It's Up To the Consumers!

Popular Economics Weekly

Consumers are feeling good enough to keep the US economy from sinking into recession at the moment. The consumer sentiment survey edged up to 98.4 this month from 98.2 in June, according to a preliminary reading from the University Michigan.

“Consumer sentiment remained largely unchanged in early July from June, remaining at quite favorable levels since the start of 2017,” said survey chief economist Richard Curtin. “Moreover, the variations in Sentiment Index have been remarkably small, ranging from 91.2 to 101.4 in the past 30 months. Perhaps the most interesting change in the July survey was in inflation expectations, with the year-ahead rate slightly lower and the longer term rate moving to the top of the narrow range it has traveled in the past few years.”

Actually, sentiment has been fluctuating in that range for several years, per the FRED graph, as economic growth and employment finally ramped up in 2015 after the Great Recession, boosting consumer confidence.

Curtin believes that inflation expectations affect consumer confidence, as the survey indicates consumer expectations for growth and jobs (hence confidence) rise with a lower inflation rate. Hence the Federal Reserve mandate to keep inflation stable while low enough to enable growth.  So today’s ultra-low inflation (and interest rates) could be encouraging consumers to spend more.

“The Consumer Expectations Index falls as inflation expectations rise, signifying that consumers view higher inflation as a threat to economic growth,” he continued. “Higher inflation was related more frequently to rising interest rates and was associated with higher unemployment expectations.”

The Conference Board’s Index of Leading Economic indicators (LEI) that is a good predictor of economic activity over the next six months was not so optimistic.

“The US LEI fell in June, the first decline since last December, primarily driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first time since late 2007, the yield spread made a small negative contribution. As the US economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year.”

Why? Manufacturers’ new orders, building permits in latest housing starts survey, and the yield curve were negative. The interest rate spread between the 10-year Treasury note and fed funds rate has sunk to negative -0.31 percent, from a positive +0.56 percent last December. Long term interest rates sinking below short term rates is a sign of slower growth, since investors rush to buy longer term Treasury bonds as a safe haven if there is too much economic uncertainty, as is happening at present.

A simple way to fix the inverted yield curve problem is for the Fed to lower the fed funds rate again. But is that the right thing to do when retail sales are soaring, and June payrolls totaled 224,000 new jobs? The economy is booming, in other words, so the Fed would normally allow higher interest rates unless other forces are at work—such as White House tweets that are artificially boost stock prices (which enrich stockholders and corporate CEOs), rather than policies that would help Main St. workers—like a higher minimum wage, and better worker protections, and strengthening health care policies, which would promote longer term economic growth.

So in fact other sectors of the economy have to be boosted, if we are to continue in this ‘goldilocks’ growth cycle (i.e., not too hot or too cold). Consumers won’t continue to party, otherwise.

Harlan Green © 2019

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Higher Retail Sales + Consumer Confidence = Growth

Popular Economics Weekly

The consumer showed a lot of life in May, driving up retail sales 1.2 percent with gains sweeping nearly all components. A leading component in the month was motor vehicle sales which jumped 2.0 percent, excluding which retail sales still rose a very strong 1.0 percent. Another component showing special strength was gasoline sales which got a boost from higher prices.

Still, excluding both of these components, retail sales ex-auto ex-gas gained a very solid 0.7 percent. These results offset weakness in April, when total sales rose only 0.2 percent (upward revised from no change).

Graph: Econoday

Consumer sentiment is also up, jumping nearly 4 points to 94.6 which is well above expectations for 91.2. The gain is centered in the current conditions component, up 6.0 points to 106.8, which offers an early signal for June-to-May consumer strength. The expectations component shows a smaller but still healthy gain, up 2.6 points to 86.8. The gain here points to confidence in the jobs outlook.

Graph: Econoday

What does all this mean? Apart from vehicles and gasoline, building materials & garden equipment stores, were up 2.1 percent in what is a good sign for the housing sector. Clothing & accessories stores rose 1.5 percent while non store retailers rose 1.4 percent. Department stores, which sank a steep 2.9 percent in April, rebounded with a 0.8 percent gain.

And, there were solid upward revisions to the two prior months with total sales in April moving from unchanged to plus 0.2 percent and March moving from plus 1.1 percent to 1.5 percent. The May burst and April revision have forecasters raising their second-quarter GDP estimates while the March revision has them raising their first-quarter revision estimates.

