Still Many Job Openings!

 Financial FAQs

Calculated Risk Blog

It’s hard to reconcile the recent downgrade of US Treasury debt by Fitch Ratings, one of the three major debt rating agencies, to AA+ from AAA, with the US economy still at full employment.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” it said. “Several economic shocks” as well as tax cuts and new spending initiatives “have contributed to successive debt increases over the last decade,” reported MarketWatch on the downgrade.

The Bureau of Labor Statistics Job Opening and Labor Turnover Survey (JOLTS) reported an average of 5.9 million hires per month (blue line in graph), and total separations of 5.6 million, while the number of job openings has declined to 9.8 million range (black line).

That’s still a lot of job openings, mostly in government and services. Openings increased in health care and social assistance (+136,000) and in state and local government, excluding education (+62,000). Job openings decreased in transportation, warehousing, and utilities (-78,000), state and local government education (-29,000), and federal government (-21,000), said the Bureau of Labor Statistics press release.

Fitch maintained that “tighter” credit, weakening investment in business, and a “slowdown” in consumption “will push the U.S. economy into a mild recession” in the fourth quarter of this year and the first three months of next year, reported MarketWatch.

This is although most economists now see little danger of any recession at all; maybe just a ‘soft landing’ that slows economic growth once the Fed ends its interest rate hikes.

That doesn’t mean it hasn’t been a wild ride since the pandemic-induced disruptions.

The Calculated Risk graph tells the best tale of the pandemic—what our economy has endured from the effects of COVID-19. There were 13.406 million job layoffs and discharges in March 2020 (red bar spike in graph) during the nationwide shutdown when city streets emptied from the mandatory lock downs and home stays and wild animals roamed the streets.

It resulted in the shortest recession ever—just two months, April-May 2020—then economic growth suddenly reversed, and businesses hired 8 million workers (blue line) in the next couple of months.

The JOLTS report also tells us the difference between hires and total separations has averaged some 300,000 nonfarm payroll jobs, which approximates the average monthly job creations this year.

This is what Bidenomics is all about, the various aid programs and bills enacted by congress to modernize the US economy and reduce global warming. It has created something like six million jobs since President Biden took office, and maybe 3,600,000 more jobs this year.

It also tells us why the US economy continues to expand in all sectors—with consumers as well as in manufacturing. Consumers provided most of the 2.4 percent increase in Gross Domestic Product (GDP) in the ‘advance’ (first of three) estimates of second quarter economic growth.

This should confirm that no recession is imminent this year. Even if growth in Q3 and Q4 slowed, the overall year’s growth would still be positive.

Goldman Sachs chief economist, Jan Hatzius is one of the major economists who trimmed the probability of a recession in the next 12 months to 20 percent from 25 percent — well below the 54 percent median among forecasters who participated in the last Wall Street Journey survey.

“The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” said Hatzius.

And as I reported earlier, Federal Reserve Chair Powell said the Fed Governors now believe we can avoid a recession at Wednesday’s post-FOMC meeting, after announcing raising the benchmark interest rate to a range of 5.25 percent to 5.5 percent, the highest level in 22 years, in order to combat “elevated” inflation.

Consumers also like the continued growth, according to the Conference Board’s July Confidence Index that jumped from 110.1 to 117.

“Consumer confidence rose in July 2023 to its highest level since July 2021, reflecting pops in both current conditions and expectations,” said Dana Peterson, Chief Economist at The Conference Board. “Headline confidence appears to have broken out of the sideways trend that prevailed for much of the last year. Greater confidence was evident across all age groups, and among both consumers earning incomes less than $50,000 and those making more than $100,000.”

We should wait for Friday’s latest official unemployment report for the most recent unemployment picture, but it looks like Fitch Ratings is an outlier on the soundness of the US economy.

Harlan Green © 2023

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

No Job Losses Due to Coronavirus—Yet

Popular Economics Weekly

MarketWatch

The Labor Department’s February employment survey took place in the middle of February, before the coronavirus began its worldwide spread. So we will have to wait for March employment figures to know its impact on employment, and almost every business sector in the U.S. economy.

The services industries are booming at the moment, as the above MarketWatch graph shows. There were a cumulative total of 218,000 new jobs created in the service sector, with 54,000 Education and

Health service jobs leading the way. Health service jobs may continue to grow, if they can find workers, as the health care industry will certainly be kept more than busy treating the effects of the coronavirus in the U.S. with infection totals mounting daily.

 Wholesale and retail trade job totals fell slightly, but major grocery chains report emptying shelves as consumers stock up in anticipation of more school and business shutdowns in Washington and New York states, for starters.  This will boost retail sales al least temporarily.

Manufacturing also showed life with 15,000 new jobs, after consecutive 12,000 job declines in the past two months. The unemployment rate even inched back down to 3.5 percent from 3.6 percent.

Restaurants and bars filled 53,000 positions and government employment rose by 45,000, including 7,000 temporary Census workers. The federal government is expected to add up to 500,000 temporary workers for the 2020 Census and hiring is already underway.

But stock investors are already seeing the oncoming recession, as interest rates have plunged to new lows. The 10-year Treasury note yield fell 18.6 basis points to an unheard of yield of 0.739 percent on Friday morning, per the St. Louis FRED graph. This is a sure sign stock investors fear the worst.

FRED

It will certainly boost the housing market, however, as mortgage rates are sinking to more than 50-year lows. This will make even more homes affordable to prospective buyers, as long as employment holds up. For instance, the 30-year High-Balance, Super/Conforming fixed rate has fallen to 3.125 percent with no origination fees with the most competitive lenders.

