Why Our Record Inequality?

 Financial FAQs

“Why are we the only developed country without universal health care, tuition free public college, mandated paid vacations and paid child leave, among other benefits, all major indicators of social well-being? We should not need a Michael Moore documentary, such as his latest Where To Invade Next, to tell us what we either no longer provide to our citizens or that cost more?” H Green/Huffington Post

CIA World Factbook

I first wrote a version of this column in 2016, on seeing what I consider to be Michael Moore’s best documentary, Where to Invade Next, a portrait of what other countries have taken from us that we no longer provide for our own citizens, a better standard of living

Nobelist Robert Shiller lamented this fact in a recent New York Times Upshot column. "Economic inequality is already a concern, but it could become a nightmare in the decades ahead, and I fear that we are not well equipped to deal with it."

In fact, the latest CIA World Factbook statistics have told Americans for years that we have a very unequal society; in fact the greatest income inequality in the developed world.

The US is ranked 102nd in the Gini inequality index of 145 countries that the CIA measures for income distribution. Only China of major countries is lower. Even Russia has less income inequality.

And it is this statistic that best highlights the social benefits that all Americans no longer enjoy. For instance, US residents going to public colleges and universities paid no tuition until the 1970s, making a university education prohibitively expensive. 

Another measure that helps to smooth out income inequality is an adequate national minimum wage, which is still $7.25 per hour in many states that did not enact a higher minimum wage of their own, whereas Australia’s national minimum wage, a country with similar demographics, is $16 per hour for a full time working adult.

Why aren't we equipped to deal with it? Dr. Shiller and even Angus Deaton co-discoverer with wife Ann Case of the exploding drug and suicide rates of non-college educated white adults, commenting on what he called the "grotesque expansions in inequality of the past 30 years," gave a pessimistic prediction: "Those who are doing well will organize to protect what they have, including in ways that benefit them at the expense of the majority."

And that has happened since the 1970s and the dominance of free market, so-called Laissez Faire ideologies that strove to cut taxes and government regulations for the sole purpose of protecting the wealth “at the expense of the majority” which has resulted in the election of Donald Trump twice.

Yet we do know how to level the playing field. We should reenact the labor laws of earlier years that allowed collective bargaining and disallowed the right to work laws in 25 states where a mass exodus from unions occurred with the loss of manufacturing jobs that paid higher wages and salaries. Then raise the income tax rate that prevailed before President Reagan succeeded in lowering taxes of the wealthiest 70 percent of Americans.

We could also pass real universal health coverage that all other countries enjoy. It would lower health costs--maybe to what it is in other developed countries, which is 50 percent less than Americans currently pay.

So, we do know how to enact economic programs that create a more equal society. European countries have succeeded via higher tax rates but provide many more services and at much cheaper costs than so-called private enterprise.

Private enterprise has been allowed to decimate the public good to such a degree that the CIA World Factbook showed an unpleasant fact; we are in danger of becoming a developing country in the company of other Third World, developed countries once again.

And because of it, the CIA announced this year the Trump administration is no longer allowing its publication, in a vain attempt to hide the damage over the last 30 years that such income inequality has done to our democracy.

Harlan Green © 2026

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

Irrational Exuberance vs. Irrational Pessimism?

 Popular Economics Weekly

I don’t believe Wall Street investors are irrationally exuberant at present, contrary to those that say we are now in a stock market bubble with the record level S&P and DOW indexes.

It’s as easy to be irrationally pessimistic about the future as are many Main Streeters that don’t feel so good about themselves or the US economy.

The indexes are high because corporations show record profits, in part thanks to the $trillions in pandemic aid, but also because of the excessive profit-taking by major retailers that took advantage of the product shortages caused by the COVID pandemic shutdowns, which has been confirmed by the FTC.

Large grocery store chains exploited product shortages during the pandemic by raising prices significantly more than needed to cover their added costs and they continue to reap excessive profits, according to a Federal Trade Commission report.

Much of Main Street, ordinary working adults in the main, have become the opposite, irrationally pessimistic, in my opinion. Surveys such as a recent PEW Research survey I highlighted last week show this is so.

In a poll by PEW Research, “About three-in-ten Americans (28%) currently rate national economic conditions as excellent or good, while a similar share (31%) say they are poor and about four-in-ten (41%) view them as “only fair.”

PEW

Why such divergent opinions when we are fully employed and have surging economic growth? The most recent Conference Board’s Consumer Confidence survey helps to explain it.

Right and left wing partisans are now controlling the debate. Middle-income Americans, which are most working Americans, are exhausted and pay little attention to economic data, which is difficult to understand even by economists.

Most consumers remain concerned about high inflation, the contentious budget debate, and partisan bickering of the Presidential election campaign.

“Consumers remained concerned with elevated price levels, which predominated write-in responses, said Dana Peterson, its Chief Economist. “March’s write-in responses showed an uptick in concerns about food and gas prices, but in general complaints about gas prices have been trending downward. Indeed, average 12-month inflation expectations came in at 5.3 percent—barely changed from February’s four-year low of 5.2 percent.”

“Recession fears continued to trend downward both in write-in responses and as measured by consumers’ Perceived Likelihood of a US Recession over the Next 12 Months,” he continued. “Meanwhile, consumers expressed more concern about the US political environment compared to prior months.”

The PEW survey chart above shows the tug-of-war between extreme right and left political factions controlling the debate, while 41% of the Americans surveyed viewed economic conditions as “only fair”.

Why? Most Americans are exhausted and still recovering from the pandemic. There is a divergence between those experiencing irrational exuberance vs. irrational pessimism because most of those polled aren’t as knowledgeable about real economic data and business cycles that are published by the government and private providers. So they must rely on their immediate experience; much of it due to the trauma caused by the COVID pandemic that killed one million Americans.

PEW said, however, expectations for future economic conditions are more positive than they were last spring: Today, roughly a quarter say that they expect economic conditions will be better a year from now (26%) – up from 17% in April 2023.

