Consumers Keep Shopping

 Financial FAQs

It’s no secret why the US economy is still growing and fully employed. Consumers have kept spending, and such activity accounts for two-thirds of US economic activity these days. So, it’s extremely important to track how long consumers will continue to spend.

The best read on spending is how much they borrow, and they are borrowing less. It’s because the Fed has upped their borrowing costs with the Prime Rate now 8.5% and credit card borrowing rates above 20%.

FREDconsumercredit

The St Louis Fed’s consumer credit graph shows the sharp drop in borrowing since consumers’ post-pandemic spending splurge. It sends a warning signal that consumers are becoming tapped out and may begin to save more. Recessions begin when that happens.

Borrowing turned negative during the Great Recession of 2008-09 and after the brief two-month post-pandemic recession (gray bar) in the above graph, for instance.

FREDpersonalsavings

Consumers also began to save more during those recessions. This graph portrays the large uptick in personal savings in 2020 after the same post-pandemic recession. But it has returned to a post-pandemic low since. The question then becomes how much longer can consumers live with depleted savings and begin to save more in such uncertain times?

In fact, a British Lord JM Keynes was the first to identify the cause of modern recessions in 1936 during the Great Depression, when he wanted to understand what had caused it.

He said it was when citizens spirits were low; he called it their “animal spirits”; and they began to save more and spend less. It’s just an economic way of saying consumers were saving more of their income for the bad times; when the unemployment rate ultimately reached 25 percent.

Keynes said, “Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

Modern economic theory has evolved into what is now termed behavioral economics, because consumers’ confidence in their future must be taken into account. And it is easily shaken, as Nobel Prize Laureates such as Robert Shiller have explicated in books such as Irrational Exuberance, where many actions to buy and sell—“the spontaneous urge to action”—are not dependent on research, or news that they may not be able to adequately access, but hearsay and rumors.

That is perhaps a harsh judgement on how consumers behave, and also why consumer confidence has been down of late, even though second quarter economic growth doubled to 2.8 percent from 1.4 percent in Q1 in its first reading.

It’s probably also why the Conference Board’s latest Consumer Confidence Index is showing growing pessimism, per Conference Board Chief Economist Dana Peterson, in its latest release:

“The proportion of consumers predicting a forthcoming recession ticked up in July but remains well below the 2023 peak. Consumers’ assessments of their Family’s Financial Situation—both currently and over the next six months—was less positive. Indeed, assessments of familial finances have deteriorated continuously since the beginning of 2024.”

Consumers shouldn’t be blamed for their pessimism, despite being fully employed. Prices are still 20 percent higher on average than before the pandemic. But their moods should considerably improve if and when the Fed finally begins to cut interest rates, and their fears of an upcoming recession lessen.

Harlan Green © 2024

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

March Payrolls Soaring

 Popular Economics Weekly

I said last week 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.

That’s because March nonfarm payrolls increased 303,000, far above the 200,000 average poll of economists, and the unemployment rate fell slightly from 3.9 percent to 3.8 percent. This may finally put a dent in those pessimists polled that would deny the US economy is continuing its surprising surge.

FREDnonfarmpayrolls

Why? Government employment increased by 71,000, higher than the average monthly gain of 54,000 over the prior 12 months. It was mostly in local government (+49,000) and federal government (+9,000). Construction added 39,000 jobs in March, about double the average monthly gain of 19,000 over the prior 12 months.

This is largely because of President Biden’s New New Deal legislation such as the Infrastructure and Inflation Reduction Acts, but also expanding CHIPS production and a host of health care addons, all government largess that is boosting overall economic growth.

Health care added 72,000 jobs, as Biden has expanded healthcare coverages, while Obamacare enrollment is up 21 million this year.

Will this finally begin to change the irrational pessimism of Main Street, in the main ordinary working adults in the PEW study I’ve been highlighting?

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.”

There’s still the inflation worry, which combined with the 8.5 percent Prime Rate that sets credit card and installment loan interest rates, is making consumers nervous.

So the key to trends are short and long term inflation expectations measured in the various surveys. And consumers don’t see inflation improving in the near term, which I maintain is in part due to the too-high Prime Rate.

I highlighted a recent National Bureau of Economic (NBER) working paper that concluded one reason consumers remain unconvinced that economic conditions have improved is because if borrowing costs were included in the inflation data, the inflation rate would be much higher.

The Federal Reserve Bank of New York’s Center for Microeconomic Data released the February 2024 Survey of Consumer Expectations, for instance, which shows that inflation expectations remained unchanged at the short-term horizon, while increasing at the medium- and longer-term horizons.

The Conference Board is similarly less sanguine about inflation: “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.

Most Americans are exhausted and still recovering from the pandemic. And they rely on their immediate experience; much of it due to the post-COVID gyrations of the economy.

PEW in the recent poll 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, the pessimists will eventually realize a surging stock market means higher corporate profits, so stocks aren’t yet overvalued. Companies wouldn’t be hiring this many workers if profits weren’t growing, so their jobs are safe.

