Good Jobs Report for Many

Financial FAQs

The stock market plunged on news total nonfarm payroll employment increased by 295,000 in February, and the unemployment rate edged down to 5.5 percent, the U.S. Bureau of Labor Statistics reported today.

Graph: Marketwatch

Why did stocks plunge on the BLS release when it was an extremely strong report with all sectors adding jobs? Because the financial markets mistakenly believe it will push up the Fed’s schedule for raising interest rates, and higher rates mean less excess liquidity to invest in the stock market.

But Janet Yellen’s Fed isn’t focused solely on the rate of job formation or jobless rate, as she has said countless times, if the U.S. isn’t closer to full employment. And there wasn’t good news on wage growth; though January’s report had showed a slight improvement. The BLS report said: "In February, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $24.78. Over the year, average hourly earnings have risen by 2.0 percent."

Graph: Calculated Risk

This is the real reason the U.S. economy has taken so long to recover. There are still more workers out of work, or looking for work than available jobs that pay a living wage. And the unemployment rate shrank from 5.7 to 5.5 percent only because 178,000 left the workforce, because they stopped looking for work.

Why no wage growth after adjustment for inflation (now slightly under 2 percent)? A Federal Reserve study reported that the greatest demand for workers since the Great Recession has been in the poverty-level, minimum wage-paying service industries, and the lowest demand is for midlevel workers who once comprised the vast majority of the middle class.

A April 2014 report by the National Employment Law Project provided details supporting the Federal Reserve study. During the recession, low-wage jobs, those paying less than $27,700 per year, had both the lowest percentage of losses and the highest percentage of gains. Twenty-two percent of the total job losses were in the low-wage category, but 44 percent of new jobs were in that category.

Graph: Truthout

Mid-wage jobs, those paying between $27,700 and $41,600 (i.e., middle class jobs), had the lowest percentage of new jobs created, 26 percent, but the second highest rate of job losses, 37 percent. High-wage jobs, those paying more than $41,600, had the highest rate of losses, 41 percent, but a higher rate of new jobs created, 30 percent, than the mid-wage category.

So Janet Yellen may not even be ready to raise interest rates in June, or sooner, as the financial markets fear. There can be no sustainable recovery, the Fed’s stated goal, until there is enough income growth to prevent another fallback into recession as happened to the Japanese and Eurozone economies because of premature credit tightening.

Harlan Green © 2015

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

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

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

Republicans’ Dark Side—Their Job Killing Machine

Financial FAQs

As Maureen Dowd just put it in a New York Times Op-ed, the debt ceiling audience has staggered away from a “slasher flick still shuddering…The gory, Gothic melodrama on the Potomac is a summer horror blockbuster—without the catharsis.” The shuddering had to come from the audience facing what Jungians would call their shadow side—the worst, most atavistic part of our nature that we have avoided facing until now.

In this case, it is the rise of the job killers—no compromise Republicans who would rather sink the economy that raise any revenues to pay down the debt. They are being led by the Tea Partiers, a mix of racists, misogynists, birthers—mostly white and less educated—who want to take back America to what it was before the last wave of immigrants reached our shores—maybe 100 years ago?

The result was incredible panic selling as ghoulish whispers of recession echoed through the financial markets. But a double-dip recession? No way, not with corporations holding $2 trillion in excess cash profits, and banks holding $1 trillion in excess reserves. These excesses are the real reason the Fed has held interest rates so low for so long. The Fed is attempting to coax them into doing something with their cash and reserve hoard, rather than hold them in MZM accounts—zero maturity earning almost zero interest rates.

Americans have not had to face the worst elements of our culture for a long time. Although our characterization of Vietnamese as “gooks” in order to make them enemies despicable enough to invade wasn’t so long ago.

The debt ceiling agreement was no catharsis because not enough was done to prevent the S&P downgrade of U.S. Treasury debt to AA+. They could not agree to reduce the deficit roughly $4 trillion, in S&P’s view, to stabilize the deficit by 2015. So S&P has begun to slash AAA ratings here and abroad.

Paul Krugman’s comment on the dark consequences of the European Union also embracing austerity when it should be stimulating growth was “Got that 30s feeling, all the way.” The results of insufficient job creation and growth would be ugly; such as the unrest in Greece cited in an AP report by Krugman.