But the lack of substantial wage increases is becoming worrisome in a fully employed economy. The 3 percent average hourly wage rise in the report is barely above inflation, and so leaves no room for disruptions as I’ve been saying.

It may be the result of a service economy now able to employ only the lowest skilled, lowest paying jobs, as automation becomes a fact of American life and manufacturing continues to move overseas, in spite of the tariff raises.

Recessions begin when the economy, based on four major indicators such as the unemployment rate, manufacturing and trade, and personal incomes, have peaked that I spoke about in my last blog; and both manufacturing and personal incomes have definitely peaked. 

The NBER business cycle Dating Committee won’t wait as long this time to call a recession, in my opinion.  It was called in December 2018, 12 months after the Great Recession actually began. Let’s see what happens over the next four months—until the end of second quarter in June, when we will know more about effects of COVID-19—which may speed up the looming slowdown. 

Why should we know by then?  I say this because the Fed suddenly dropped their short term interest rates one-half percent last Wednesday, and are hinting at more rate cuts. The financial markets reacted in panic after a very short-lived rise. What does that tell us about business confidence? It tells us the Fed also sees a rocky economy ahead.  We don’t even yet know how COVID-19 is transmitted, much less how to treat it other than with quarantines and certain preventive measures.

The worldwide spread of the COVID-19 virus means a worldwide slowdown of economic activity. It’s now appearing in 92 countries at last count, with 101,781 cases of COVID-19, at least 3,460 deaths; 15 now in the U.S.  About 55,866 have recovered,  primarily in China's Hubei Province, according to the latest figures.

The greatest danger to the U.S. economy is a sharp cutback in consumer confidence and spending as we retreat to our homes to wait this out, while the slow response of our public health system will mean further disruptions, and even shortages of essential supplies needed to treat COVID-19.

Harlan Green © 2020

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

Q4 Real GDP Growth Still Good

Popular Economics Weekly

BEA.gov

Real gross domestic product (GDP) increased at an annual rate of 2.6 percent in the fourth quarter of 2018 (table 1), according to the "initial" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.4 percent. Due to the recent partial government shutdown, this initial report for the fourth quarter and annual GDP for 2018 replaces the release of the "advance" estimate originally scheduled for January 30th and the "second" estimate originally scheduled for February 28th. See the Technical Note for details.

The fourth-quarter GDP estimate surprised many analysts. Consumer spending rose 2.8 percent, despite the sharp drop in December retail sales, which is down from outsized rates of 3.5 and 3.8 percent in the prior two quarters but still good.

So why do jittery stock and bond investors keep waiting for the ‘other’ shoe to drop with growth so good? We know a major reason for the record low interest rates is the huge amount of excess liquidity not being invested in productive assets, but chasing inflated stock values, which makes buying long term sovereign debt in particular such a safe investment.

It’s called running for cover when the geopolitical situation worsening and a US administration that cannot live without drama, ballooning trade wars and massive federal debt now predicted to reach 100 percent of GDP per the Congressional Budget Office by 2023.

The flight to quality syndrome keeps investors buying up sovereign government debt in particular, thereby keeping interest rates in line with the very low inflation rate, which is a good time to invest in public education, infrastructure, and the general welfare.

In fact, the 10-year Treasury yield has not been this low since the 1950s, when money was plentiful and U.S. economic growth was phenomenal, reaching 6 and 7 percent GDP growth rates after WWII, as I said in my last blog.

This is the reverse of conditions that led to the housing bubble bust. Housing prices became inflated in the early 2000s because inflation was rising faster than interest rates that Fed Chair Alan Greenspan kept reducing to pay for GW’s wars on terror.

What more drama can happen this time? There was little damage to date from the record 35-day government shutdown and loss of business activity, though the BEA says it kept the annual growth rate at 2.9 percent rather than 3 percent. But we can’t see yet how much this will affect 2019 growth.

Let’s hope we find a better way to invest the excess liquidity, if we want to maintain full employment and rising wages in 2019. January’s 304,000 new payroll jobs is a good start. The US has to be investing much more in productive enterprises, as I’ve said.

Business investment rose 6.2 percent for nonresidential fixed investment in Q4, back near the high single-digit increases of the first half of last year when the corporate tax cut was driving spending. Residential investment, however, was weak, down 3.5 percent for the fourth straight quarterly decline that offers definitive evidence of how weak the housing sector has become.

However, former chief economic advisor Jason Furman isn’t so optimistic about 2019 growth. “I’m not seeing a sustained supply-side expansion in the wake of the (2017) tax cuts,” he says.

That means productive investments haven’t been increased enough, and probably won’t, unless there’s more agreement on Capitol Hill about what’s really needed to keep this virtuous business cycle, and the financial markets, from collapsing in 2019.

Harlan Green © 2019

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Record Income Inequality = U.S. Credit Downgrade?

Financial FAQs

Graph: MarketWatch

The current debate whether the U.S. will escape the ‘new normal’ of slower economic growth since the Great Recession (when homeowners lost a collective $9 trillion in value) is taking a new turn with Moody’s Investor Services now warning of a credit rating downgrade of U.S. Treasury securities from its AAA rating, something Standard & Poor’s had already done in 2011 when Republicans threatened to shut down the Federal government over their refusal to raise the debt ceiling.

Why the Moody’s downgrade now, when it has kept U.S. sovereign debt at AAA rating? America’s income inequality has worsened since the Great Recession and more pressure will be put on our government to increase so-called transfer payments—especially social security, Medicare, Medicaid, and other government benefits paid to seniors and lower income household just to keep them out of poverty—at a time of record federal debt, said Moody’s.

Only the top 10 percent income earners have seen their incomes increase since the Great Recession. Most American households have seen either flat income growth or an actual decline for the bottom 40 percent of income earners.