Harlan Green © 2024

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

Inflation Not the Real Danger

 The Mortgage Corner

FREDcpi

Why do polls say we are going in the wrong direction and the economy isn’t doing well? Fifty-two percent of American adults say they are worse off financially than they were a year ago, according to a survey conducted for The New York Times this month by the online research platform Momentive.

A large part of the discontent is sky-high inflation, the highest in 40 years. Yet it was much higher more than 40 years ago, per the FRED graph on the Consumer Price Index. It was over 14 percent in 1980 due to the 1970’s era of stagflation that manifested slow growth and lower employment with higher inflation, as per the FRED graph.

It’s difficult to reconcile the pessimism shown in the latest consumer confidence surveys with actual economic data. The University of Michigan’s gauge of consumer sentiment, for instance, fell again to a final June reading of 50 from an initial reading of 50.2 earlier in the month and well below May’s level of 58.4.

Yet U.S. factory orders jumped 1.6 percent in May in a show of strength among manufacturers in a report out today, and the unemployment rate has remained at 3.6 percent for two months.

Maybe it’s a general fear of what’s to come—perhaps a hangover from two years of the pandemic, and now a war that has exacerbated inflation.

The increase in factory orders exceeded the 0.6 percent forecast of economists polled by The Wall Street Journal. The rise in new orders in April was also raised to 0.7 percent from 0.3 percent.

A more recent poll of senior manufacturing executives signaled a slowdown in June. An index of manufacturers slipped to a two-year low in June as orders contracted for the first time since the start of the pandemic in spring 2020.

In fact, inflation is not the real danger to growth, but the fear of rising interest rates. Is that counter-intuitive? When the Fed or inflation hawks sound off on the dangers of inflation above the Fed’s 2 percent target rate, they really mean they don’t like the higher interest rates that tend to follow; which do slow economic growth.

Whereas higher inflation is usually a sign of robust growth; until it crimps consumers’ pocketbooks. For instance, the CPI inflation rate during the record 10-year Clinton era growth range of 2.5-3.5 percent. It only dipped below that during the recent pandemic years, a once-in-a-lifetime event.

Higher interest rates do most harm. That’s because most economic growth is powered by debt. We know the federal debt is upwards of $22Trillion, or 100 percent of GDP. Whereas consumer debt, either in the form of credit card or installment debt that includes mortgages, is up $38.1B or 10.1 percent annually, as consumers continue to spend with more borrowing.

Bloomberg

Inflation has mostly hovered around the 2 percent target rate historically, and should return to that range by next year, as the FRED graph makes clear, with spikes during extraordinary time, such as the 1970s era of stagflation, as I said.

But interest rates aren’t so flexible, and tend to become in installment loans with fixed monthly payments, in particular. So, we need to pay closer attention to interest rates, if we want to know what will happen next.

Harlan Green © 2022

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Retail Sales Surge While Consumers Pay Down Debt

Popular Economics Weekly

Econoday.com

U.S. retail sales rebounded sharply in October as purchases of motor vehicles and building materials surged, likely driven by rebuilding efforts in areas devastated by Hurricane Florence.

CBS News reports an economic consulting firm says Hurricane Florence may result in between $17 billion and $22 billion in lost economic output and property damage. That would put Florence in the Top 10 of costliest hurricanes to hit the U.S.

The Commerce Department said last Thursday retail sales increased 0.8 percent as households also bought more electronics and appliances. September sales were revised down, sales slipping 0.1 percent instead of nudging up 0.1 percent as previously reported; the month Hurricane Florence made landfall.

Autos were very strong in October, rising 1.1 percent following several months of weakness. Building materials were up nearly as much as autos, up 1.0 percent in what is a good indication for residential investment, said Econoday. Gasoline sales jumped 3.5 percent in the month though this reading for November due very likely fluctuating oil prices, which have been declining of late.

But consumers are spending less overall, as consumer credit slowed more than expected to just $10.9 billion in September, below Econoday's consensus range and less than half of the upwardly revised $22.9 billion August increase. 

Growth slowed in nonrevolving credit, which rose $11.2 billion in September versus $18.3 billion previously, while growth in revolving credit stalled completely and posted a marginal decline of $0.3 billion. Gains in nonrevolving credit reflect vehicle financing and student loans while gains in revolving credit reflect credit-card debt. 

St Louis FRED

Consumers are paying down their overall debt, in other words, and household net worth is now higher than before the Great Recession, as shown in the above graph. “Household net worth just hit $107 trillion and in relative terms it is at an all-time high of 5.23x nominal GDP. What is significant about this is it is coming during a cycle that has been characterized by household de-leveraging,” said economists from RBC Capital Markets in a MarketWatch interview.

“It took bubbles of epic proportions in the past to boost net worth/GDP significantly (tech, housing). This time around we have a household balance sheet where liabilities relative to net worth are sitting at a 33-year low. Pristine balance sheets coupled with significant momentum from tight labor markets (firming wage growth) and tax reform (firming after-tax income) puts the consumer in a position to continue carrying this cycle for a while,” said RBC.

