-Shiller Prices in July

The Mortgage Corner

With all the bad news coming from the stock market, it’s good to know that this hasn’t affected the housing market. In fact, it’s pushing interest rates lower, so that a conforming 30-year fixed mortgage rate has dropped to 3.50 percent in California. And that will continue to boost home sales (and prices, of course). That’s why Case-Shiller shows two cities already above their bubble highs, and the Conference Board’s Index of Leading Economic Indicators (LEI) shows continued strong growth ahead.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased a whopping 2 percent to a seasonally adjusted annual rate of 5.59 million in July from a downwardly revised 5.48 million in June. Sales in July remained at the highest pace since February 2007 (5.79 million), have now increased year-over-year for ten consecutive months and are 10.3 percent above a year ago.

Graph: Econoday

Lawrence Yun, NAR chief economist, says the increase in sales in July solidifies what has been an impressive growth in activity during this year's peak buying season. "The creation of jobs added at a steady clip and the prospect of higher mortgage rates and home prices down the road is encouraging more households to buy now," he said. "As a result, current homeowners are using their increasing housing equity towards the downpayment on their next purchase."

And demand is well ahead of thin supply, at 4.8 months at the current sales rate vs 4.9 and 5.1 in the two prior months and 5.6 months in July last year. Sales are up 10.3 percent year-on-year, well ahead of the median price which, at $234,000, is up 5.6 percent.

The S&P/Case-Shiller U.S. National Home Price Index recorded a higher year-over-year gain with a 4.5 percent annual increase in June 2015 versus a 4.4 percent increase in May 2015. The smaller 10-City Composite had marginally lower year-over-year gains, with an increase of 4.6 percent year-over-year. Denver and Dallas are the two cities now above their 2007 bubble highs, while Denver (+10.2%), San Francisco (+9.5%) and Dallas (+8.2%) had the biggest year over year increases.

Graph: Calculated Risk

This mismatch of supply vs. demand means even higher existing-home prices ahead. Especially since housing construction is just beginning to play catch up after years of low growth—no coincidence, given the rising demand for housing of any kind—rental as well as for prospective homeowners. Led by a strong jump in single-family production, nationwide housing starts inched up 0.2 percent to a seasonally adjusted annual rate of 1.206 million units in July, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. This is the highest level since October 2007.

It’s also why the Conference Board’s Index of Leading Economic Indicators (LEI) continues to show moderate growth for the next 6 months, and is up 1.7 points from January to July. “The U.S. LEI fell slightly in July, after four months of strong gains. Despite a sharp drop in housing permits, the U.S. LEI is still pointing to moderate economic growth through the remainder of the year,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board.

Swings in housing permits have been distorting recent LEI readings including for July. Permits, which fell 16 percent in Tuesday's housing starts report, more than offset what are a run of mostly neutral readings among other components. Given the uncertainties of measuring housing data (readings with plus or minus 11 percent variations are common) the index could have added another 0.54 points to the July indicator, instead of subtracting that amount, for a much stronger reading.

The strongest component is the rate spread which reflects the Fed's ongoing accommodative policy. Also pointing to strength are initial jobless claims, which are at rock bottom lows, and the report's credit index which points to a rise ahead for lending.

So what’s happening in China and the so-called emerging markets (including the Petro states, and Russia) will help to keep interest rates low, housing strong, and maybe the Fed from raising their short-term rates for some time to come.

Harlan Green © 2015

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

Fannie Says Better Growth For Rest of 2015

Popular Economics Weekly

“Economic activity was suppressed in the first quarter due largely to the West Coast port disruptions and difficult weather patterns across the Northeast, but the economy is expected to gain momentum throughout the spring and reach previously anticipated levels by year-end,” said a just released Fannie Mae’s Economic & Strategic Research Group report.

Is this a repeat of 2014, when growth surged for the rest of the year? It is what happened in 2014, due to last year’s deep freeze. In fact, it should be a repeat, as consumers aren’t spending much in Q1, the weather is as bad—whether blizzard, flood, or drought in the west—and Congress may be as gridlocked in ideological warfare as ever, and is therefore unable to do more harm to growth that it has in the past.