In fact, the income declines have been happening since the 1970s, as globalization of the workforce by multi-national U.S. corporations have steadily shipped many of the best paying manufacturing jobs to cheaper countries and regions, while American workers’ salary bargaining rights have been steadily chipped away by more conservative congresses and compliant Republican and Democratic administrations.

Now new evidence has surfaced of another reason for decline in higher-paying jobs—robots, mainly concentrated in manufacturing regions. The Brookings Institute originated a study on the effects of robots replacing mainly manufacturing jobs. To no one’s surprise, most of the robots are concentrated in ‘rust-belt’ manufacturing right-to-work states in the Midwest and South that severely restrict union collective bargaining rights.

Brookings Institute

Brookings’ analysis of data from the International Federation for Robotics determined that more than half of more than 233,000 industrial robots in the country are found in just 10 Midwestern and Southern states, led by Michigan, Ohio, and Indiana. As of 2016, the overall national average for red states” was 2.5 robots per thousand workers. The national average for blue states that mainly vote Democrat was 1.1 per thousand.

Moody’s has become decidedly pessimistic about the future of America’s credit worthiness because it sees little that the U.S. can do to mitigate the increased income inequality, the worst in developed countries “…fiscal consolidation efforts that attempt to reduce the burden of entitlement spending, by hiking payroll taxes or cutting benefits, would ultimately exacerbate inequality,” said Moody’s.

What can be done to reduce the worst household income inequality since 1928, just prior to the Great Depression? The CIA World Factbook ranks the U.S. 39^th from the bottom in the distribution of family income based on the Gini Coefficient Index that measures income inequality.

I respectively disagree with Moody’s pessimism about the prospects for improving U.S. credit worthiness. Cutting benefits would certainly harm growth, taking away incomes that increases consumer spending of the bottom 40 percent; spending that in turn increases tax revenues. And states with the political will to restore bargaining rights of union and government workers would restore some of the lost wages that increase tax revenues.

Then there is a need for massive investments in public infrastructure in all the sectors that increase efficiency and labor productivity—from physical structures to education and R&D that sent us to the moon and created the Internet. Studies show they more than pay for themselves, which also increases tax revenues and pays down federal debt.

There is in fact no reason for pessimism if such ‘antidotes’ are applied to America’s ailing fiscal health, and Moody’s as a responsible credit rating agency should be the first to recommend them.

Harlan Green © 2018

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

Are Interest Rates Dangerously Low?

Popular Economics Weekly

Graph: FRED

Why should historically low interest rates be a problem, you say?  Doesn’t that help consumer demand by enabling consumers to buy more by borrowing more cheaply, and economic growth by encouraging companies to create more jobs?  Not when rates have remained low for such an extended period.

Interest rates are far too low this late in the recovery from the Great Recession. It isn’t only because the Treasury Yield Curve slope has been steadily declining since 2014 that measures the difference between the 10-year and 2-year Treasury bond yields, as we said last week.

The Benchmark 10-year Treasury yield itself hasn’t risen above 3 percent in at least one year. It was this low for sustained periods during the Great Recession, when it dipped below 2 percent. But it shouldn’t be as low today (2.85 percent at this writing). In fact, interest rates haven’t recovered from the Great Recession. It normally ranges from 4 to 5 percent during prosperous times when there is a greater demand for money—e.g., from 2000 to 2008—as the FRED graph shows.

It signals a significant weakness in aggregate demand for goods and services; which is the sum of demand by consumers, investors, government spending and net exports, (and somewhat mirrors the weak 2 percent GDP growth since then). This could means we are dangerously close to another recession, if economic shocks such as the Turkish Lira plunge, or a full-fledged trade war occurs.

Consumer spending is perking along above 3 percent only because of excessive borrowing due to the low interest rates, rather than rising incomes, so it won’t be sustainable. And capital spending is half of what it should be with the stimulus from the Republican tax cuts and $1.3 trillion in additional federal spending.

Exports—another component of aggregate demand—is momentarily rising, but it could be a one-time surge in orders to escape rising costs from the trade war. And there is always the threat of cuts to government entitlement programs like food stamps, Medicare and Medicaid, which increases costs of many low and middle-income consumers.

So we could be teetering on the edge of an economic slowdown, no matter what the pundits are saying about full employment and the latest 4.1 percent GDP 2^nd quarter growth, with excessive government and private debt providing little cushion for support should geopolitical and financial problems worsen.

However, there is a caveat to this dismal scenario. It may not be a recession for all Americans. Household debt — including mortgages, credit cards, auto loans, student loans and other credit — grew for the 16th consecutive quarter in the April-to-June period, rising by 0.6%, or $82 billion, to $13.29 trillion, the New York Fed reported Tuesday.

That’s because the recovery has really benefited just the top 10 percent income-earners, who have been able to pay down their debts. With personal disposable incomes at a $15.46 trillion annual rate in the quarter, the debt-to-income ratio dipped to 86 percent. That’s the lowest, by a tiny amount, since the fourth quarter of 2002. At the height of the credit bubble in 2008, debts topped at 116 percent of disposable income.

And we have government debt approaching 100 percent of GDP by 2020, according to the watchdog Congressional Budget Office. The sad denouement of this scenario could be that another downturn will hurt those most dependent on the federal government for protection, as has happened in the past.

Harlan Green © 2018

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The Dangerous Treasury Yield Curve

Popular Economics Weekly

New Federal Reserve Chairman Jerome Powell has maintained that the Fed is on track to raise their short term interest rates at least 3 times this year. Why? It sees higher inflation down the road because of the huge federal budget deficit, and growing federal debt that now totals more than $20 trillion, combined with declining tax revenues due to the recent tax cuts.