So how long does the second-longest business cycle, now in its 10^th year, last? That’s the question on everyone’s mind. The 10-yr Treasury bond yield just plunged to 3.05 percent, flattening the so-called yield curve once again.

So if the Fed keeps raising short term rates as promised, it could seriously compromise growth next year by restricting credit and consumer spending that makes up two-thirds of economic activity.

Harlan Green © 2018

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

Consumers “Another Day Older and Deeper in Debt...”

Popular Economics Weekly

“Ya load sixteen tons, whaddya get, another day older and deeper in debt…”, the famous folksong sung by Burl Ives and Tennessee Ernie Ford describes today’s consumers who are still spending huge amounts of borrowed money at the end of this second longest business cycle since the end of WWII. And it can’t last much longer since consumers’ average incomes have barely risen since the 1970s in real terms.

Consumer borrowing picked up in May, according to the Federal Reserve on Monday. Total consumer credit increased $24.6 billion in May to a seasonally adjusted $3.9 trillion. That’s an annual growth rate of 7.6 percent, which is the fastest credit growth since November.

What are the numbers? Economists has been expecting half that gain; $12.4 billion, according to Econoday. Credit grew a revised $10.3 billion in April, up from the prior estimate of $9.3 billion. When we compare the 7.6 percent annual credit growth rate with consumers’ personal income growth rate of 2.7 percent, we see why consumers have become so indebted.

This borrowing binge cannot last. As noted in the World Inequality Report 2018, in both Europe and the US the top 1 percent of adults earned around 10 percent of national income in 1980. In Europe that has risen today to 12 percent, but in the US it has reached 20 percent. In the same time period in the US annual income earnings for the top 1 percent have risen by 205 percent, while for the top 0.001 percent the figure is 636 percent. By comparison, the average annual wage of the bottom 50 percent has stagnated since 1980.

Interest rates are also on the rise, with the Fed having raised their short term rates (mostly tied to the Prime Rate) 1.75 percent, and making noises about 2 more raises this year. Why? Inflation is growing with the fears of a Trump trade war giving boost to prices in those affected by retaliatory tariffs on imports US companies depend on. The Prime Rate has risen from its bottom of 3.25 percent in 2008 during the Great Recession to 5 percent today—also a 1.75 percent rise.

The wholesale Producer Price Index for final demand of materials that go into finished products rose 0.3 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. On an unadjusted basis, the final demand index moved up 3.4 percent for the 12 months ended in June, the largest 12-month increase since climbing 3.7 percent in November 2011.

Any further raises in either interest rates or inflation could tap out those consumers that are most heavily indebted.

Harlan Green © 2018

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Boom Times For Consumers In 2017?

Popular Economics Weekly

Here are more signs that economic growth will increase in 2017. There’s a large increase in revolving credit, one of the largest of the cycle, reports the Federal Reserve, a sign that retail sales are booming (with retails sales report due out Friday). And the National Federation of Independent Business reported its small business optimism index soared 7.4 points in December to 105.8, the highest reading since December 2004.

Graph: Econoday

Revolving credit jumped $11.0 billion in data for November to indicate that consumers are increasingly running up their credit-card debt. Non-revolving credit, up $13.5 billion, is also positive, here reflecting demand for vehicle financing and student loans (which are tracked in this report). Total credit rose $24.5 billion in the month, well above the consensus of economists. Retail sales for December, to be posted Friday as we said, will offer more definitive data on the strength of holiday spending.

The outsized increase in small business optimism far exceeds expectations and follows a robust 3.5-point rise in November. NFIB said business owners who expect better economic conditions accounted for about half of the overall increase, with a net 50 percent of respondents expecting that the economy will improve, a 38 point leap up from November. 

And even more importantly for small businesses, plans to increase capital spending jumped 5 points to 29. An increase in capital expenditures usually means increased productivity, a plus for increased economic growth. Earnings trends were also up 6 points, but remained in negative territory at minus 14, which is why more capex spending is so necessary to boost small business profits.

Graph: Calculated Risk

And lastly, the Labor Department just released its JOLTS report, the Job Openings and Labor Turnover Survey, which showed Jobs openings increased in November to 5.522 million from 5.451 million in October. Quits rose to 3.1 million (a sign more workers are finding better jobs), and new hires rose to 5.2 million.

This tells us the actual size of the U.S. jobs market that ‘churns’ so many millions of jobs every month, and which gives US the best picture of employment. The above graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Over the month, hires and separations were also little changed at 5.2 million and 5.0 million. It is the difference between hires and separations that determines the actual number of new jobs created, says the Labor Department’s Bureau of Labor Stats (BLS).

The number of job openings (yellow) are up 6 percent year-over-year. This is big and says and says our economy continues to expand, but there aren’t enough skilled workers to fill those jobs. Quits are up 7 percent year-over-year. These are voluntary separations, as we said, and are the reason incomes are now rising faster than inflation.