Graph: Trading Economics

We started out 2014 with a negative GDP growth rate of minus -2.1 percent. But it jumped to 4.6 and 5 percent in Q2 and Q3, such was the pent up demand from those very good jobs numbers. Just in the last 12 months 3.1 million jobs have been created, and consumers are in an almost ebullient mood. But consumers have to stop saving so much of their increased earnings, if that is to happen.

Fannie believes there’s also another ingredient to boost growth. An improved housing market as incomes improve and interest rates stay near record lows. “Our forecast calls for an increase in economic growth to 2.9 percent for 2015, which is a slight downward adjustment from our prior forecast but solid improvement nonetheless,” said Fannie Mae Chief Economist Doug Duncan

.

Graph: Econoday

Stronger retail sales gave an indication of the future. Sales of goods and services in March rebounded 0.9 percent after dropping 0.5 percent in February. The market consensus for March was for a 1.1 percent boost. Excluding autos, sales gained 0.4 percent, following no change in February. Expectations were for a 0.6 percent increase. Gasoline sales dipped 0.6 percent after a 2.3 percent increase in February. Excluding both autos and gasoline, sales rebounded 0.5 percent after declining 0.3 percent in February.

 

Graph: Econoday

However, the Conference Board’s Index of Leading Indicators is not so optimistic about future growth. Its 12 components predicted slower growth over the next 6 months. “In the negative column are building permits which, Thursday's disappointing housing starts report, fell sharply,” said Econoday.” This is a reminder that housing, despite some hopeful signs, has yet to boost economic growth. And declines in the factory workweek and for factory orders are reminders that the manufacturing sector, due in part to weak exports (and strong dollar), may now be pulling down economic growth.”

Let’s hope Fannie Mae is right. “Although we are beginning this year at a more modest pace compared to the above-trend numbers seen at mid-year 2014,” says the report, “the country’s aggregate income has benefitted from the improving labor market, which, combined with low gasoline prices, should help drive higher auto sales and overall consumer spending throughout 2015.”

So it may just be the gloom of winter’s cold that has been holding back economic growth in Q1, especially housing, and that more buyers will enter the housing market this selling season.

Harlan Green © 2015

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

GDP Growth Higher, Case-Shiller Prices Steady

The Mortgage Corner

The economy in the second and third quarters posted its best back-to-back growth in 11 years, And the Conference Board’s Index of Leading Economic Indicators showed strong growth over the next six months. offering fresh evidence that the U.S. will enter the new year with good momentum.

The government last Tuesday said gross domestic product rose at a 3.9 percent annual pace in the third quarter instead of 3.5 percent. Combined with a 4.6 percent gain in the second quarter, the U.S. has posted its best six-month stretch of growth since the middle of 2003.

Graph: Trading Economics

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.9 percent in October to 105.2 (2004 = 100), following a 0.7 percent increase in September, and no change in August.

“The LEI rose sharply in October, with all components gaining over the previous six months,” said Ataman Ozyildirim, Economist at The Conference Board. “Despite a negative contribution from stock prices in October, and minimal contributions from new orders for consumer goods and average workweek in manufacturing, the LEI suggests the U.S. expansion continues to be strong.”

The largest of the 10 contributors were manufacturer’s new orders, up some 10 percent, and the 10-year Treasury bond rate dropping from 2.62 percent to 2.21 percent, boosting consumer spending and housing sales.

“The upward trend in the LEI points to continued economic growth through the holiday season and into early 2015,” said Ken Goldstein, Economist at The Conference Board. “This is consistent with our outlook for relatively good, but not great, consumer demand over the near term. Going forward, there are continued concerns about slow business investment and lackluster income growth.”

 

Graph: Econoday

S&P/Case-Shiller reported almost half of major cities tracked in Tuesday’s housing data saw prices fall in September, while almost half saw them rise,. Overall, the gauge of home prices in 20 cities was basically unchanged in September, ticking down .03 percent, a sign the summer sales market has ended.

Annnual growth cooled as well, with year-over-year home prices rising 4.9 percent in September — the slowest pace since October 2012 — compared with annual growth of 5.6 percent in August.