Graph: Marketwatch

But that’s not the real danger to continued growth, according to a new report by the San Francisco Fed. It is the danger than short-term interest rates may rise above long term bond rates, which would be what is called an inverted yield curve. And an inverted yield curve has correctly signaled all nine recessions, with only one false positive in the 1960s, says the SF Fed.

When short-term rates exceed long-term rates, the banks’ cost of money exceeds what they can earn, which makes it less profitable for them to lend. This can choke off available credit. The above graph shows the last 3 recessions when the yield curve was negative—in 1991, 2001, and 2007.

I maintain the inverted curve is not the only reason for the coincident recessions. It has as much to do with why long term Treasury bond rates are still so low in the ninth year of this economic recovery; the 10-year bond yield is still below 3 percent.

Rates are still low because there isn’t enough aggregate demand for the $trillions in excess cash being held by corporations, the Fed, and banks. That is to say, it’s not being used for investment purposes by the private or public sectors, or returned to the employees of those businesses. Instead, it’s being hoarded or used to buy back the shares of private businesses, which inflates stock prices but doesn’t increase the demand for their goods and services.  And government spending has been in a austerity mode since Republicans took over the US House of Representatives in 2010.

Boosting aggregate salaries of their employees would boost demand.  The incomes of wage and salary earners aren’t even keeping up with their spending, which is why the personal savings rate is just 3.2 percent, when it should be at least double at this stage of an economic recovery.

Macroeconomists look at aggregate demand to predict economic growth, which is the sum of activity in the private and public sectors. And they see weak demand, because average household incomes haven’t risen faster than inflation over the past 30 years, and government isn't upgrading our aging infrastructure, education system, R&Development--all necessary to boost productivity.

Average real household incomes have literally not grown at all when inflation is factored in as I said last week. This has been happening since the 1980s when trickle-down economics came into vogue, which said that the owners of capital and industry should receive the lion’s share of national income (via lower taxes and regulations), and that would create more jobs and growth for everyone.

So beware of another inverted yield curve, if the Fed continues to raise their rates as predicted. And stock traders know that. Hence the extreme price volatility of late. They see the same shrinking credit and declining growth picture, if long term bond rates don’t begin to rise soon.

But that won’t happen unless corporations and our government actually begin to spend their monies on productive uses, not tax cuts and share buybacks.

Harlan Green © 2018

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

Interest Rates On the Rise!

Financial FAQs

Central Banks everywhere seem to be following our Federal Reserve in selling bonds they had accumulated to keep interest rates low for so long—in fact, since the end of the Great Recession. They also seem to be crossing fingers that it won't hurt growth.

The 10-year Treasury yield rose 1.8 basis point to 2.285 percent, contributing to a 14 basis point jump over the past week. The 30-year bond, or the long bond, gained 1.7 basis point to 2.831 percent, according to Marketwatch.

Our Fed Chair Janet Yellen took the lead in calling for more Fed rate hikes this year at the last FOMC meeting; as well as beginning to sell some of the $4.5 billion in Treasury bonds it had accumulated during the various Quantitative Easing programs first initiated by former Fed Chair Ben Bernanke.

The QE programs and extremely low inflation have kept long term rates below 3 percent for several years. The Fed’s actions in tightening credit mean they see higher inflation and growth ahead. But so far it’s just words. They are hoping that talking up interest rates will have the effect of boosting growth, for some reason.

I don’t see how, since consumer spending and business investment are still at post-recession lows. First quarter GDP’s final growth estimate rose from 1.2 to 1.4 percent and it’s averaged 2 percent annually since 2009, the end of the Great Recession. That’s the reason for the various QE bond buying programs that have taken so many bonds out of the market.

Graph: Econoday

So the question is, as the Fed begins to sell them back into the bond market will interest rates rise? They are taking a gamble, since consumers aren’t spending as they should, and inflation is falling, rather than rising—another sign of weak demand.

Graph: Econoday

Real disposable personal income has fallen precipitously since 2014, and the Fed’s preferred PCE inflation index is down to 1.4 percent annually. That should be a danger sign, rather than a sign of higher growth.

Maybe the Fed is looking at consumer optimism, still holding at November post-election highs. Both the University of Michigan sentiment survey and Conference Board’s confidence survey show extreme optimism about future prospects.

Why such optimism? We are nearing full employment, or perhaps there is the hope that Republicans may be able to pass an infrastructure bill that would boost state and federal work projects.

But then Congress has to begin work on legislation that both Republicans and Democrats can agree on. They shouldn’t wait on much more partisan legislation that isn’t likely to pass—like reforming health care and cutting taxes, which no one seems to be able to agree on.

Harlan Green © 2017

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

What Is the Future of Interest Rates?

The Mortgage Corner

The deficit is moving to the back burner with Donald Trump and congressional Republicans in charge of Washington, and that is causing interest rates to rise quickly. Republicans leaders on Capitol Hill are now papering over divisions with Trump and deficit hawks are sounding the alarm, reports Politico.

“There is now a real risk that we will see an onslaught of deficit-financed goodies — tax cuts, infrastructure spending, more on defense — all in the name of stimulus, but which in reality will massively balloon the debt,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

 
So it's no longer a secret that bond yields are rising, with the 10-year bond yield now at 2.25 percent up from 1.71 percent just one week ago. But this is still far below the 4-6 percent yields in mid-2000, when 4 percent inflation and 6 percent fixed rates prevailed.

Calculated Risk’s Bill McBride predicts higher mortgage rates ahead, though still at historic lows. “With the ten year yield rising to 2.25 percent today, and based on an historical relationship, 30-year rates should currently be around 4.1 percent,” he said.