There is hope, in other words, because of a resurgent US economy, the strongest economy in the world, that they will eventually realize their jobs are safe and secure in such an environment.

Harlan Green © 2024

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

In The Age of Anxiety

Popular Economics Weekly

thesocialhistorian.com

We are now in a full-blown “Age of Anxiety”; not the first, of course. There was as much anxiety during the 1918-20 Spanish Flue pandemic that reportedly killed 50 million in a series of worldwide outbreaks lasting more than two years.

If we do not find ways to lessen anxiety in this age due to the novel coronavirus pandemic, we might seriously experience what Dr. Rick Bright, who was recently transferred from his position as Biomedical Advanced Research and Development Authority director at HHS has described as “the darkest winter in modern history.”

“The mortality of the pandemic could be “unprecedented” and ultimately outstrip the 50 million casualties of the 1918 influenza epidemic," wrote Bright in his prepared testimony,“ without a science-based national response to the pandemic.”

There is much more to the current age of anxiety. New Deal economist John Kenneth Galbraith wrote a book called The Age of Uncertainty in the 1970s that attempted to explain the general anxiety brought on by post-WWII institutions that were no longer stable.

“In it we contrast the great certainties in economic thought in the last century with the great uncertainty with which problems are faced in our time,” he said. “Little of this certainty now survives. Given the dismaying complexity of the problems mankind now faces, it would surely be odd if it did.”

This anxiety has been compounded by a record income inequality, the worst since the Great Depression. A 2018 PEW Research survey showed the wage stagnation of American salaried workers over almost two generations.

PEW

Its study found that today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers, the top 10 percent of income earners.

I have frequently cited Robert Shiller, a Nobel Laureate economist who says anxiety has reached such a level that it is becoming a second pandemic, an anxiety pandemic that is contagious because “stories of fear have gone so viral that we often think of them constantly,” which could delay the recovery because of the public’s irrational responses.

“Business closures, soaring unemployment, and loss of income fuel financial anxiety, which may, in turn, deter people, desperate for work, from taking adequate precautions against the spread of the disease…But, unlike COVID-19 itself, the source of our anxiety is that we are unsure what action to take.”

And that is already happening with news pictures of crowded bars and restaurants  in states like Texas and Georgia, where they haven’t met the 14-day requirement of falling infection rates decreed by the CDC.

“Unless we get the virus under control, the real recovery economically is not going to happen,” says Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, in a recent interview. He goes on to say that “even if social distancing standards were relaxed, it wouldn’t restore the health of the economy as some protesters have implied it would.”

It is the economic health of Americans that most concerns Americans, which means remedies must be found to curb the rising anxiety, if there is to be something less than a Great Recession or Depression.

And it has to be a united focus of governing authorities on the scientific message that this pandemic is bringing; we are all in this together.

Harlan Green © 2020

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

The Coming Anxiety Pandemic

Popular Economics Weekly

Dryuz.com

Americans’ confidence in their future is sinking fast as they decide who to trust during the COVID-19 pandemic. Hence what Nobel laureate economist Robert Shiller has called the rise of its result—an anxiety pandemic.

Dr. Shiller’s predictions on financial behavior include a psychological element. As can be seen from the rising debate over masks, or when and how to open public spaces, the level of anxiety over this pandemic is already sky high.

This, unfortunately, will slow down any sustainable recovery that doesn’t take into account how consumers in particular react to the remedies being proposed to tame COVID-19. A good outcome doesn’t look good at the moment because of the mixed messages coming from on high—the federal government vs. states, Trump’s advisors vs. actual scientific experts.

“It is not good news when two pandemics are at work simultaneously,” Shiller said in a recent Project-Syndicate column. “One can feed the other. Business closures, soaring unemployment, and loss of income fuel financial anxiety, which may, in turn, deter people, desperate for work, from taking adequate precautions against the spread of the disease.”

The University of Michigan’s final April sentiment survey sank to a 7-year low of 71.8. The current conditions component bore the brunt of the deterioration, falling 33 points to 74.3.  Expectations posted a smaller decline, with that index falling just ten points, albeit to a lower level of 70.1.  The record low for the monthly Michigan headline index is 51.7, set 40 years ago, and that could be repeated.

Expectations for the recovery are now running all other the map. The White House has revised its estimate of coronavirus deaths from 100,000 to more than 200,000 back to more than 100,000, while the latest Washington state and Johns Hopkins survey raised it latest estimate from 135,000 to 200,000 deaths, in part because of some states opening too early and thus ignoring White House guidelines of at least two weeks of declining infection rates before lifting stay-in-home orders.

Why so much confusion? Major economists are becoming alarmed at the uncertainty being manifested by the messaging.

Nobel economist Paul Krugman attributes the uncertainty of message to Trump and the Republican Party’s refusal to rely on scientists for advice.

”The disdain for experts, preference for incompetent loyalists and failure to learn from experience are standard operating procedure for the whole modern G.O.P.,” he said recently.

Obama economic advisor Austin Goolsbee said as much on the struggles to provide recovery money:

“The administration has been adamant that it is not required to be fully transparent or accountable in handling these (recovery) funds…They undermine the credibility of the crisis response, which the government will desperately need soon enough.”

Add to this the latest employment numbers. Private payroll data service ADP just predicted a loss of 20 million payroll jobs in its latest private sector survey.

ADP

In other words, we will be seeing much darker days ahead if the American public cannot trust the words of our leaders. They cannot unite if they are listening to different voices. “It’s not about red or blue states,” New York Governor Andrew Cuomo has been saying at his daily press conference. “It’s not about ‘you’ or ‘me’, it’s about ‘we.”

Harlan Green © 2020

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

Consumer Sentiment in the Dumps

Financial FAQs

MarketWatch

Consumer sentiment is plunging.  And why not? With an additional 6.6 million initial unemployment compensation claims this week, it brings the total in just the past three weeks to 16.8 million since the COVID-19 national lockdown of businesses and stay-in-home orders, according to the Labor Department.