What should we take away from this? No wonder it is so difficult to forecast future job trends. But with 300,000 more Job Openings than actual Hires, U.S. businesses must find more ways to train and promote their own workforce.

Harlan Green © 2016

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

Record Low Rates Spur Consumer Debt, But Not Spending

The Mortgage Corner

Consumer credit rose a very large $17.2 billion in February with January revised higher to $14.9 billion, says the Federal Reserve. Nonrevolving credit, which are gains for vehicle financing and student loans, rose $14.2 billion and revolving credit, where credit-cards are tracked, rising the smallest amount as usual with a gain of $2.9 billion. Total consumer borrowing, which does not include mortgage debt, is now $3.57 trillion.

Graph: Econoday

This seems to contradict recent weak retail and consumer spending data that shows consumers saving more and spending less. So what are consumers up to? The lack of gains for revolving credit is good in the sense that it points to consumer wherewithal but negative relative to short-term consumer spending, says Econoday.

The Commerce Department reported consumer spending has been tepid the past 2 months. Income rose a soft 0.2 percent in February with wages & salaries slipping 0.1 percent for the first decline since September and, as it turned out, underscoring the lack of earnings punch in the employment report. But the worst news comes from the spending part of the report, up only 0.1 percent and with January revised sharply lower, now also at 0.1 percent vs an initial jump of 0.5 percent.

Graph: Econoday

And consumers continue to put money in the bank as the savings rate, in perhaps a sign of consumer defensiveness, is up 1 tenth to 5.4 percent for a 3-year high. This is while year-over-year income growth is near a two-year low and spending well under the growth during 2014. This softness isn't helping vehicle sales which in an ominous sign for the March retail sales report (released next week) fell 5.1 percent in data released on Friday. The annualized unit rate of 16.6 million is the lowest since February last year.

So what is the problem, with jobless claims at record lows, pointing to a lack of layoffs and ongoing strength for the nation's labor market? Initial claims fell 9,000 in the April 2 week to a slightly lower-than-expected 267,000. Consumers continue to pile up debt, but are spending less on day-to-day needs paid with credit cards.

Could it be due to plunging stocks and geopolitical uncertainty, synonymous with the recent terrorist attacks and weak growth in other major economies, like the EU and China?

We have no real answer, but continue to hope real estate will somehow fill the growth gap, with record low interest rates, and the Fed showing no signs of raising interest rates further. Purchase applications for home mortgages declined by 2.0 percent in the April 1 week, but refinancing, boosted by lower rates, increased by 7 percent. The average rate for 30-year conforming loans ($417,000 or less) dropped by 8 basis points from the prior week to 3.86 percent. (But conforming fixed mortgage rates are now as low as 3.25 percent in California for 1 origination point.)

Year-on-year, the purchase index was up 11 percent, still strong but a far cry from early March levels when it was more than 30 percent higher than year ago levels. But last week's construction spending report for February showed spending for new single-family homes rose 1.2 percent month-to-month and multi-family homes 0.9 percent. And, the 11 percent year-to-year rise in the purchase index is in line with February's year-to-year 10.7 percent increase in residential construction spending, and these are still quite impressive.

So when and how will we know what consumers are really up to, more savings or more spending? Probably not until the spring housing season kicks in sometime in May. We should also have a better picture of 2016 GDP growth by then.

Harlan Green © 2016

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Construction Boosted By Public Works, Offices

We are already seeing the results of the $1.1T budget agreement, and $305 STIRR Surface Transportation and Highway Trust Fund bill.  Construction spending rose a strong 1.5 percent in January due to a surge in highway & street spending as well as gains for manufacturing and on Federal construction projects.

Graph: Calculated Risk

           

This is incredible news, as it is the first time that Repubs and Democrats agreed on federal spending since the great sequester cut spending across the board in 2011.  The result will be much needed repairs of our almost century-old infrastructure.  Remember those Flint, Michigan lead drinking water pipes?

We may be finally turning the corner on neglect of our public infrastructure, so held back by the austerity policies of one political party. There was an impressive 33.9 percent gain for highways & streets (mostly done by states), and a smaller 9.9 percent increase in the Federal category.

And also in the private sector, private nonresidential components, namely offices, had a 24.8 percent year-on-year gain.  This is another sign of increased business investment.

But the housing sector also benefited on the multi-family side, reflecting strength in rental prices.  Year-on-year spending on rental housing is up 30.4 percent vs 6.6 percent for single-family homes. Together, residential spending is up a huge year-on-year 7.7 percent.

The availability of acquisition, development and construction (AD&C) loans has been a factor holding back a stronger rebound in home construction until now, but easing credit conditions and a growing loan base should help expand the residential building market.

According to the National Association of Home Builders and FDIC analysis, the outstanding stock of 1-4 unit residential construction loans made by FDIC-insured institutions rose by $2.6 billion during the fourth quarter of 2015, raising the total stock of outstanding loans to $60.9 billion.