The 30-year conforming mortgage rate is already approaching that rate, with 30-year fixed rates @3.625 percent for a 1 pt. origination fee (3.875 percent for 0 pts.), and the Hi-Balance conforming fixed rate now 3.875 percent for 1 pt. origination, up ¼ percent just from last Friday.

Graph: St. Louis Fed

So we know part of the reason the 10-year Treasury--the main determinant of mortgage rates--is rising so quickly, after staying below 2 percent for most of this year. It’s also partly because we are at full employment while incomes are rising, and rising wages are two-thirds of product costs. Hence companies will raise their prices in response to such rising costs.

But that alone can’t account for such a quick rise. It has to be because investors and the financial markets are anticipating that President-elect Trump will be able to push through a massive, possibly $1 trillion plus infrastructure rebuilding with little thought to the budget deficit, as Politico reports.  It was a campaign promise, and he also wants to cut taxes.

This happened in 2001, when GW Bush pushed through massive spending to pay for his Wars on Terror, while also cutting taxes. His budget deficit therefore increased, and bond markets in particular don’t like large deficits, as it means too many bonds are in circulation to pay for those deficits, which reduces their price—and bond yields rise in inverse proportion to falling bond prices.

Graph: Calculated Risk

There’s also the anticipation that this will cause future inflation with so much money flooding into the economy at once. The above Calculated Risk graph shows the historical relationship between the 10-year bond yield and 30-year fixed mortgage rates.

We are therefore lucky at this late stage of a recovery to still see 4 percent fixed mortgage rates. One can see when the 10-year yield returns to a more normal 3.5 to 4 percent yield, fixed mortgage rates could almost double.

That’s why the 30-year fixed rate mortgage rose as high as 6.48 percent in 2006 at the top of the housing bubble. Will this hurt first-time homebuyers in particular? Not if inflation and housing prices don’t rise as fast, and construction can keep up with the rising demand for new homes.

Harlan Green © 2016

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Housing Creating More Jobs In 2016

We predict housing in 2016 continuing to grow the economy.  This is mainly because new-home construction should surpass 1 million units again this year, and it is new-home construction (and sales), rather than existing-home sales, that adds to economic growth.

For instance, we see in the December unemployment report that 45,000 new construction jobs were created plus 73,000 jobs in Professional and Business Services, which include attorneys, accountants, insurance agents, architects and designers that work in the real estate industry. 

 

 Graph: Marketwatch

            Much will depend on interest rates this year, of course, but the conforming 30-year fixed rate has barely budged from its record low of 3.50 percent for a one point origination fee.   A 3.375 percent fixed rate is even available in California if a borrower wants to buy down the rate further.

            The best indicator of future sales is the NAR’s Pending Sales Index, which is based on signed contracts, and consistently in 2015 predicted sales in the range of 5 million to 5.5 million, similar to the level in the early 2000s.

            One reason we believe housing has more room to grow is that new-home construction hasn’t fully recovered from the Great Recession, and is the reason for lower sales of new homes. Sales have generally picked up through the year, but are running at half the rate of 2000 and 2001, when nearly 1 million newly built homes were sold. New-home sales rose in November to an annual rate of 490,000, which is far below the peak of around 1.2 million sales in 2005.

            More new-home sales will depend on increased household formation, which economists are predicting will return to 1.2 million new households per year.  Why?  The Millennial generation is beginning to buy as they marry and begin to raise children.

Some 1,071,000 construction jobs have been added since 2011, according to Calculated Risk.  And delinquency rates have returned to pre-recession levels—in fact are the lowest in history, according to Black Knight’s Mortgage Monitor Report, reports Calculated Risk’s Bill McBride.  This is perhaps the most important statistic for the housing recovery, since it means more borrowers are available to buy homes. Black Knight now calculates that approximately 5.2 million borrowers could likely both qualify for and benefit from refinancing at today’s interest rates.

            But if mortgage rates rise by even 50 basis points (i.e., 0.5 percent), some 2.1 million borrowers will no longer be eligible for refinancing, or buying another home, says Black Knight.

            So does the Fed really want to slow down or even kill the housing market, if it continues to raise their interest rates?   That is the real question.  This might not affect mortgage rates all that much, however, as mortgage rates depend on longer term interest rates and the bond market, which follows inflation. 

But we still have almost no inflation.  Higher food prices are balanced by lower gas and commodity prices in general, and which will continue to fall as the oil glut continues this year.  We believe that interest rates will therefore remain low throughout 2016. 

Why?  There is very little growth in the rest of the world, and developing countries like Russia and Brazil are already in recessions, while China’s economy stagnates. That means foreign investors will still flock to the one safe haven in times of uncertainty—U.S. Treasury Bonds—thus keeping our interest rates low.

  

Harlan Green © 2016

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

Will Housing Starts Save Inventories?

The Mortgage Corner

Will new housing construction improve the very low inventory levels that are restricting housing sales? It is hard to know at present if this slowdown is due more to the severe winter weather, lack of inventory, or rising interest rates.

The US Census Bureau reported privately-owned housing starts in February were at a seasonally adjusted annual rate of 907,000. This is 0.2 percent below the revised January estimate of 909,000 and is 6.4 percent below the February 2013 rate of 969,000.

The National Association of Home Builders says it is also due to stricter loan underwriting criteria, but remains optimistic that demand for new homes will be high due to the inventory shortages.

“While housing construction is in a recent lull due to unusual weather conditions, we expect to see an improvement as the winter weather pattern subsides and builders prepare for the spring selling season,” said NAHB Chief Economist David Crowe. “Competitive mortgage rates, affordable home prices and an improving economy all point to a continuing, gradual strengthening of housing activity through the rest of the year. Moreover, building permits, which are less dependent on weather and are a harbinger of future building activity, rose above 1 million units in February.”