It has already pushed the revised March unemployment rate to 5.4 percent, but it could easily top 10 percent in future months if unemployment claims rise to +20 million, say economists. That would top numbers for the Great Recession.

The University of Michigan preliminary April sentiment survey sank to a 7-year low of 71.0. The current conditions component bore the brunt of the deterioration, falling 31 points to 72.4.  Expectations posted a smaller decline, with that index falling just ten points, albeit to a lower level of 70.0.  The record low for the monthly Michigan headline index is 51.7, set 40 years ago, and that could be repeated.

U.ofMichigan

“Consumer sentiment plunged 18.1 Index-points in early April, the largest monthly decline ever recorded,” said surveys chief economist Richard Curtin. “When combined with last month's decline, the two-month drop of 30.0 Index-points was 50% larger than the prior record. Of the two Index components, the Current Conditions Index plunged by 31.3 Index-points, nearly twice the prior record decline of 16.6 points set in October 2008.”

This is serious for a number of reasons. It affects consumer spending, the main engine of economic growth, but we also can’t ignore the psychological effects of such a worldwide pandemic, which Nobel laureate economist Robert Shiller labels a second anxiety pandemic that causes irrational behaviors—both financially and personally—in a prolonged business shutdown.

“It is not good news when two pandemics are at work simultaneously,” he said in a recent Project-Syndicate column. “One can feed the other. Business closures, soaring unemployment, and loss of income fuel financial anxiety, which may, in turn, deter people, desperate for work, from taking adequate precautions against the spread of the disease.”

An anxiety pandemic can cause a deeper recession, as consumers save more and spend less over a longer period as well. Starbucks is already reporting a drop in same-store coffee sales of 60-70 percent, reports MarketWatch. Its only business during the lockdown is takeout or drive-thru pickups, which might become even more prevalent during and after lifting of the lockdown if such changes in consumer behavior become permanent.

Such a jarring economic disruption—even if it doesn’t rise to the level of a Great Depression or Recession—has to cause permanent changes in behavior.

The loss of consumer confidence can be deadly to any recovery. We already know about the mounting Deaths of Despair with the rise in drug addiction, alcoholism, suicides among the long term unemployed, and can only hope this ‘medically induced’ work stoppage isn’t prolonged.

Harlan Green © 2020

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

Can We Expect More Than One Pandemic?

Popular Economics Weekly

Wrightson/ICAP

Yes, says behavioral economist Robert Shiller, who won his Nobel prize for the study of human behavior in financial markets. Why? Financial market investors are panicking because of the COVID-19 pandemic, for starters, which could affect the general public’s financial behavior as well, and so wreak even more damage to crashing financial markets.

“We are feeling the anxiety effects of not one pandemic but two,” said Dr. Shiller in a recent Project-Syndicate article. “First, there is the COVID-19 pandemic, which makes us anxious because we, or people we love, anywhere in the world, might soon become gravely ill and even die. And, second, there is a pandemic of anxiety about the economic consequences of the first.”

The first indication of a looming loss of confidence in the economy and jobs is showing up in consumer sentiment surveys, per Wrightson’s above graph. The University of Michigan’s consumer sentiment index fell by 12 percent in March. 
The Conference Board’s confidence survey fell as well.

“Consumer confidence declined sharply in March due to a deterioration in the short-term outlook,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index remained relatively strong, reflective of an economy that was on solid footing, and prior to the recent surge in unemployment claims. However, the intensification of COVID-19 and extreme volatility in the financial markets have increased uncertainty about the outlook for the economy and jobs. March’s decline in confidence is more in line with a severe contraction – rather than a temporary shock – and further declines are sure to follow.”

Dr. Shiller knows a lot about human behavior, and the irrational behavior of financial market investors. He wrote about irrational exuberance in his best-seller of that name in 2000, just as the Dot-com bubble burst from overinvestment building the digital infrastructure (remember all those fiber-optic cable networks being laid?).

And the Great Recession was caused by the busted housing bubble—due to home buyers bidding up housing prices to stratospheric heights because of the popular thought that housing prices could never decline—another example of irrational exuberance.

Now what about its opposite—irrational pessimism, or a contagion of fear that stock prices have no visible bottom; or a cure or vaccine will not be found in time to save many companies from bankruptcies, due to a prolongation of social isolation and business shutdowns?

“The effects financial anxiety has on the stock market may be mediated by a phenomenon that psychologist Paul Slovic of the University of Oregon and his colleagues call the “affect heuristic,” said Shiller. “When people are emotionally upset because of a tragic event, they react with fear even in circumstances where there is no reason to fear.”

Dr. Shiller’s research has found that people tend to react to rumor, word-of-mouth, or popular media stories rather than actual facts.

In a joint paper with William Goetzmann and Dasol Kim, for example, Shiller found that people living within 30 miles of the epicenter of a substantial earthquake significantly raise their expectation that there could be a 1929- or 1987-size stock market crash.

Similar fears may have caused the plunge in market asset values today, where interest rates and Treasury bond yields have plunged to historic lows as investors flee to save haven investments in order to preserve their cash.

While many Americans might have faith in upcoming cures for COVID-19, they might not have such faith in a restoration of the economy and jobs. It took years for markets to recover from the Great Recession, even with the Fed holding their rates to almost zero.

I maintain that we will need some form of a New Deal, or even Green New Deal—prolonged market interventions by government in a word—to reassure Americans and the rest of the world that the second, anxiety pandemic can be controlled as well.

Harlan Green © 2020

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

Nobelist Daniel Kahneman on Thinking, Fast and Slow

Financial FAQs

Amazon

Thinking, Fast and Slow; what else should Nobel Laureate Daniel Kahneman be noted for, the son of Lithuanian Jewish parents fleeing the Russian Empire in the 1920s who grew up to the sound of black boots marching during the Nazi occupation of Paris, if not the study human behavior in both wartime and peacetime?