Graph: NAHB.org

            “On a year-over-year basis, the stock of residential construction loans is up 18.9%, as indicated by the red bars in the graph above. The current reading is higher than the 16% to 17.5% annual growth rate range that the series had been in for the prior year and a half, says the NAHB. “This change suggests accelerating single-family building growth in 2016, which is consistent with NAHB’s forecast. Since the first quarter of 2013, the stock of outstanding home building construction loans has grown by 49%, an increase of $20.1 billion.”

This is further evidence the housing market is just beginning to recover.  Banks are finally lending again, and interest rates are at record lows, with the 10-year TBond yield at 1.76 percent and 30-year conforming fixed rates as low as 3.25 percent in California.

Harlan Green © 2016

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Why Slower Q4 Growth?

Gross domestic product — the value of everything a nation produces — expanded at a 0.7 percent annual rate from October to December. That’s a big markdown from 2 percent growth in the fall and 3.9 percent last spring. The economy expanded at a 2.4 percent clip last year, the same as in 2014, the Commerce Department said. Alas, the U.S. hasn’t topped 3 percent growth since 2005.

But those numbers may be revised higher, as more data on imports/exports and inventories for December come in. Hence there are two more revisions to the Q4 GDP estimate put out by Commerce. Softer consumer spending, falling exports and a smaller buildup in business inventories were largely the cause of the fourth-quarter slowdown, fresh government data showed.

Graph: Marketwatch

However, the biggest drag on growth was in industrial production. Though the drop in industrial production in the fourth quarter was concentrated not in manufacturing, per se, but in mining and utilities, mostly due to falling energy prices, says Marketwatch’s Rex Nutting.

“Manufacturing output slowed in the fourth quarter, but it did grow, at an anemic annual rate of 0.5 percent. Meanwhile, mining output (mostly petroleum and other fossil fuels) plunged at a 15.5 percent rate and utilities (hurt by the warmer-than-usual fall) saw seasonally adjusted output drop at a 15.4 percent annual rate.”

On the other hand, spending on services was higher, adding 0.9 percentage points, as was spending on goods, at plus 0.5. Residential investment, another measure of consumer health, rose very solidly once again, contributing 0.3 percentage points. Government purchases added modestly to growth.

Inflation fell again, but personal consumption is holding up, as is consumer sentiment. And next week’s December unemployment report will tell us if January growth might pick up, since strong employment tends to boost consumer spending.

Graph: Econoday

Consumer spending may not be that strong but consumer confidence is solid, at 98.1 in January, says the Conference Board. “Consumer confidence improved slightly in January, following an increase in December,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions held steady, while their expectations for the next six months improved moderately. For now, consumers do not foresee the volatility in financial markets as having a negative impact on the economy.”

The assessment of the current jobs market is favorable with only 23.4 percent describing jobs as hard to get. This is a low percentage for this reading and down more than 1 percentage point from December. But improvement here is offset by a dip in those describing jobs as currently plentiful, down 1.4 percentage points to 22.8 percent.

The bottom line is economic growth has slowed due to a decline in energy and commodity prices that hurts some industrial sectors, but it helps consumers. And consumers account for some 70 percent of economic activity these days. So look for increased government spending (state and national) on public works, as well as more new home construction to keep us out of a recession in 2016. This activity is all domestic, which isn’t affected by what is happening in China, Europe, the Middle East, Russia, and other third world countries.

Harlan Green © 2016 

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

Consumer Debts Returning to ‘Normal’

Popular Economics Weekly

The NY Fed released their 2013 Q4 Household Debt and Credit Report. The report showed that total household debt is 9.1 percent below the Q3 2008 peak. Mortgage debt is down 13.4 percent from the peak, and Home Equity revolving debt is down 25.9 percent.

This is even though aggregate consumer debt increased by $241 billion in the fourth quarter, the largest quarter-to-quarter increase since 2007, said the NY Fed report. More importantly, between 2012:Q4 and 2013:Q4, total household debt rose $180 billion, marking the first four-quarter increase in outstanding debt since 2008.

Calculated Risk

Does this mean the household deleveraging of debt that has held down consumer spending since the Great Recession is over? Are consumers opening up their wallets finally, and will this drive increased consumer spending and so GDP growth this year?

Barron’s Gene Epstein and Applied Global Macro Research (AGMR) economists believe so. AGMR projects 4 percent in economic output this year and next, arguing that future demand for housing will also boost consumer spending by creating jobs in the many ancillary industries that service housing. This is far above the Fed’s FOMC prediction of 2.8 to 3.4 percent GDP growth through 2015. It also means unemployment has to fall below 6 percent, and the Fed will begin to raise their overnight rate to 0.25 percent from its current 0 percent.

But AGMR’s report doesn’t take into account the sharp decline in federal and local government spending, which has been a drag on growth since 2009. It would have to pick up as well, in my opinion. This is happening in states like California, whose budget is now in surplus, but not at the federal level, in spite of the $1.1 trillion budget agreement for the rest of this fiscal year.