Graph: Calculated Risk

Single-family housing starts in February were at a rate of 583,000; this is 0.3 percent above the revised January figure of 581,000. The February rate for units in buildings with five units or more was 312,000.

This is a sign that the purchase market should improve for single-family buyers as well. Nationally, affordability is down from 203.7 in October 2012 to 165.4 in October 2013, according to the NAR. Mortgage rates are down from last month and up 25.8 percent from a year ago. Lower rates help affordability but an increase in inventory will help ease the pressure on home prices.

And by region, affordability is up from one month ago in all regions except the Northeast, where there was a 5.0 percent decrease in affordability. The Midwest had the biggest gain in affordability at 2.7 percent. From one year ago, affordability is down in all regions. The West has had the largest price gain at 16.7 percent while the Northeast had the smallest at 7.4 percent.

Graph: NAR

In fact, the indeterminate status of Fannie Mae and Freddie Mac may also have an effect. Their fees have been rising in an attempt by the US Treasury to push more lending onto private banks that pool their own mortgages for purchase in the secondary market.

But, except for in the jumbo market with loan amounts above the Hi-Balance conforming limits, that isn’t happening. Fannie and Freddie are still the only game in town for conforming loans. This means Janet Yellen’s Federal Reserve must continue to keep longer term interest rates as low as possible for the forseeable future, if real estate is to continue its recovery from the Great Recession.

Harlan Green © 2014

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How To Lower That Household Debt?

Financial FAQs

Here is the underlying reason our economy isn’t growing faster, hence creating more jobs. Household debt hasn’t even declined to early 2000 levels, mainly because household incomes haven’t risen above 2000 levels, after inflation is factored in.

Mortgage debt in particular still totals some $8 trillion, for example, whereas it was some $5 trillion in 2003 before housing prices really took off. Then how can households adequately service that debt, and increase their overall spending? They can’t, and so there is very little increase in the demand for goods and services, hence little increase in growth and jobs.

Graph: WSJ Marketwatch/Federal Reserve NY

Household debt is declining, but ever so slowly. In Q2 2013 total household indebtedness fell to $11.15 trillion; 0.7 percent lower than the previous quarter and 12 percent below the peak of $12.68 trillion in Q3 2008, said the New York Federal Reserve in its latest Household Debt and Credit Report.  Mortgages, the largest component of household debt, fell $91 billion from the first quarter.

“Although overall debt declined in the second quarter, households did increase non-housing debt, led by rising auto loan balances,” said Andrew Haughwout, vice president and research economist at the New York Fed.  “Furthermore, households improved their overall delinquency rates for the seventh straight quarter, an encouraging sign going forward.”

This graph from Ezra Klein’s WaPo blog illustrates how much household incomes have fallen, as well. Back in 2007, for instance, median household income was $55,438. That’s declined to $51,404 in February 2013. Those numbers are pretax and adjusted for inflation and seasonal factors. The red line is median household income and blue line the unemployment rate, which is still 7.4 percent.

Graph: Ezra Klein

We can also understand why lowering the budget deficit has been such a problem. It’s not only because government unemployment benefits increase during recessions and their aftermath, but government tax revenues decline precipitously. Even there the effects of reduced household income is obvious. Private sector businesses don’t see increasing demand, so it’s hoarding some $2 trillion plus in cash from record profits, but isn’t hiring many new workers. Meanwhile, banks hold $1 trillion plus in excess reserves, rather than increasing lending.

That leaves only one way to increase household incomes; by borrowing from those excess funds held by the private sector to create more public sector jobs, such as in infrastructure repair, better educational programs, and research and development of new products. The consequent increase in tax revenues then pays down that debt, as it did in the 1950s to 1070s after the record 120 percent World War II federal deficit. So we can see that until more jobs are created, household incomes can’t growth; or households even begin to pay down their debts to pre-recession levels.

Harlan Green © 2013

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

Will Interest Rates Continue to Rise?

The Mortgage Corner

We think not.  Interest rates are rising, mainly due to some Fed Governors saying they may begin to end the QE3 purchase of securities later this year. But that is based on overly optimistic growth projections by mostly deficit hawks who don’t like the Fed to borrow so much money.

Therefore, we also want to know how this affects real estate sales, with rates already up 1 percent since Bernanke sounded off on the possibility of slowing down purchases this year. The effect will not be good, as RE sales are already slowing.

I believe initial ‘tapering’ of securities in QE3 might not even happen this year because of slowing economic growth, and less than full employment.  Both are stuck at the low end of a recovery, with GDP growth less than 2 percent this year to date, and the unemployment rate still above 7 percent, when 5 percent is closer to full employment.

A key indicator of future sales is mortgage volume, and it has been slowing since the rate rise.  Although the 4-week average of the Mortgage Bankers Association purchase index has generally been trending up over the last year, it has been down over the last couple of months.  However, the 4-week average of the purchase index is still up about 7 percent from a year ago, as the graph shows.

Graph: Calculated Risk

But the refinance index is down some 59 percent, and refinance volumes tend to affect future sales.  The last time the index declined this far was in late 2010 and early 2011 when mortgage rates increased sharply, with the Ten Year Treasury rising from 2.5 percent to 3.5 percent, says Calculated Risk.  The Ten Year Treasury yield is up from 1.6 percent to over 2.7 percent today, but with such slow economic growth we don’t anticipate mortgage rates rising much further.