This was the second year Dr. Kahneman came to Westmont’s annual Breakfast Lecture series that packed the Santa Barbara Hilton’s largest ballroom. I’m sure many were there because they were looking for some insight into how our species may react to the current coronavirus scare that some are characterizing as a ‘Black Swan’ event (mostly economists), meaning a very serious event with no predictable outcome.

Dr. Kahneman emphasized that our decision-making propensities come from different parts of the brain that cause us to both ‘narrow frame’ (fast process) and ‘broad frame’ (slow process) the information we take in. And we need both parts to reach a rational decision that is in our best interests.

We have a tendency, or bias, to come to a conclusion or make a decision quickly, but Dr. Kahneman says not so fast! We need the slower-thinking side of us to see the larger picture. He said it can be just a matter of closing one’s eyes for a few minutes that slows down our thought process while allowing us to process what we’ve just taken in intuitively.

We should take the time to collect all the pertinent, ‘cognitive’ facts, in order to slow down our first reaction to what is right in front of us. He used several examples of narrow vs. broad frame thinking, such as forecasting future events, or diagnosing the high rate of skin cancer among farmers.

I was particularly interested in his take on how we make economic decisions. He is at the foundation of behavioral economics, or how humans make financial decisions that are not always in our best interest; particularly if we allow so-called free, unregulated financial markets to make choices for us.

There are now at least three Noble prizes that have been awarded for information biases in how we take in information and make decisions on how to intelligently invest. And they are mostly Keynesian, or neo-Keynesian economists that believe governments must take an active role in regulating markets to prevent excessive speculation, for instance, as happened with the Dot-com bubble in 2001, or housing bubble that resulted in the Great Recession.

Nobel economist Robert J Shiller described in his best-selling book, Irrational Exuberance how many investors and homebuyers relied on rumor, hearsay, or word of mouth, rather than serious research to buy a home, or invest in the financial markets and thereby drive up asset prices (such as housing) to unsustainable levels.

Economists and Psychologists call it herd behavior when investors flock to a particular investment because others are doing the same, rather than researching the history of the company or index to see if it is overvalued.

Dr. Kahneman and his partner, Amos Twersky, found that humans have an optimistic bias in forecasting favorable outcomes that we must be aware of, when making decisions based on those forecasts. We therefore need to look at the broader picture.

How will the lowering of interest rates, as the Fed is currently doing, affect both poor and wealthy consumers, for instance? Should we save more and spend less in the event of an economic slowdown or recession?

Stocks are overvalued in this 11^th year of the current recovery just by looking at the current price-to-earnings ratio of the S&P. Why? The record profits of those corporations cannot be sustained with slower population growth and labor productivity—the two main factors that determine economic growth. Their earnings, the denominator of the P/E ratio, will therefore shrink, causing the ratio to rise above historical levels, hence certain stock assets become overvalued and will eventually fall.

That is what happened during the 2001 Dot-com stock bubble and 2007-09 Great Recession. P/E ratios soared to levels last seen before the Great Depression, which means history does provide lessons, if heeded.

Here are two of behavioral economist and Nobel prize-winner Robert J Shiller’s most memorable statements in Irrational Exuberance: “ 'It amazes me how people are often more willing to act based on little or no data than to use data that is a challenge to assemble.”…'The ability to focus attention on important things is a defining characteristic of intelligence."

We know it’s best to slow down one’s thinking process before making an important decision. But how often do we?

Harlan Green © 2020

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

We Need New Jobs Deal

Calculated Risk

The best picture we have of current and future job trends is the Labor Department’s JOLTS report (i.e., Job Openings and Labor Turnover Survey). Calculated Risk’s colorful graph shows Job Openings (yellow line) hasn’t yet dropped below 7 million openings in August, though it is falling.

This is a given while there were 5.8 million Hires (dark blue line), so there are still 1.2 million job vacancies searching for employees.  It gives a good picture of the huge labor turnover rate in the $20 trillion U.S. economy.

It is also why it is so difficult to predict the next recession, or depression. I maintain we need another New Deal that boosts public spending on health care, education, infrastructure, R&D, and the environment, if we want to continue the longest economic recovery ever.

How low must the number of Job Openings fall—maybe 1-2 million?—for anyone to begin to worry that a lack of available jobs that promotes real productivity might begin to hurt growth?  The yellow line of the Job Openings tally dipped to some 2.4 million op enings in 2009 at the bottom of the Great Recession.

 The red and blue columns show Layoff, Discharges and other, and Quits (light blue column), which are basically flat, which means we are at the top of this business cycle.  The only hint of a downward trend in job formation is the downward curve in the number of Job Openings (yellow line).

We really must look for any downward trend in retail sales, and consumer spending to tell us the direction of economic growth.  Retail sales dropped 0.3 percent last month as households slashed spending on building materials, online purchases and especially automobiles, the first spending decline since February.

What else should we look for?  Nobel prize-winning behavioral economist Robert Shiller believes consumer spending is holding up this longest economic upturn since WWII because of the Trump presidency.  The fact that he touts himself as a successful businessman creates a general sense of optimism about jobs and the economy.

“Trump has for decades touted a glamorous narrative of his life by “surrounding himself with apparently adoring beautiful women, and maintaining the appearance of vast influence,” Shiller said in a recent op-ed in Britain’s the Guardian newspaper. “The end of confidence in Trump’s narrative is likely to be associated with a recession,” Shiller warned.

So such optimism can be a two-edged sword.  While Trump’s affluent lifestyle has been “a resounding inspiration to many consumers and investors … a severe recession may be his undoing,” Shiller warned.

What else could cause such an outcome?  The Great Recession that ended in June 2009 could have been a second Great Depression; but for the Obama administration’s passage of the $850 billion American Reinvestment and Recovery Act emergency aid package that gave states as well as Washington enough dollars to stop the losses.

But, alas, the religiously right wing Tea Party that resisted almost all public spending took over the house in 2010, sharply cutting back further government programs. The focus turned to austerity measures that hurt the Midwest and southern states depending on government largesse to support them, after the loss of all those manufacturing jobs.