As net household borrowing resumes, it is interesting to see who is driving these balance changes, and to compare some of today’s patterns with those of the boom period. This will help to determine how sustainable is such consumer spending, and so economic growth and job creation.

Auto and student loans have led the way and been growing for some time, while overall debt continued to fall. But in 2013, the increased credit card and mortgage debt among the young and the riskless has led to a turnaround in the trajectory of overall debt. This was the case in the comparison in debt with 2005, and is still the case today. It is the under 30-year olds that are borrowing and spending the most.

 

Graph: NY Federal Reserve

And we believe it is the below-30 cohort that will comprise most of the increased demand for housing, as household formation is predicted to pick up above 1 million per year for the rest of this decade, according to the 2013 Harvard Joint Center for Housing Studies’ State of the Nation’s Housing report.

“With rising home prices helping to revive household balance sheets and expanding residential construction adding to job growth, the housing sector is finally providing a much needed boost to the economy,” says Eric S. Belsky, Managing Director of the Joint Center for Housing Studies. “But long-term vacancies are at elevated levels in a number of places, millions of owners are still struggling to make their mortgage payments, and credit conditions for homebuyers remain extremely tight.”

So as always, the key will be pent-up demand for housing and consumer goods that has been constrained since 2009, due mainly to the mountain of debt that has now been reduced to more manageable levels. But government has to be included in any growth projections, and any boost in government spending is still in question.

Harlan Green © 2014

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Will 2014 Be a Janet Yellen Rally?

Popular Economics Weekly

Consumer spending and future economic growth will depend on just how hard New Fed Governor Janet Yellen pushes the Federal Reserve Governors to maintain QE3 in 2014. She is a UC Berkeley economist interested more in creating jobs, and most of the Governors are bankers that would rather fight the fear of inflation than focus on keeping interest rates low enough to create those jobs. The December unemployment report was terrible, needless to say, with just 74,000 net nonfarm payroll jobs added.

It’s a contest between the Austerians (or Taperians), such as Fed Governors Lacker and Fisher that would end QE3 sooner vs. the Accomodators, such as Minneapolis Fed Governor Kacherlakota, which would like credit to remain easy until the unemployment rate drops below 6 percent—perhaps to 5.5 percent and closer to full employment. So how much will Dr. Yellen resist further tapering of QE3 is a big question to be answered at her first January FOMC meeting.

Taking out autos and gasoline, November consumer spending wasn’t that bad, but it could be all the holiday shopping, which is seasonal and could drop in January. So this is one indicator that will help decide what the Fed Governors do next with new Fed Governor Janet Yellen.

The latest retail sales report suggests a moderately healthy consumer sector-somewhat in contrast to the December employment report. Overall retail sales in December rose 0.2 percent, following an upwardly revised gain of 0.7 percent the month before (originally up 0.4 percent). Analysts forecast no change for the overall December figure.

Graph: Econoday

As expected, autos tugged down sharply on sales. Motor vehicle & parts dropped 1.8 percent after a 1.9 percent increase in November. Excluding both autos and gasoline, sales advanced a healthy 0.6 percent in December, following a 0.3 percent gain in November. In the core, strength was seen in food & beverage stores, health & personal care, clothing, nonstore retailers, and food services & drinking places.

Graph: Econoday

Consumers are also modestly optimistic about the economy, based on the expansion of consumer credit.  (This could have a lot to do with those low interest rates, which include mortgage rates, and it is such low mortgage rates that have boosted housing prices.) Consumer credit rose $12.3 billion in November—a solid gain. Details showed a rare back-to-back gain for revolving credit, up a modest $0.5 billion but following a $4.0 billion gain in October which was the third largest gain of the whole recovery. The last time revolving credit rose 2 months in a row was back in January and February of last year.

So maybe we will have a Yellen rally, based on her well-publicized views on the importance of the labor side (vs. the owners, including corporations) in a strong economy—especially the 80 percent of wage and salary workers whose incomes haven’t risen at all with inflation since 2000.

Harlan Green © 2013

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

Equality Is Good For Everyone!

Popular Economics Weekly

It looks like some states are beginning to take the equality issue seriously again. Massachusetts just raised their minimum wage to $10 per hour, California is raising it to $8.25 over 2 years, with New Jersey and other states to follow.

And just last week, the Center for American Progress launched the Washington Center For Equitable Growth, which aims to deepen the economic critique of inequality. It is being set up by Berkeley economist Emmanuel Saez, among others, who is known with his partner Thomas Piketty, as the first economists to historically research the history of income distribution over the past 100 years.

Their results show that we have the worst income distribution in the developed world; as bad as in 1929 that resulted in the Great Depression. Such inequality was again the case in the run-up to the Great Recession.

It was declining household incomes that led the Bush administration and Federal Reserve to create the housing bubble. It used very easy credit conditions and lax loan qualification standards to boost economic growth. But those declining incomes caused consumers to use up all their available credit and savings to maintain their standard of living, thus causing the Great Recession.