ATHENS, Greece — They descended by the hundreds -- black-shirted, bat-wielding youths chasing down dark-skinned immigrants through the streets of Athens and beating them senseless in an unprecedented show of force by Greece's far-right extremists. In Greece, alarm is rising that the twin crises of financial meltdown and soaring illegal immigration are creating the conditions for a right-wing rise -- and the Norway massacre on Monday drove authorities to beef up security.

It took FDR, maybe our greatest President, and WWII to pull us out of the Great Depression. Right now, we have no such leadership when we need him or her the most. We happen to have President Obama, who seems to not want to face his own inability to find any villains of the Great Recession. And so the villains are prevailing at the moment.

If only he could face his enemies—which are those who want to tear him down by tearing down the economy. Roosevelt was able to face them down in his famous 1936 Madison Square Garden reelection campaign speech while on crutches and debilitated by polio:

“Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.”

Obama has failed to recognize the bullying tactics of House Republicans, such as blatantly ruling out any kind of compromise during the debt ceiling negotiations. It was also the Nazi’s main tool of intimidation during their rise in 1930’s Germany, described most recently via U.S. Ambassador William E Dodd’s account, “In the Garden of the Beasts”.

It is even showing up in our schools with the rise of children’s bullying in schools. Is all this pessimism warranted, is the real question, or is it the product of our 24/7 media feeding frenzy that wants to show up any sensational incident or event in its worst light to gain attention?

Alas, it is more than that. It is the steady loss of opportunity and growing income inequality we have allowed to happen over the last 30 years that is the real cause of the rise of our dark side. Michael Moore answers it best in his latest letter to his followers:

“From time to time, someone under 30 will ask me, "When did this all begin, America's downward slide?..."It ended on this day: August 5th, 1981.

“Beginning on this date, 30 years ago, Big Business and the Right Wing decided to "go for it" -- to see if they could actually destroy the middle class so that they could become richer themselves. And they've succeeded.”

On August 5, 1981, President Ronald Reagan fired every member of the air traffic controllers union (PATCO) who'd defied his order to return to work and declared their union illegal. They had been on strike for just two days.

Reagan had been backed by Big Business in his run for the White House and they, along with right-wing Christians, wanted to restructure America and turn back the tide that President Franklin D. Roosevelt started -- a tide that was intended to make life better for the average working person, said Moore.

The best evidence of Republicans job killing machine is their attack on government spending in the debt ceiling agreement, when government employment has fallen by 946,000 over the past 13 months, according to Barron’s Gene Epstein, while private payrolls have grown by 1.96 million over that time. And their attack has continued in Wisconsin, Indiana, and even Ohio with cuts in public employee benefits. This is when we most need to strengthen our governmental institutions that pay for environmental protection, education, health care, and public safety.

These are not signs of an incipient recession, in other words, but a lack of responsible leadership, as even S&P said in their downgrade announcement. So how do we put the darker side of ‘U.S.’ back into its bottle? The huge stock market losses make it harder for even the no tax, free marketers to deny the results of their work. The free market had spoken, after all, and did not like what it saw.

We can hope the panic subsides and rational thought returns. But it is really up to our leaders to lead again, as President Roosevelt once did.

Harlan Green © 2011

Why Are Republicans Playing With Fire?

Financial FAQs

The reports that 4,000 FAA employees and up to 70,000 airport construction workers narrowly escaped being laid off until Labor Day is unbelievably true. And this is the height of the summer travel season.

In this case, Senate Majority Leader Harry Reid had to scotch together a last minute compromise after Republican Senator Orrin Hatch scotched an earlier compromise of the House bill negotiated by Senators Rockefeller and Kay Bailey Hutchinson that would have cut spending on rural airport subsidies, according to the New York Times.

In fact, such actions are putting into question the motives for Republicans’ opposition to any kind of stimulus spending to spur economic growth. Republicans have once again brought us ever closer to another recession by imposing their anti-government, anti-union agenda.

What else should we think? In fact, we just had the 30^th anniversary of President Reagan’s firing of 11,000 striking Air Traffic Controllers that Governor Scott Walker has been holding up as his model for banning collective bargaining of public employees in Wisconsin. (Though that may soon be reversed with next week’s Wisconsin recall elections.)