The result is the discontent we see today.  We need another New Deal that will invest in our future generations--those roads, bridges, schools; need we say more?--rather than a “glamorous lifestyle”, to sustain this recovery.

Harlan Green © 2019

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

What is a Common Sense Stock Market?

Financial FAQs

Pundits and stock traders seem to believe Friday and Monday’s stock “massacre” was caused by too-quick trigger fingers—in computers controlled by algorithms, not people.

Whereas, investors and traders using their common sense would have seen the ‘yuge’ drop in valuations made no sense for many of the S&P 500 stocks of the largest US corporations that were making record profits.  Then they might not have oversold their holdings, as happened to those with the trigger-finger algorithms.

For instance, Boeing’s common stock price dropped $20 in a day when news came out that its profits are increasing and there are predictions of large future cash flows from its booming airline and defense businesses. And corporations such as Boeing will be saving $billions in future taxes due to the lower corporate tax rate.

What about the rest of the economy? Stocks have historically been a prediction of future economic activity, since they are priced at a discount to future earnings. So the total annual return of capital gains plus dividends can be a prediction of a company’s financial health.

Nobel laureate economist Robert Shiller in his best-selling Irrational Exuberance, a historical analysis of stock and bond yields, says stocks have earned $7 per year on average in capital gains plus dividends, bonds 4 percent per year for the past 100 years. 

And Dr. Shiller said Price-to-earnings ratios, another measure of stock values, averaged 15 to 1 historically. Today, the S&P P/E ratio is 17, meaning 17 times earnings, which is high, but not that high. In fact, the stock P/E’s reached 26 times earnings just before the Great Depression, and an oxygen-deprived 44 times earnings in 2000 on the eve of the dot-com crash.

That was why Dr.Shiller and Fed Chairman Alan Greenspan sounded the alarm over the  irrational exuberance that was “infecting” investors at the time. Dr. Greenspan’s famous warning was given in 1996, four years before the 2000 crash, when he said: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

Japan has finally worked their way out of two decades of virtual deflation at a tremendous cost to growth, because of their spate of irrational exuberance. They now rank behind China and the European Union in the size of their economy.

Our stock market is in a similar circumstance today when too much money is chasing 50 percent fewer publicly listed stocks than in 1996, as I said in yesterday’s column. And there are already indications that corporations will be doing more of the same with the new tax savings.

But there is good news for employees. Friday’s unemployment report unveiled the largest pay increase in years. Average hourly earnings jumped to a year-on-year expansion best of 2.9 percent.  This is while the Fed’s core PCE inflation index is just 1.5 percent, way below its 2 percent stated target.

Graph: Econoday

Wages and salaries, the actual hourly incomes of normal working stiffs that excludes interest-bearing bank accounts, rental income, retirement benefits, stock dividends or annuities, actually rose year-on-year to 4.9 percent for its 5th straight climb and is now at its highest rate since November 2015.

And the just released JOLTS report of job hires and openings showed more workers quitting jobs voluntarily, which means they were finding better paying jobs. Job openings have slowed a bit, down 2.8 percent in December to 5.811 million, whereas Hires are steady, down fractionally in the month to 5.488 million. But that is keeping the spread between openings and hires also steady, at 323,000—which means 323,000 net job openings that haven’t been filled.

This might be why wages and salaries are finally increasing faster than the inflation rate, but it can also be that minimum wages in coastal states in particular are creeping toward $15 per hour by 2022, since 80 percent of the workforce depends on wages and salaries.

What should we make of the possibility of more irrational exuberance pushing stock valuations too high? Corporate profits will increase with the tax cuts, wages and salaries are soaring, and inflation is far away from the 2 percent target.

I believe investors should focus on price-to-earnings ratios, which also tell us whether stock prices have strayed too far from actual earnings.  Dr. Shiller warns irrational exuberance could infect investors again, if the S&P P/E ratio strays once more into the mid-twenties.

Harlan Green © 2018

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

New-Home Sales, Case Shiller Index On the Rise

The Mortgage Corner--II

As if to confirm U.S. housing starts and building permits’ jump to their highest levels in nearly 7-1/2 years, the sales rate of new single-family houses in April 2015 rose even higher at a seasonally adjusted annual rate of 517,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. “This is 6.8 percent above the revised March rate of 484,000 and is 26.1 percent above the April 2014 estimate of 410,000,” per the Census Bureau.

Graph: Calculated Risk

It means home construction is returning to pre-recession levels, as is the demand for more housing, which will spur more housing construction. The sales rate is rising fast enough to drop housing inventories to 4.6 months, at the low end of inventories.

The south was the biggest gainer, with construction up 5.8 percent. Also, the median price rose to $297,300 for a strong 8.3 percent year-on-year gain. So sales have finally reached the long term trend line, which should signal a longer term recovery as buyer’s enthusiasm tends to feed on itself, according to Behavioral Economist and Nobelist Dr. Robert Shiller.

Graph: Calculated Risk

As if to confirm the rising enthusiasm of buyers, the S&P Case-Shiller Home Price Index continued its climb to post-recession highs, with San Francisco now up 10.31 percent year over year, Denver and Dallas up 10 percent and 9.3 percent, respectively. Denver and Dallas housing prices have almost doubled since the Great Recession, per the above graph. San Francisco’s prices are just now approaching their bubble high.

“Home prices have enjoyed year-over-year gains for 35 consecutive months,” says David M. Blitzer, Managing Director & Chairman of the Index Committee for S&P Dow Jones Indices. “The pattern of consistent gains is national and seen across all 20 cities covered by the S&P/Case-Shiller Home Price Indices…”

Of course lower interest rates were also a factor, as I’ve said, with housing affordability increasing this year, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI).

In all, 66.5 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $65,800, said the report. “This is up from the 62.8 percent of homes sold that were affordable to median-income earners in the fourth quarter.”