As the mission statement of the Center says:

“New research suggests that growing inequality in the United States may have broad social and economic effects — by reducing stable demand for goods and services, dampening entrepreneurialism, undermining the inclusiveness and responsiveness of political and economic institutions, limiting access to education, and stunting individual development.  Yet our understanding of how these mechanisms interact with the broader economy is limited.”

In December 2011 I wrote a column entitled, Equality Is Good For Everyone, when there was hope that maybe the Great Recession was finally over, and households might regain their financial footing from the busted housing bubble.

Alas, that wasn’t to be because Congress become locked in the battle over a higher debt ceiling and government spending cuts, just as the Europeans were going through their own austerity budget cuts. And so similar budget cuts were agreed to by President Obama and Congress that has reduced economic growth by as much as 1 percent per year, according to leading economists.

President Obama had just given a speech on income inequality that December at Osawatomie, Kansas, the site of Teddy Roosevelt’s “New Nationalism” speech, which signaled the beginning of the progressive era that culminated in FDR’s New Deal.

Teddy Roosevelt had given his now famous speech in 1910 that called upon the three branches of the federal government to put the public welfare before the interests of money and property.

“The new Nationalism puts the National need before sectional or personal advantage,” said Roosevelt. “It is impatient of the utter confusion that results from local legislatures attempting to treat National issues as local issues. It is still more impatient of the impotence which springs from over-division of governmental powers, the impotence which makes it possible for local selfishness or for legal cunning, hired by wealthy special interests, to bring National activities to a deadlock. This new Nationalism regards the executive power as the steward of public welfare. It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that of the representative.”

Sound familiar? Obama said the Republican ideology of laissez faire, small government, free markets that existed when Teddy Roosevelt made his Osawatomie speech had resulted in too much graft and unlimited corporate power.

“It’s a simple theory — one that speaks to our rugged individualism and healthy skepticism of too much government. It fits well on a bumper sticker. Here’s the problem: It doesn’t work. It’s never worked.”

Berkeley Professor and former Clinton Labor Secretary Robert Reich has been most vocal on the growing divide between Haves and Have-nots that has resulted from the decline in equality with his film and book, Inequality For All. He also highlights the resultant distortions—among them a declining quality of life for most Americans, and financial markets becoming more susceptible to boom and bust cycles.

Harlan Green © 2013

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

Consumer Debt At Record Lows

Financial FAQs

The Federal Reserve just released the Q2 2013 Household Debt Service and Financial Obligations Ratios. The overall Debt Service Ratio decreased in Q2 2013, and is just above the record low set in Q4 2012 thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt increased slightly in Q2 (omitting mortgage debt), and is back to levels last seen in early 1995.

These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households, says Calculated Risk.

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

Also, the financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

This is a very good sign for higher employment and economic growth in 2014, which shows the Fed’s QE3 quantitative easing program that is keeping interest rates at record lows is bearing results.

Graph: Calculated Risk

Also the homeowner's financial obligation ratio for mortgages (blue line in graph) is at a new record low.  This ratio increased rapidly during the housing bubble, and continued to increase until 2008. With falling interest rates, and less mortgage debt (mostly due to foreclosures), the mortgage ratio has declined to an all time low, said the Federal Reserve report.

This is while Fannie Mae also just reported that the Single-Family Serious Delinquency rate declined in September to 2.55 percent from 2.61 percent in August, while Freddie Mac’s serious delinquency rate declined in September to 2.58 percent from 2.64 percent in August.

Fannie Mae’s serious delinquency rate is down from 3.41 percent in September 2012, and this is the lowest level since December 2008. Its serious delinquency rate peaked in February 2010 at 5.59 percent, believe it or not.

Graph: Calculated Risk

So can we say that real estate is out of danger of falling back into recession? Probably, but Congress and Obama haven’t resolved the fate of Fannie and Freddie that guarantee some 90 percent of mortgages originated today. The U.S. Treasury is still holding them in conservatorship when they are making record profits, and putting those profits into general coffers, rather than paying off the $180 billion in debt incurred by them during the Great Recession and busted housing bubble.

That is not a good sign, what with the Consumer Finance Protection Bureau now policing mortgages with ever more stringent regulations, such as Qualified Mortgages, that is restricting mortgage lending. So indications are good for more growth in consumer spending this year, but prospects for housing in 2014 are still questionable.

Harlan Green © 2013

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

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

Inflation Is Not The Problem

Popular Economics Weekly

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

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

Graph: Econoday

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

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

Graph: Econoday

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

Graph: Econoday

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

Harlan Green © 2013

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

Mortgage Delinquencies Continue Decline

The Mortgage Corner

Mortgage delinquencies and foreclosures continue to decline. According to Lender Processing Services (LPS), 6.08 percent of mortgages were delinquent in May, down from 6.21 percent in April, while 3.05 percent of mortgages were in the foreclosure process, down from 4.12 percent in May 2012.