Here’s a chart summarizing the results:

The leaders were Charlotte, NC, and Miami, while the year-over-year leaders in price rises were again Miami, Las Vegas and San Francisco. With the Federal Housing Finance Authority loosening some conforming mortgage qualification standards, and if conforming interest rates remain below 4 percent, we could see overall housing prices stabilize and maybe even begin to rise again in 2015.

But it all depends on the jobs market, of course, and we see robust job growth continuing into the first half of 2015, as well, before the Fed begins to raise their short term interest rates.

Harlan Green © 2014

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

Leading Indicators, Housing, Show More Growth Ahead

Financial FAQs

It looks like the US economy is kicking into high gear from its winter slump, as the Conference Board’s just released July Index of Leading Indicators (LEI) jumped 0.9 percent, the highest it’s been this year. It is a compilation of 12 leading measures of economic activity, such as interest rate spreads, employee hours worked that is a good predictor of future economic growth.

Graph: Econoday

“The LEI improved sharply in July, suggesting that the economy is gaining traction and growth should continue at a strong pace for the remainder of the year,” said Ataman Ozyildirim, Economist at The Conference Board. “Although housing has been one of the weakest components this year, the sharp gain in building permits helped boost the LEI in July. Financial markets and labor market conditions have also supported recent gains, but business spending indicators remain soft and their contribution marginal.”

So real estate may finally be taking its place as a leading indicator of economic growth, as in past recoveries. Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 2.4 percent to a seasonally adjusted annual rate of 5.15 million in July from a slight downwardly-revised 5.03 million in June. Sales are at the highest pace of 2014 and have risen four consecutive months, but remain 4.3 percent below the 5.38 million-unit level from last July, which was the peak of 2013.

Graph: Calculated Risk

Lawrence Yun, NAR chief economist, says sales momentum is slowly building behind stronger job growth and improving inventory conditions. “The number of houses for sale is higher than a year ago and tamer price increases are giving prospective buyers less hesitation about entering the market,” he said. “More people are buying homes compared to earlier in the year and this trend should continue with interest rates remaining low and apartment rents rising.”

Graph: Econoday

And housing starts for July jumped to an annualized pace of 1.093 million units-up from 0.945 million units the prior month. The latest number well topped expectations for 0.963 million units. July was up a sharp 15.7 percent (monthly), after dipping 4.0 percent in June.  July's pace was the highest level since November 2013.

Employment is also showing the largest improvement, with weekly initial unemployment claims below 300,000 again, reports the Labor Dept. This could mean August’s jobs report due in two weeks might show another drop in the unemployment rate, now at 6.2 percent.

Jobless claims have continued to trend lower, pointing to month-to-month strength for the August employment report coming up in 2 weeks. Initial claims fell 14,000 to a better-than-expected level of 298,000 in the August 16 week, a week that is also the sample week for the monthly employment report. A comparison with the July sample week shows a 5,000 improvement. The 4-week average, at 300,750, is up 4,750 from the prior week but is down 8,500 from the July sample week.

Continuing claims, lagging data for the August 9 week, are also down 49,000 from prior week to a new recovery low of 2.500 million. The 4-week average, at 2.528 million, is down 2,000 from the prior week and is down 16,000 from the July sample week. The unemployment rate for insured workers remains at a recovery low of 1.9 percent.

Real estate has historically led recoveries, but because of the severity of the housing bust, hasn’t until now. That is the main reason many economists say growth has been in the 2 percent range since the end of the Great Recession. But if housing continues its recovery, we could see GDP growth rising at least another 1 percent. And with builder optimism and new-home sales also surging, this could happen.

Harlan Green © 2014

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

Inflation Is Not The Problem

Popular Economics Weekly

All the talk that QE3 is about to end centers on when the Fed believes inflation will become a problem. Fed Chairman Bernanke doesn’t believe inflation will be a problem, as long as wages aren’t growing. And wages can’t even keep up with inflation at present, as he said in his latest congressional Q&A.

“There's a distinction between prices being high and prices rising...(cost of living) isn't going up, it's high, it's not going up. In other words, real wages are going down because even though inflation is very low wages have been growing slower than inflation.”