Santa Barbara and South Coast sales are slowing a bit from the spring, per Gary Woods’ monthly MLS report, but are still better than last year. Single Family and PUD sales are up 4 percent in a year, and the median price up 16 percent. 

“There have been a significant number of new home listings coming on the market,” said Gary in his report, “and with the escrows declining slightly the overall inventory has started to climb. With sales starting to cool the median sales price should continue to rise because available properties in the overheated $600,000 to $900,000 have declined while homes on the market priced above $1 million have become more plentiful.”

Nationally, existing-home sales finally reached its more normal 5 million unit annual rate over the past 2 months, and new-home sales are some 500,000 annually, vs. 1.2 million at the height of the housing bubble, as we said last week. So RE sales and prices have room to grow if economic growth does pick up in the fall, as the more optimistic Fed Governors predict. 

Graph: Econoday

However, the best place to look for interest rate trends is not Wall Street speculators betting on what Bernanke’s Fed will do. It is the actual demand for money, and that is still low for all but student and auto loans. Consumer credit reported by the Commerce Dept. has been strong for so-called installment loans, but not revolving credit card debt.

Consumer credit growth was held down in June to $13.8 billion versus May's revised $17.5 billion. Revolving credit, which had jumped a revised $6.4 billion in May, contracted $2.7 billion. Revolving credit has been up and down for the whole recovery, reflecting consumer caution and tight lending standards. So excluding autos, June was a weak month for retail sales as reflected in the revolving credit component of this report.

So who knows what the future will bring, with all the political uncertainty? That is probably what the Wall Street speculators are counting on—more uncertainty equals more volatility and so greater profits for the day traders.

Harlan Green © 2013

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

Consumers Key to Future Growth

Popular Economics Weekly

The February unemployment report gives a big boost to predictions for 2013 growth. The unemployment rate fell to 7.7 percent, and some 236,000 nonfarm payroll jobs were added to the workforce (246,000 private payroll jobs, less 10,000 government jobs lost). The next piece of the puzzle will be consumer spending. Will the increase in jobs be enough to offset the payroll tax increase? February retail sales, which account for one-third of consumer spending, comes out on Wednesday.

Graph: Calculated Risk

What makes the February report more hopeful was also the increase in incomes. Earnings have been oscillating monthly, but average hourly earnings increased 0.2 percent in February, following a gain of 0.1 percent January.   And the average workweek edged up to 34.5 hours in February from 34.4 hours the month before.

Turning to detail for the Household Survey that includes the self-employed, the decrease in the unemployment rate was from a 130,000 drop in the labor force, a 170,000 rise in household employment, and a 300,000 decrease in unemployed, a sign that more have stopped looking for work.

Graph: Econoday

Why are consumers the key to growth? Because they have been contributing to most of the Gross Domestic Product growth of late—1.5 percent in Fourth Quarter’s meager overall 0.1 percent rise in GDP activity, while government spending and inventories have been contracting.

Graph: Econoday

January’s retail sales fell slightly due to the tax increase but have still been averaging 4.8 percent since 2010, which matched the overall increase in jobs since then. Gains were scattered, led by general merchandise (up 1.1 percent), nonstore retailers (up 0.9 percent), and building materials & garden supplies (up 0.3 percent).  Weakness was in miscellaneous store retailers (down 2.6 percent), health & personal care (down 1.0 percent), and clothing & accessories (down 0.3 percent).

Graph: Econoday

The Conference Board’s January Index of Leading Economic Indicators also helps a bit when reading 2013 tea leaves. Interest rate and credit components were strong pluses for the outlook as is the rally in the stock market. Two very important components also on the plus side were lower unemployment claims and higher building permits. The claims point to strength in the jobs market and the permits to strength in housing. A negative is consumer expectations which could be low for a number of reasons--higher payroll taxes, uncertainty over future income, and higher gasoline prices, say analysts.

But we know consumer expectations are notoriously fickle, and can change direction suddenly. The latest Conference Board survey of consumer confidence shows a slight improvement, but it remains at the low end.

Why should consumers be more confident with so many still out of work and the White House fighting with Congress over budget deficits, rather than proposing more job creation programs? It should be clear by now that too much government austerity is the danger, as in Europe, while the private sector is using most of its profits in other ways—whether to create more jobs overseas, or for mergers and acquisitions, or more speculation on Wall Street.

Harlan Green © 2013

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

When Is Federal Debt Not a Burden?

Financial FAQs

The sequester advocates have gotten their way. The March 1 deadline has passed to reach an agreement to alter the across the board spending cuts and so governments will begin the draconian job cuts that will certainly slow economic growth this year—up to 750,000 jobs lost and as much as 0.6 percent off GDP growth if some compromise isn’t reached in coming weeks.

This all came about because of a lack of understanding of basic economic principles, propagated by those who should know better. One such economist and deficit hawk is Dallas Fed President Richard Fisher, who is calling for a gradual reduction in QE3 bond purchases this year, because of the ‘money Ritalin”, or artificial boost it is giving to economic growth.

"I think it's really time to taper this off," Fisher said recently on CNBC. "It doesn't mean stop it. We're not going from Wild Turkey to cold turkey. But I do think we've run up to the limits of the efficacy of what we're doing. It's a good time to do it."

He maintains the economy is improving but job creation isn't picking up fast enough. Really? That is precisely why QE3 is so important. Fed Chairman Bernanke recently said "We believe the monetary policies that we've conducted have helped get a stronger recovery and more jobs than we otherwise would have had," during his semiannual Congressional testimony.

What is it that Fisher and the deficit hawks don’t understand about Bernanke’s statement? Why doesn’t Fisher believe the facts; that Fed policies have helped a stronger recovery “than we otherwise would have had?”