This was the largest drop in delinquencies in 11 years, and gives a total of 9.13 percent delinquent or in foreclosure. It breaks down as:
• 1,708,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,335,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,525,000 loans in foreclosure process.

Graph: Calculated Risk

Delinquencies are down more than 15 percent since the end of December 2012, coming in at 6.08 percent for the month. As LPS Applied Analytics Senior Vice President Herb Blecher explained, much of this improvement is supported by the fact that new problem loan are approaching the pre-crisis average.

“Though they are still approximately 1.4 times what they were, on average, during the 1995 to 2005 period, delinquencies have come down significantly from their January 2010 peak,” Blecher said. “In large part, this is due to the continuing decline in new problem loans -- as fewer problem loans are coming into the system, the existing inventories are working their way through the pipeline. New problem loan rates are now at just 0.73 percent, which is right about on par with the annual averages during 2005 preceding.

It has to be why consumer spending is in effect soaring. Consumers were out in force in May as consumer credit rose a huge $19.6 billion. Revolving credit jumped $6.6 billion for the largest gain since May last year and the second largest of the recovery. The gain points to a jump in credit card use which, if extended, would be a big plus for retailers. It hasn’t increased at all for most of the year, until now.

Graph: Econoday

Non-revolving credit also jumped in the month, up $13.0 billion for yet another outsized gain that reflects both strong car sales but also gains in the student loan component that are tied in part to ongoing government acquisitions of student loans from private lenders, acquisitions that do not necessary reflect current student borrowing.

So the wealth effect from more jobs and rising housing prices seems to be taking hold. That is why delinquencies have been declining, in the main. This is while the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) showing some 3.828 million new job openings in June, and 4.4 million new jobs created.

Graph: Econoday

Both hires and separations are oscillating upward with hires running a little higher than separations. In May, there were 4.441 million hires versus 4.395 million the month before. There were 4.323 million total separations in the month of May-slightly up from 4.287 million in April. The separations rate was 3.2 percent. Total separations include quits, layoffs and discharges, and other separations.

Harlan Green © 2013

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

Economic Growth Stronger Than Predictions?

Popular Economics Weekly

There are signs that economists have underestimated GDP growth this year. The New York Times surveyed economists in a recent Sunday front page article, that said growth could increase to 3 percent from the 2 percent norm of the past 3 years. “That is the surprising new view of a number of economists in academia and on Wall Street, who are now predicting something the United States has not experienced in years: healthier, more lasting growth,” said the Nicholas D. Schwartz article.

And consumers are spending more. May retail sales surprised on the upside and increased 0.6 percent on the month and were up 4.3 percent from a year ago. Retail sales excluding just autos and excluding both autos and gasoline were up 0.3 percent from April, much as expected. On the year, they were up 2.8 percent and 4.1 percent respectively.

Graph: Econoday

This is reflected in consumer confidence numbers. Consumer sentiment has been oscillating upward slowly since the mid-2011 plunge. Consumer spirits have been on a climb the last couple of months, but dipped back mid-June to 82.7 versus May's 84.5.

The consumer's fundamental outlook for the economy is little changed with the expectations component rising nearly 1 point to 76.7 which is near a recovery high. In fact, the current conditions outlook is almost back to 2006 levels.

The nonpartisan Congressional Budget Office also sees relatively fast growth of 3.4 percent next year, and 3.6 percent between 2015 and 2018. A few other private economists are even more bullish, according to the New York Times article. Jim Glassman, senior economist at JP Morgan Chase’s commercial bank, estimates the economy could expand by 4 percent in both 2014 and 2015. If that were to come to pass, it would be the strongest back-to-back annual growth since the late 1990s.

There are many ingredients that could boost economic growth. The U.S. could become a net exporter of oil and gas in the coming decades. Health care costs are declining thanks to Obamacare, or the Affordable Care Act, according to many analysts. And housing may now be leading the recovery, while household net worth has increased some $3 trillion in Q1 2013, according to the Federal Reserve’s Flow of Funds report.

In fact, household debt continues to decline, also making consumers more optimistic about their future. The Calculated Risk graph shows the Debt to Service Ratio for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages (blue) and consumer debt (yellow).

Graph: Calculated Risk

Almost all of the ratios are down to levels that prevailed in the1990s (graph begins in 1980). This is both because of historically low interest rates, rates that we haven’t seen since World War II, and the large number of foreclosures and short sales that have reduced mortgage debt by as much as one-third in some regions.

That tells us the importance of low interest rates during this recovery, when household incomes are still stagnant, mainly due to almost no growth in wages and salaries—the income earned by most households (therefore consumers).

In fact, real, after inflation household incomes have declined 7.8 percent since the end of the Great Recession, which is the ‘real’ reason this recovery has been so painfully slow.

Graph: dshort.com

As Doug Short says in his excellent blog column, “The stunning reality illustrated here is that the real median household income series spent most of the first nine years of the 21st century struggling slightly below its purchasing power at the turn of the century.”

Harlan Green © 2013

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