Graph: Econoday

This is substantially below the Fed’s target inflation rate of 2 to 2.5 percent, which is the level that shows sustained economic growth, according to the Fed. The reason for the spike in monthly CPI was energy prices, and the summer driving season. By major components outside the core, energy spiked 3.4 percent, following a partial rebound of 0.4 percent in May.  Gasoline surged 6.3 after no change in May.  The food component rebounded 0.2 percent, following a dip of 0.1 percent in May.

The Conference Board’s Index of Leading Economic Indicators (LEI) also mirrors the ongoing weak economic growth. The weak portions were in stagnant stock prices and building permits, while the positive contributors were higher long term interest rates (which predicts future growth), the leading credit index (more debt), lower average weekly initial claims for unemployment insurance, higher average consumer expectations for business conditions and manufacturers’ new orders for consumer goods and materials.  The factory workweek was a zero contribution.

Graph: Econoday

Right now, therefore, industrial production seems to be the main culprit, rather than the service sector, because of subdued exports. The Empire State and Philly Fed manufacturing surveys were slightly positive, but overall production has trended downward.

Graph: Econoday

So we can say that inflation should not be a problem for some time. Real inflation could even be years away, given that overall household incomes have shrunk 10 percent since 2000.  That means the decline in wages and salaries is the real problem holding back sustainable domestic growth.  Then the question becomes how to gain back some of that wealth?

Harlan Green © 2013

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

Consumer Sentiment, Leading Indicators Signal Higher Growth

Popular Economics Weekly

Both the University of Michigan’s Consumer Sentiment survey and Conference Board’s Index of Leading Indicators rose in May, signaling that employment and growth may be stronger than forecast by most economists.

How can that be with 7.5 percent of the workforce looking for work and some 18 million that have either part time, or no work at all? The real answer is the U.S. economy is almost too complex to accurately measure, and economists have their biases when predicting growth. In fact, few understand what is called macroeconomics, which helps to predict how government polices affect growth.

For instance, Haver Analytics surveys monthly a group of leading economists, and found that the latest Blue Chip survey foresaw U.S. economic growth of 1.6 percent in Q1’13 following an anemic 1.4 percent rise during Q4'12, when Q1 GDP growth was actually 2.5 percent.

“There is, however, divergence as to the degree of further improvement,” wrote Haver Analytics in a major understatement. “By the end of 2013, the consensus foresees GDP growing at 2.7 percent rate with the top 10 forecasts at 3.6 percent and the bottom 10 at 1.8 percent. The same divergence holds true for next year's expected growth. The consensus of a 3.0 percent advance in real GDP for Q4 2014 is derived from 3.8 percent at the top end and 2.2 percent at the bottom.”

The Blue Chip Indicators also forecast a 7.5 percent unemployment rate by the end of 2013, when it has already dropped to that level in May. The Congressional Budget Office also forecasts 2 percent growth this year, rising to 3.5 percent in 2014.

Graph: Calculated Risk

Consumer spirits are improving dramatically this month in what very well may be a reflection of improvement in the jobs market. The consumer sentiment index jumped to 83.7 for the mid-month reading vs 76.4 for the final April reading and vs April's mid-month reading of 72.3. The Econoday consensus was looking for 78.0 with the high-end estimate at 82.5. The latest reading is near the recovery high set in November.

Boosted by strength in housing permits, the Conference Board’s index of leading economic indicators (LEI) surged 0.6 percent in April, double the rate of growth expected by the Econoday consensus and at the high-end of the Econoday consensus. The gain points to rising economic momentum six months out.

Also showing strength are financial measures, including credit activity, as well as jobless claims and the stock market. On the negative side are manufacturing measures, which reflect this sector's ongoing bumpy ride, as well as consumer expectations. This latter factor, however, is very likely to turn positive in May judging by this morning's big jump in the consumer sentiment report.

Graph: Haver Analytics

The bottom line is that conditions may be improving enough that consumers are willing to spend again. The household debt-service ratio - an estimate of the share of debt payments to disposable personal income - fell to 10.38 percent in Q4’12, reported the Federal Reserve.

That was the lowest since the series started in 1980. In comparison, the ratio, which takes into account outstanding mortgage and consumer debt, was 10.56 percent in the third quarter. It peaked in the third quarter of 2007, shortly before the U.S. economy fell into recession. This may give consumers, who power 70 percent of economic activity, enough confidence to spend again.