This should mean we will see much better GDP growth for the rest of 2015, and maybe into 2016, which is a Presidential election year, let us not forget, as the unemployment rate continues to fall. And Presidential years have historically shown better growth, for some reason.

Harlan Green © 2015

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New-Home Construction, Permits Soar

The Mortgage Corner

Housing starts jumped in April and building permits hit their highest level in nearly six years, offering hope the weak housing market could be stabilizing, according to the US Census Bureau’s April report on housing starts.  This means more homes will be available to make up for the current inventory shortage, the lowest inventory of homes for sale since early 2000.

Groundbreaking for homes surged 13.2 percent to a seasonally adjusted annual pace of 1.07 million units, the highest since November 2013, the Commerce Department said. Ground-breaking for single family homes rose 0.8 percent, while starts for the volatile multi-family homes segment surged 39.6 percent.

The housing starts report suggested building activity would likely continue to rise for some time, according to Inside Debt, as permits to build homes jumped 8.0 percent to a 1.08 million unit pace in April. Permits for single family homes, however, rose just 0.3 percent. Permits for multifamily housing soared 19.5 percent.

Graph: ICAP

A separate report showed consumer sentiment falling in May on worries over income growth, tempering the housing data's upbeat signal on the economy. The news has been good but not consumer sentiment which has softened noticeably so far this month, to 81.8 vs 84.1 in final April and 82.6 vs mid-month April. The latest reading is below the low estimate in the Econoday forecast.

Weakness is split evenly between the composite's two components with expectations down 1.5 points from final April to 73.2 and with current conditions down to 95.1 which is 3.6 points below final April and which signals specific monthly weakness for the run of consumer data for May.

Graph: Econoday

Gas prices are steady and are not affecting inflation expectations which remain stable to lower, at 3.2 percent for 1-year expectations which is unchanged from final April and at 2.8 percent for 5-year expectations which is down 1 tenth.

It's hard to explain the fall off in this report, says Econoday. Job indications are strong led by the big bounce higher in the April employment report and followed by two straight weeks of significant declines in jobless claims. The stock market is making new records and housing prices are strong so far in 2014, two factors that add to consumer wealth. So we see consumer confidence continuing to improve this year as consumers feel more wealthy with a steadily improving housing market.

Harlan Green © 2014

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Consumer Sentiment, Leading Indicators Signal Higher Growth

Popular Economics Weekly

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

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

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

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

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

Graph: Calculated Risk

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

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

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

Graph: Haver Analytics

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

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

Harlan Green © 2013

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No Double Dip Recession—Why Worry?

Popular Economics Weekly

Goldman Sachs chief economist Jan Hatzius has joined the chorus that says 2013 should be a good year for growth, in spite of the so-called ‘fiscal headwinds’ of a gridlocked Congress and White House.

Why? Because both domestic and worldwide demand is picking up. U.S. exports have risen some 50 percent just since the end of the recession, while employment was given a boost with the December unemployment report that showed an additional 335,000 jobs were created in 2012 than originally prognosticated.

And real estate in 2013 may finally be rid of the drag from foreclosure sales. Calculated Risk has put up an interesting report by FNC, a real estate research firm, which says foreclosure prices have bottomed out over several months.

Graph: FNC

FNC’s report shows that foreclosure price discounts, which compare a foreclosed home’s estimated market value to its final sales price, have dropped to pre-mortgage crisis levels at about 12.2 percent in Q4 2012. At the height of the mortgage crisis in 2008 and 2009, foreclosed homes were typically sold at more than 25 percent below their estimated market value. Additionally, the report indicates that the typical size of foreclosed homes is also approaching pre-crisis levels.

Calculated Risk also reports on the 4 economic indicators used by the National Bureau of Economic Research (NBER) that determine business cycle troughs and peaks. So far just two—real GDP and personal income less transfer payments have reached their pre-recession levels. Industrial production and employment have yet to reach their previous peaks.

This tells us there is still unused potential, among other things. For instance, real GDP returned to the pre-recession peak in Q4 2011, and hit new post-recession highs for four consecutive quarters until dipping slightly in Q4 2012. (Gray areas are recessions.) But Q4 may be revised up from new data on increased exports and higher inventory levels released after the “advance” Q4 estimate. It will be followed by 2 revisions as more complete information is available to the Commerce Department’s Bureau of Economic Research.