What is another catalyst? Housing formation is recovering, which is largely due to Millennials moving out of their parents’ homes, or higher education venues. Based on unusually low household formation numbers of past several years, "there's a ton of people living in basements," Fundstrat Global Advisors' Tom Lee said in a recent interview with CNBC's "Trading Nation." "Two quarters of pretty decent household formation isn't getting everybody out of the basement. I think this means we have multiple years where household formations are well over 1.3 million, 1.4 million."

 

Household formation will be the key to future housing growth, as the millenials’ population size has now reached that of the baby boomers, their parents. And many have yet to reach home-buying age. Household formation had dipped as low as 360,000 per annum in recent years, due to the housing bust. So this is yet another sign of a growing pool of homebuyers.

Harlan Green © 2015

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

Dr. Robert Shiller--Why the Weak Recovery?

Popular Economics Weekly

Nobelist Robert Shiller, winner of the Nobel for his research in Behavioral Economics, or the psychology that drives economic behavior, has come up with the latest reason this economic recovery has been so weak to date. GDP growth has averaged just 2 percent since the end of the Great Recession.

It has to do with what Lord JM Keynes called ‘animal spirits”, or the psychological fact that fear breeds more fear, so that it can grip a whole country, as it did during our Great Depression, and perhaps is doing so again.

“The same could be said today, seven years after the 2008 global financial crisis, about the world economy’s many remaining weak spots,” said Dr. Shiller. “Fear causes individuals to restrain their spending and firms to withhold investments; as a result, the economy weakens, confirming their fear and leading them to restrain spending further. The downturn deepens, and a vicious circle of despair takes hold. Though the 2008 financial crisis has passed, we remain stuck in the emotional cycle that it set in motion.”

In fact, over the last two decades, like that of many other developed nations, US growth rates have been decreasing. In the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent. But it is much more due to the fact household incomes have declined for most Americans after inflation, and so now spend more than they save to even maintain their current standard of living.

Doctor Shiller’s answer is to restart our vision of going to the moon and beyond; that is, using public spending on national projects that both inspire our body politic and restore our leadership in the sciences.

“Government-funded space-exploration programs around the world have been profound inspirations,” says Dr. Shiller. “Of course, it was scientists, not government bureaucrats, who led the charge. But such programs, whether publicly funded or not, have been psychologically transforming. People see in them a vision for a greater future. And with inspiration comes a decline in fear, which now, as in Roosevelt’s time, is the main obstacle to economic progress.”

But he doesn’t go into what may be behind the fear—what economists now call consumer confidence or sentiment. We measure confidence in particular to gauge just how Main Streeters feel about their future economic prospects for jobs and financial security. And the main determinate of their current still low confidence level has to be the fact that most Americans have not seen any change in their financial conditions for decades.

The result is record economic inequality that is plaguing growth as it did in 1929, the real cause of the Great Depression. The result of that inequality is money not flowing to where it can be spent productively and so do the most good—to consumers or government that will spend and/or invest in productive enterprises, rather than put it into tax shelters for their heirs, as most of the wealthiest seem to be doing today.

Graph: Business Insider

This is evidenced by the personal savings rates of the different income brackets. For instance, the wealthiest 1 percent now save more than 50 percent of their income, whereas the poorest 20 percent save none.

What do they do with their savings? Mostly hoard it. According to the new Billionaire Census from Wealth-X and UBS, the world's billionaires are holding an average of $600 million in cash each—greater than the gross domestic product of Dominica. That marks a jump of $60 million from a year ago and translates into billionaires' holding an average of 19 percent of their net worth in cash.

"The apparent safety of cash, reinforced by the painful psychological experience of the 2008-09 global financial crisis and the subsequent troubles within the European Monetary Union, likely reinforces the tendency to favor this cautious allocation strategy," said Simon Smiles, chief investment officer for Ultra High Net Worth at UBS Wealth Management.

And House Republicans are once again proposing repeal of the inheritance tax, now for the $5million in inherited wealth and above set that still have to pay it. The Center for Budget Policies and Priorities tells us the effect of this loss in taxes:

· Cost $269 billion in reduced revenues over 2016 to 2025, according to the Joint Committee on Taxation (JCT), adding $320 billion to deficits when counting additional interest on the national debt.

· Do nothing for 99.8 percent of estates. Only the estates of the wealthiest 0.2 percent of Americans -- roughly 2 out of every 1,000 people who die -- owe any estate tax. This is because of the tax's high exemption amount, which has jumped from $650,000 in 2001 to $5.43 million per person (effectively $10.86 million for a couple) in 2015. Repeal would bestow a tax windfall averaging over $3 million apiece, or more than a typical college graduate earns in a lifetime, on the roughly 5,400 wealthy estates that will owe the tax in 2016.^[2] The 318 estates worth at least $50 million (some of which are worth hundreds of millions of dollars) would receive tax windfalls averaging more than $20 million each.

· Exacerbate wealth inequality, which has grown significantly in recent decades. In 2012, the wealthiest 1 percent of American families held about 42 percent of total wealth, new data show.^[3] Large inheritances play a significant role in the concentration of wealth; inheritances account for about 40 percent of all household wealth and are extremely concentrated at the top. Repealing the estate tax would exacerbate wealth inequality by benefiting only the heirs of the country's wealthiest estates, who also tend to have very high incomes.^[4]

It’s sad that we even need to have this argument on whether such inequality is a bad thing, given Dr. Shiller’s worries that we are re-experiencing what happened during the Great Depression.

Harlan Green © 2015

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

What Will 2015 Bring?

Popular Economics Weekly

We already have an idea of what will happen in 2015. Firstly, job creation should continue to exceed 300,000 payroll jobs per month. Nobelist Paul Krugman is especially optimistic about economic growth, given that we have escaped much of the austerity budget cuts taken by the Eurozone and Japan.

“What about the prospects looking forward? As I’ve pointed out before, business investment has been relatively strong throughout. Residential investment, however, has been very low since 2006, suggesting that there’s a backlog of pent-up demand, which should come into play in an improving job market. So that’s one source of strength. Also, low oil prices are going to be mostly positive, although with some adverse regional effects; more on that in a later post.”