Harlan Green © 2013

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

2013 U.S. Economy Finally In Recovery

Popular Economics Weekly

With tax rates returning to more normal levels from the rollback of Bush era tax cuts, and Republicans giving up on denying debt ceiling increases until April that would force more cuts in government spending, there seem to be very few domestic factors to hold back more robust growth in 2013.

The “No Budget, No Pay-Act” bill could also open a path to a longer term increase: It would require the House and Senate to each agree by April 15 to a budget resolution for fiscal year 2014. And such a measure, which is intended to set spending and revenue levels for the next five to ten years, might include debt ceiling increases, say congressional staffers.

We are already seeing signs higher growth is happening—maybe even approaching 3 percent GDP growth in 2013. The Conference Board’s Index of Leading Economic Indicators (LEI) just jumped 0.5 percent in December, industrial production is rising again, and retail sales are surging. This and increased housing production are sure to increase hiring. Weekly initial jobless claims have already fallen to 330,000, close to the longer term average.

Graph: Calculated Risk

The drop in jobless claims was the biggest factor in the LEI increase that predicts future growth. Conference Board economist Ken Goldstein said: “The latest data suggest that a pickup in domestic growth is now more likely, compared to a few months ago. Housing, which has long been a drag, has turned into a positive for growth, and will help improve consumer balance sheets and strengthen consumption. However, for growth to gain more traction we also need to see better performance on new orders and an acceleration in capital spending.”

What will help capital spending is surprising strong industrial production, with the manufacturing component up 0.8 percent following an increase of 1.3 percent the prior month.  Motor vehicle production was strong with a 2.6 percent rise after a 5.8 percent boost in November, along with other sectors.  Excluding motor vehicles, manufacturing output increased 0.7 percent after a 0.9 percent rebound in November.

Graph: Econoday

And retail sales are increasing 5 percent per year, almost back to early 2000 levels. Gains were led by furniture & home furnishings, food services & drinking places, and health & personal care.  A decline was seen in electronics & appliance stores. Overall consumer spending was moderately healthy in December and likely will lead many economists to bump up their fourth quarter GDP forecast (which had been nudged down last week from a negative international trade report).

Graph: Econoday

More housing construction in particular will boost growth this year, as it leads directly to new construction jobs, as well as boosts the financial sector. The jump in December housing starts was led by the multifamily component although single-family starts also were up notably.  Multifamily starts jumped 20.3 percent after a 6.3 percent decline in November.  The single-family component gained 8.1 percent in December after decreasing 3.2 percent the prior month.

The lesson seems to be that for all the political quarreling, there are fundamental factors driving growth. Increased hiring is driving up the demand for goods and services. Record low interest rates are boosting housing and stimulating exports due to the weaker dollar. The U.S. economy seems finally to be out of intensive care, and government is now aiding, rather than obstructing better growth.

Harlan Green © 2013

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

Better Growth and Jobs Ahead?

Popular Economics Weekly

The U.S. economy is now growing faster than the rest of the world. And the Fed just announced it will discuss a possible expansion of the size of its third round of bond buying and “better ways to guide markets about future policy actions” at this Wednesday’s FOMC meeting.

This is huge, and markets rallied on Monday’s announcement prior to the meeting because there is no other stimulus spending in the works with austerity causing recessions in Europe and even China slowing. So it looks like the U.S. will once again be the world’s engine of growth that prevents another worldwide recession.

Even Barron’s is sounding upbeat on future growth—at least according to the Levy Forecast. The U.S. is “improving its manufacturing, competitiveness, containing its depression, cleaning up private balance sheets, developing greater energy independence. (read abundant natural gas)…Furthermore, the people and government of the U.S. have withstood all kinds of military, political, and economic challenges without collapsing or losing their free markets or culture of innovations.”

In the case of the Fed, words can mean as much as actions, since no one wants to bet against our Federal Reserve—and by proxy the U.S. Dollar as the world’s preeminent reserve currency.