They confuse overall debt with annual deficits, for one. The annual federal deficit is dropping the fastest in history—and in fact endangering this recovery. While history has shown the only way to reduce overall government debt is by increasing economic growth, which means stimulating job formation and so tax revenues. (Note that economic stimulus shouldn’t be a bad word in the context of creating more jobs, since it generates increased revenues to pay down the debt.)

Graph: Calculated Risk

Cutting taxes, which inordinately benefits the wealthiest 1 percent, hasn’t stimulated much growth—especially during the GW Bush administration which ran up the largest government debt since World War II, accompanying the slowest recovery since then, as well as helping to cause the Great Recession.

The answer to why such misconceptions then should be obvious. The so-called “debt burden” that economists such as Fisher and even Carmen Reinhardt and Kenneth Rogoff have said slow economic growth, is only a burden if programs aren’t in place to stimulate future growth. Cutting government spending for programs that create future jobs (in infrastructure, education, research and development) at a time of weak economic recovery, such as now, only further weakens the recovery.

It’s the chicken and the egg conundrum. Will just increasing the supply of money stimulate growth? Not unless it is spent wisely. Conservatives, such as deficit hawks believe that cutting taxes and so government spending puts more money into private pockets. But not when the private sector hoards the increased profits due to a lack of demand for their products, rather than investing it in future growth.

This is after all the definition of a recession—falling demand that leads to greater joblessness, due to falling prices or some outside event like the 1970’s oil embargos—that deficit hawks in particular don’t want to understand.

It is very basic economics 101. Just cutting spending doesn’t reduce debt without also investing in future growth. The sequester job cuts in particular will just diminish the revenues needed to bring down the federal government’s overall debt load.

Harlan Green © 2013

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

Our Psychological Depression

Popular Economics Weekly

The plunging financial markets are telling us something depression, but it is more about crowd psychology, than actual events. Americans are very depressed about their financial prospects. Duh, says Paul Krugman, given the congressional deadlock. So why is it causing such market turmoil? I maintain it is because of the unfounded downgrade by Standard & Poors of U.S. Treasury securities to AA+ from AAA. This event has to be almost as shocking as 9/11 to our collective psyches. For just as Bin Laden meant the 9/11 attack to be an attack on our economy, the S&P downgrade means we are no longer the world’s only economic superpower.

So will the downgrade, which hasn’t been matched by either Fitch or Moody’s bond rating services, have an effect on real economic growth is the question. Yale Professor Robert Shiller and other behavioral economists maintain that consumer confidence, or ‘animal spirits’, affects consumers’ behavior. Professor Shiller also says that much of how people judge the economy doesn’t come from facts or economic fundamentals, but the stories they hear, as well as the degree of optimism or pessimism they feel about their own circumstances. For instance, surveys by Professors Shiller and Karl Case in their Macro Markets LLC, show that the housing bubble was fueled in large part by hearsay and media stories that housing values had always risen, and would continue to do so.

So confidence is only one factor that economists look at for their predictions. It’s a good thing, because we are seeing moderate economic growth at the moment and jobs being created. Even retail sales are surging 8 percent annually at the same time that consumer confidence measured by the Conference Board and University of Michigan surveys is at recession-levels.

So it may be that plummeting confidence in financial markets is causing the extreme market volatility of late, rather than economic fundamentals. For instance, the rise in the Consumer Price Index showing some inflation was the reason given for the stock market plunge, along with very negative Empire State and Philadelphia Fed industrial sentiment surveys.

But inflation is also a sign of increasing demand, and prices must rise for businesses to expand. The core CPI index without food and energy fluctuations is up just 1.8 percent annually, while industrial production is still healthy, according to the Federal Reserve. On a year-on-year basis, overall industrial production is rising at 3.7 percent in July. Overall capacity utilization in July also improved to 77.5 percent from 76.9 percent the prior month, signaling that businesses are expanding.

Then why were the Philly and Empire State surveys so pessimistic? It may be that since both surveys are a consensus of managers’ predictions about future prospects, they could also have been affected by the S&P downgrade, which is radiating outward as hedge funds and retirement funds with extensive holdings of Treasury securities also risk being downgraded by S&P, who has decided that it has to make up for allowing AAA ratings on subprime mortgage securities during the housing bubble, thus prolonging it.

There are also other indicators that show sentiment doesn’t match behavior. Imports are surging, the reason for the larger trade imbalance, which corroborates the higher retail sales’ numbers. And weekly initial unemployment insurance claims continue to fall. Though there was a slight uptick in last week’s claims, the four-week average fell for the seventh straight week, down 3,500 to a 402,500 level that is nearly 20,000 lower than the month ago comparison. In fact, private sector nonfarm payrolls grew 154,000 in July, following an 80,000 rise in June and 99,000 increase in May.

S&P has admitted their downgrade wasn’t really about the numbers, but about their judgement that the political situation could be gridlocked for years to come. This is because the numbers aren’t that bad. Most of the deficit is short term; caused by the Bush tax cuts, ywo unpaid wars and lost revenues from the Great Recession. The wars will end, so defense budgets will shrink, and revenues rise as economic activity continues to pick up. Politicos might also realize that most of those Bush tax breaks should probably be allowed to expire in 2012, rather than be renewed. This in itself would save some $3.8 billion over the next 10 years, according to the Center for Budget and Policy Priorities.

So S&P wasn’t making a judgment about the near term deficit, which they had overestimated by $2 trillion, but about what the federal deficit may look like in 10 years. Yet how can anyone know about events so far into the future? Though given the post-recession frayed nerves of consumers and investors, even the slightest ‘aftershock’ can cause an outsized response.

Harlan Green © 2011