Graph: Trading Economics

We would also posit that current economic growth will remain high in 2015, following consecutive 4.6 and 5 percent growth rates in Q2 and Q3. This is because government hiring will continue to pick up as effects of the Great Recession wear off, which has been the main drag on growth, as Professor Krugman says.

"Since Obama took office, we’ve gained 6.7 million private-sector jobs, compared with just 3.1 million at the same point under Bush. But under Bush we’d added 1.2 million public sector jobs, while under Obama we’ve cut 600,000. The point is that relatively good private sector performance has been masked by public-sector cutbacks; this is the opposite of what you usually hear, but that’s no surprise.”

And Fed Chair Janet Yellen is determined to keep interest rates low until wage and salaries climb above the 2 percent inflation rate, which might happen in 2015 with continuing strong job growth.

The weak growth link remains the housing market, and any improvement will be closely watched by economists. The key will be adequate population growth (with more new household formation), especially from the millennials, children of the baby boomers as we have been saying.

Several housing specialists, including the NAR’s Realtor.com, Jed Kolko of Trulia.com, and even Robert Shiller of the Case-Shiller Housing Price Index see a better housing market in 2015. But increased household formation of those millennials that have been living with their parents, or renting, are the key. And 2015 looks to be the year when they begin to buy homes, according to Fortune Magazine’s Fortune.com. Historical household formation has been some 1 million new households per year, but has been less than half the historical average since the end of the housing bubble.

Graph: Fortune

Why? Millennials job growth, for one: “In 2014, it’s been a banner year for employment but parsed by age groups those under 35 have been gaining jobs at a 60 percent faster rate than rest – one of the best years for employment was even better for millennials,” said Realtor.com economist Jonathan Smoke in his recent release of the 2015 housing forecast.

And the oldest cohort of 25-34 puts the majority of millennials out of school and getting married. That’s combined with birth rates putting 2014 in the running for highest volume of births in years, as millennials outnumber their baby boomer parents by as much as 10 percent (as much as 88 million vs. 77 million baby boomers).

We will see what else 2015 brings, of course. More new, entry-level homes will have to be built, of course, so builders have to get the message that millennials won’t be able to afford the homes and higher prices tolerated by their parents.

There are indications that home builders are already doing this. For example, CNBC’s Diana Olick reports homebuilder D.R. Horton has a new brand, Express Homes that offers properties at $120,000 to $150,000 in lower priced states such as Texas and Georgia, well below the national median price of a new home, which in March came in at a record $290,000, according to the U.S. Census.

In other words, if and when housing returns to normal growth levels, we should see more sustained overall economic growth for 2015 and beyond.

Harlan Green © 2014

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

Unemployment Still the Problem

Financial FAQs

Friday’s U.S. unemployment report might have been an aberration due to the severe winter with just 74,000 nonfarm payroll jobs created, according to the Bureau of Labor Statistics, but how many of those workers who left the labor force might never return? The civilian participation rate fell to 62.8 percent, which is a 35-year low.

We are now in the 71^st month of the recovery without employment having returned to its prior peak (red line in graph). It was the GW Bush recovery that held the record of 47 months until then (brown line on graph), which highlights just why tried and true New Deal era measures, such as expanding social welfare programs and reviving public sector jobs, are needed to revive economic growth for Main Street workers.

Graph: Calculated Risk

The lack of jobs is the real problem. Discouraged workers no longer looking for work (down 347,000) dropped the December unemployment rate to 6.7 percent from 7 percent, rather than more workers entering the workforce. And this highlights the 700,000 government jobs lost from the Great Recession, instead of public sector jobs being added or retained to help the recovery, as was done during Roosevelt’s New Deal. It also highlights the growing popularity for extending unemployment and food stamps benefits to middle class workers that have lost jobs and income, as well as the poorest reported in Paul Krugman’s latest NY Times column.

So this hardly shows the need for more Fed tapering at the moment. It is the low interest rates and cheap money that have enabled soaring auto sales, and yes, housing construction to rebound with private construction adding the most jobs since 2006, according to ADP and Moody’s Analytic’s Mark Zandi.

Graph: WSJ Marketwatch

As much as Fed Chairman Bernanke tried to sound optimistic during his most recent speech, government and both political parties are only now beginning to think about how to create more jobs. The problem won’t be economic growth, as productivity is soaring thanks to technology, but political policies that shed the public sector of jobs and public projects that pay forward for future growth.

Growth can’t become sustainable unless highways and bridges are improved, more teachers are hired, and spending on the research and development of future products is boosted. And that can only happen if governments are solvent again, which means increasing tax revenues, either with higher minimum wage rates and/or a more equitable tax rate structure.

Right now, wage and salary earners pay a rising portion of their incomes in taxes, whereas investors’ share of capital gains and income tax has shrunk, which allows wealthy investors to have effective tax rates in the teens. And workers can’t buy more products, unless wages are rising again.

Graph: EPI

It’s the Henry Ford story all over again. His workers couldn’t buy enough of his cars until he raised their wages to $5 per day. So it will take the middle class rising up again to claim their benefits from the forces that took them away, claiming the profits from increased labor productivity for themselves.

Harlan Green © 2013

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

Econ Robert Shiller’s Nobel Prize a Big Win

Popular Economics Weekly

Although much of what Yale economist Robert Shiller writes is about the importance of financial markets, he won the Nobel Prize in Economic Sciences for studying how financial markets misbehave. He is a pioneer in the new field of Behavioral Economics, or behavioral finance, as he has sometimes calls it.

“Mr. Shiller, 67, later introduced an important caveat to the idea that markets operate efficiently, finding that stock and bond prices show greater predictability over longer periods,” said the New York Times, in commenting on the award to Dr. Shiller, Eugene Fama, and Lars Peter Hansen. “Mr. Shiller and other economists see evidence that these movements cannot be entirely explained by rational decision-making, and instead reflect the irrational behavior of market participants.”