Graph: Calculated Risk

A note about consumer confidence is in order here. Deficit hawks and austerity advocates want to continue to shrink government, their rationale being that businesses will hire more workers and expand if only they had confidence in future growth. But business confidence is really based the whether the demand for their goods and services is increasing or decreasing, not on what governments might or might not do.

Graph: Calculated Risk

And said demand depends in part on whether consumers feel better about their finances, among other things. Confidence levels have been rising, as jobs and housing values have increased, but are nowhere near pre-recession levels. Let us see whether personal income, one of the 4 business cycle indicators, continues to improve.

Harlan Green © 2013

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

How Do We Put Americans Back to Work?

Financial FAQs

It’s becoming evident that rather than the political gridlock, such as the congressional supercommittee’s obsession with spending cuts, we need to worry about economic growth and jobs. And there are some very good ideas on how to do that, such as in President Bill Clinton’s newest book, “Back to Work”. And economists such as Christina Romer, former Chairman of Obama’s Council of Economic Advisors, in a recent New York Times Op-ed are pleading with the Fed’s Ben Bernanke to actually target a growth rate that will both create jobs and keep inflation within a manageable range.

What? You mean the Federal Reserve’s QE-1, 2, and 3 buying of securities wasn’t doing just that? Well, no. It has accomplished the goal of keeping both short and long term interest rates low, but that hasn’t done anything for setting expectations of higher growth. In fact, the Fed just downgraded its own predictions of future growth. If anything, such low interest rates reflect deflationary expectations, which is the real problem. Companies won’t hire if they can’t raise prices, while consumers’ incomes fall in such an environment, stifling demand.

Dr. Romer and other major economists are beginning to insist the Fed should actually set what is called ‘nominal’ (i.e., before inflation accounted for) Gross Domestic Product growth target at the long term growth rate of around 5 percent. That way, expectations are raised for economic growth, without abandoning an inflation target of say, 2 percent, the current Fed inflation target.

How else can we boost demand for goods and services that is the actual driver of economic growth? We have discussed in a prior column how necessary it is for consumers—who power 70 percent of growth—to spend more, which in turn creates greater demand, which in turn creates more jobs in a virtuous circle. They won’t if their confidence remains low, which surveys show causes them to spend less.

Former President Clinton has much more to say in “Back to Work” that directly addresses how to put Americans back to work, and he should know. “..during my administration we had four surplus budgets and began to pay down the national debt,” he says; “we eliminated sixteen thousand pages of federal regulations; we cut taxes on the middle class, working families of modest means, and income from capital gains; we reduced the size of the federal workforce to its lowest level since 1960, and the economy produced 22.7 million new jobs.”

How did he do it? By emphasizing cooperation rather than competition between government and the private sector. “I believe the only way we can keep the American Dream alive for all Americans and continue to be the world’s leading force for freedom and prosperity, peace and security,” said Clinton, “is to have both a strong, effective private sector and a strong, effective government that work together to promote an economy of good jobs, rising incomes, increasing exports, and greater energy independence.”

Why is strong government so important? It is what engenders both business and consumer confidence, which are still at record lows. And without that confidence, consumers won’t spend to keep up demand, as we said, and businesses won’t hire in anticipation of higher growth.

Confidence from both the Conference Board and University Michigan surveys has remained at recession levels since 2008, really. And we know major reasons for such low confidence are both political gridlock, and the S&P downgrade of U.S. Treasury bonds to AA+. This is what it means to lose confidence in our institutions, readers. Also, the subprime debacle that brought on the housing bubble caused a major loss of confidence in our Too Big To Fail financial institutions, which were allowed to gamble with their investors’ monies, and then be bailed out by taxpayer money.

But the confidence measures have stood in contrast to strength in consumer spending. If recent gains for confidence can be extended in the weeks ahead, the economic outlook as well as expectations for holiday shopping will improve. Some thawing in the jobs market may be helping with sentiment, says Econoday.

So confidence has to be restored in all of our institutions if we want to bring back economic growth. “What’s the smart, effective way to do that?” asks Clinton. “With a strong economy and a strong government working together to advance shared opportunity, shared responsibility, and shared prosperity? Or with a weak government and powerful interest groups who scorn shared prosperity in favor of winner take all until it’s all gone?”

Studies have shown that only by sharing prosperity can we really create strong economic growth. And right now we rank near the bottom ranks of nations in income inequality, according to the much cited CIA World Factbook.  So there is a lot of work to be done to restore confidence in Americans’ future.

Harlan Green © 2011