The biggest monetary-policy development since the last Fed meeting was that Narayana Kocherlakota, president of the Minneapolis Fed, also came out in support of more accommodative numerical targets. In what one Fed watcher called a plot twist out of an Alfred Hitchcock movie, Kocherlakota called on the Fed to hold interest rates at zero for another four years until the unemployment rate hits 5.5 percent. Only a few months earlier, Kocherlakota, a leading inflation hawk, had advocated a rate hike before the end of this year.

Two signs of greater growth ahead were boosts in retail sales and the Conference Board’s Index of Leading Economic Indicators (LEI). Housing prices are also rising again as inventory shortages are slowing sales.

Graph: Econoday

The consumer was out spending more than expected in September—even after discounting gasoline prices.  Apple also appears to have bumped the numbers up.  Total retail sales in September advanced 1.1 percent after gaining 1.2 percent the month before.  Motor vehicle sales increased 1.3 percent after a 1.8 percent jump in August.

The best known predictor of future growth is the LEI, and the Conference Board’s index of leading indicators jumped in September but with help in August from a downward revision. The leading index increased 0.6 percent in September, following a 0.4 percent decline the prior month—originally down 0.1 percent.

Graph: Econoday

And though existing-home sales are slowing because of falling inventories, the national median existing-home price for all housing types was $183,900 in September, up 11.3 percent from a year ago. The last time there were seven consecutive monthly year-over-year increases was from November 2005 to May 2006, according to the NAR.

Graph: Calculated Risk

The Fed has made what amounts to a promise to not only keep interest rates low for years—maybe up to 4 years, if Fed Governor Kocherlakota is to be believed—until the unemployment rates drop substantially. This is a promise that not only the U.S., but the whole world will listen to given the Fed’s preeminence in supporting growth.

Harlan Green © 2012

Increased Consumer Spending a Good Sign

Financial FAQs

The most recent retail sales show consumers are able to spend more, even as they borrow more. Add to that credit card delinquencies are at an 18-year low, according to credit reporting company Transunion Corp., and we have a picture of an improving economy. This is, the fact that consumers can continue to cure their debt problems, while spending more, is a good sign.

"The national credit card delinquency rate continues to remain at the lowest levels we've observed in 18 years," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. "It's a positive situation because average borrower balances have increased over the past year as new card originations have grown."

Graph: Econoday

Retail sales soared in July. Total sales rose 0.8 percent for the strongest rise since February with ex-auto sales also up 0.8 percent for, again, the best showing since February. All components show gains including motor vehicles, general merchandise, health & personal care, furniture, and restaurants. Clothing also shows a significant gain, one that points to strength for the back-to-school season. Ex-auto ex-gas the gain is 0.9 percent for the best showing since January, said Econoday.

This was predicted by the surge in consumer borrowing. Total credit outstanding rose $6.5 billion in June, following a $16.7 billion jump the month before, reported the Federal Reserve. The latest gain was led by non-revolving credit, gaining $10.2 billion in June after a $9.2 billion rise in May. Non-revolving credit is mostly for motor vehicle purchases and student loans.

 

Graph: Econoday

What is behind greater consumer spending is the consumer feels better about the economy despite the recent run up in gasoline prices. Apparently it is due to a somewhat improved jobs picture with 163,000 net payroll jobs created in July. Strength was in the consumer's assessment of current conditions which was up solidly at 87.6 versus July's 82.7. This gain also underscores the improvement seen in weekly jobless claims, which are now down in the 350,000 range from more than 400,000 last year.

Graph: Econoday

So there are signs that the recovery may be gaining a little more strength—emphasis on little, however.  The Conference Board’s July index of leading economic indicators rebounded 0.4 percent, offsetting the June decline of 0.4 percent. It is at its highest level since February 2007, which should boost consumer confidence even higher.

Graph: Econoday

The improvement in jobless claims, which points to improvement in underlying job growth, together with improvement in building permits led the increase in the overall index with each component having a contribution of 0.18 percentage points.

Also with positive contributions were the report's credit reading, the stock market, and the report's imputed readings for new orders on both consumer and capital goods which are government data that have yet to be released, said Econoday.

So July was a good month for consumers, and points to further economic improvement for holiday retail sales, which should drive economic growth for the rest of the year. So consumers seem to be focusing more on improving their own financial condition, rather than the discouraging news about China, Europe, and a deadlocked Congress.

Harlan Green © 2012