His recognition will ultimately swing the pendulum of economic thought away from the so-called Austrian school of free market economics that conservatives have long worshipped to justify their belief that small government and little taxes were the most “efficient” way to distribute wealth. We know the result of those theories—Inequality For All, to paraphrase Robert Reich’s latest book and film now in theatres.

He also boosted Keynesian economics with Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, written with Nobelist George A. Akerlof in 2009, which documented how financial behavior is tied to the vagaries of human nature, a clear tribute to John Maynard Keynes and his theory of animal spirits—today termed a greater or lesser confidence in an unknown future.

His biggest claim to fame comes from his 2000 book, since revised, Irrational Exuberance, which predicted the dot-com bubble bust. In it he looked at the empirical behavior of stock prices over the past 100 years. It showed that S&P price-to-earnings ratios had soared to unsustainable levels—as much as 44 to 1, almost double that of the Black Monday stock market collapse at the beginning of the Great Depression.

“The high recent valuations in the stock market,” said Shiller in Irrational Exuberance, “have come about for no good reasons. The market level does not, as so many imagine, represent the consensus judgment of experts who have carefully weighed the long-term evidence. The market is high because of the combined effect of indifferent thinking by millions of people, very few of whom feel the need to perform careful research on the long-term investment value of the aggregate stock market, and who are motivated substantially by their own emotions, random attentions, and perceptions of conventional wisdom.”

He also specialized in real estate and wrote books such as The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It, and with Karl Case set up the S&P Case-Shiller Home Price Index that tracks national same-home sale prices for 10 and 20 metropolitan districts.

But I predict that he will become known for an even greater contribution to economic thought. It is for his book, The New Financial Order, Risk in the 21^st Century, Princeton U. Press (2003). In it, he uses his empirical knowledge and Big Data to tell us how to create hedging and insurance mechanisms that protect against major risks that have pummeled the financial markets.

“…the insights of finance have been applied in only a limited way,” says Professor Shiller in his introduction. “Finance has substantially neglected the protections of our ordinary riches, our careers, our homes, and our very abilities to be creative as professionals. We need to democratize finance and bring the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart”.

And that will continue to be is his real contribution to a world where equality is good for everyone. Understanding how markets misbehave will rip the shroud away from those who have been able to profit from the public’s lack of knowledge about how financial markets actually perform.

Harlan Green © 2013

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

Housing Is Definitely Recovering

The Mortgage Corner

In spite of warnings from such as Robert Shiller of Irrational Exuberance fame that housing values could remain stagnant over the next ten years, housing prices are making a comeback, which is boosting economic growth. Some of the worst hit bubble cities have the largest price increases, and diminished inventories. Even better news is that housing prices have returned to historical levels as measured by the price-to-rent ratio, which measures the relationship between rents (which are closely tied to incomes) and housing values, signaling that housing values are no longer in bubble territory.

Graph: Calculated Risk

Data through February 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices ... showed average home prices increased 8.6 percent and 9.3 percent, respectively, for the 10- and 20-City Composites in the 12 months ending in February 2013, said the press release.

“Home prices continue to show solid increases across all 20 cities,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “The 10- and 20-City Composites recorded their highest annual growth rates since May 2006; seasonally adjusted monthly data show all 20 cities saw higher prices for two months in a row – the last time that happened was in early 2005. Home sales aren’t doing badly either.”

For instance, we can say that housing prices in California cities, San Francisco, Los Angeles, and San Diego have recovered more than half their values lost since 2000. And the Price-to-Rent ratio is back to 1 to 1, meaning that the historical ratio held since January 1983 is probably the best indicator that prices have now stabilized for the longer term.

Graph: Calculated Risk

Some economists, including Dr. Shiller, seem to be puzzled by the price surge, in particular. But what about the return to more than 1 million plus new households being formed in 2012—a tripling of the recession lows, when children fled back to their parents homes because of the hard times?

And we mustn’t forget that employment has improved substantially, with some 6 million jobs now added to payrolls since the Great Recession. Dr. Shiller’s latest conclusions are based on surveys and his theories that much of consumer behavior comes from hearsay and not much research into investments, hence the housing bubble.

Dr. Shiller, an Economics Professor at Yale University, also says the biggest home price increases now are seen in multifamily rather than single-family homes which reflects a shift from home ownership to renting. The buyers are investors who rent their properties, in other words.

“Most of the increase in households in this country has been met by an increase in renting,” says Shiller. “My own survey data with Chip Case confirms that people feel more positive about renting.” He suggests that those investing in real estate are buying homes most suitable to convert to rentals, which means price increases will be more closely tied to rent increases, which means closely tied to inflation. Hence he is intimating the price-to-rent ratio should remain stable around its historical 1 to 1 ratio for years to come, which means housing prices won’t rise faster than rents.

But whether rental or primary residences, housing is contributing to overall economic growth. The First Quarter contribution by the U.S. Bureau of Economic Analysis shows that housing contributes more than 2 percent of GDP growth, and is on the upswing, particularly in single-family construction. Home improvements and broker commissions provide slightly less, while office and shopping mall investment provides contribute little at present, due to the high vacancy rates still prevailing, an overhang from the Great Recession.

Needless to say, construction spending means greater construction employment, and spending has been surging. Construction outlays rebounded 1.2 percent in February after dropping 2.1 percent in January. Private residential construction jumped 2.2 percent. For the latest month, the new one-family component was particularly strong, gaining 4.3 percent, following a 3.6 percent boost in January. The new multifamily component fell back 2.2 percent but followed a robust 6.1 percent jump the prior month. Public construction gained 0.9 percent, following a 0.2 percent rise in January. On a year-ago basis, overall construction was up 7.9 percent in February compared to 6.1 percent in January.

Graph: Econoday

Single-family investments is about to surpass home improvement outlays, says the BEA, with multifamily outlays still a minor component. So will Americans give up their home-ownership dream, and become a nation of renters? In fact, the current 64 percent home ownership rate is the long term ownership rate, which is one more factor that should tell us the housing bubble mentality Dr. Shiller so warns against has been deflated.

Harlan Green © 2013

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