The only problem is that Reagan wasn’t against collective union bargaining according to Associate Professor Joseph A. McCartin of Georgetown University, author of a forthcoming book, “Collision Course: Ronald Reagan, the Air Traffic Controllers, and the Strike That Changed America.” And it exposes Scott Walker’s total disregard of both history and the truth.

“Although he opposed government strikes, Reagan supported government workers’ efforts to unionize and bargain collectively’” said Professor McCartin in a recent New York Times’ Op-ed. “As governor, he extended such rights in California. As president he was prepared to do the same. Not only did he court and win Patco’s endorsement (the Traffic Controllers union), he directed his negotiators to go beyond his legal authority to offer controllers a pay raise before their strike—the first time a president had ever offered so much to a federal employees’ union.”

How close are we to a double-dip recession? The latest revisions to Q1 and Q2 2011 Gross Domestic Product growth show that consumer spending has shrunk—mostly from a lack of confidence in the future, and household debt that is still too high. This is while DOW Jones plunged 512 points on Thursday—due to fears of another recession. So this is not the time for Republicans to be playing with fire.

It is why GDP growth has slowed so drastically. There are 4 indicators used by the National Bureau of Economic Research Business Dating Committee to determine a recession—employment, personal income less transfer payments, real GDP growth, and industrial production, as we have said. Of the 4, industrial production and GDP growth have been recovering since mid-2009. But they are really dependent on employment and personal incomes less transfer payments, which haven’t done so well. Personal incomes have improved for those who are employed, but the money is either being saved or used to pay down debts.

And employers are not hiring enough workers to keep up with population growth. So there is really no excuse for Republicans’ ideological blindness that opposes any kind of government action to stimulate growth, unless it is intentional. In other words, would they use another economic collapse to try to knock out Obama in 2012? It is a horrific thought, if so. Republicans should keep in mind the Blame Game can work in unexpected ways. Playing with fire during this economic conflagration could forfeit their chances of winning anything.

Harlan Green © 2011

Inequality and the Destruction of Our Wealth

Popular Economics Weekly

This is making the case for a higher growth rate and greater prosperity, not the ‘new normal’, post-recession slow growth malaise so many pundits are predicting. And it has little to do with cutting government spending, or the recent Great Recession, but everything to do with the righting the tremendous inequality caused by current economic policies in place.

An illustration is the budget “compromise” being worked out in Congress—cutting spending without increasing tax revenues. It just continues policies that have contributed to the wholesale destruction of most Americans’ incomes and wealth. It does not even reduce the deficit but grows it, and so reduces the main source of our prosperity, our standing as the world’s superpower. It also continues the downward slide in household incomes by continuing to divert the tax dollars that would most improve our standard of living to the richest, whose standard of living hasn’t suffered.

The destruction of middle class wealth and income by Republicans, in particular, has been prolonged and systematic for decades. This standard of living has already declined for most of us, and will continue to decline if this “compromise” doesn’t include reversing the drain in tax revenues, for starters.

Don’t take my word for it. Check out CIA reports on how we compare with the wealth of other countries. We now rank 97^th in income equality below all developed countries, Iran, and Russia. In fact, the U.S. is now just above Jamaica and the poorest African countries. Wealth—both income and assets—has become concentrated among fewer and fewer Americans, in other words.

In fact, just since the end of this recession Americans have experienced the worst income inequality since the Great Depression. And most economists agree the inequality of that era, in which the top 1 percent income bracket had corralled almost a quarter of national income, destabilized financial markets to such an extent that it was a major cause of the Great Depression. It was also an underlying cause of the Great Recession and could soon tip us back into another recession if such inequality is not reversed.

This is the real casualty of the current budget gridlock. Instead of focusing on reducing the deficit by reducing or closing tax loopholes of the wealthiest, the budget cutting crusaders of the Republicans’ extreme right wing want to preserve their wealth. That is, in the name of ‘freeing’ private capital by reducing government expenditures, a huge amount of wealth has been ‘freed’ from the gainfully employed to their supporters on Wall Street and Big Business.

This has always been the rationale of modern conservatives for downsizing government. Yet such extreme inequality lowers the standard of living for all in several ways. For starters, it decreases opportunity. There is less opportunity to access the ever more expensive higher education, and so less upward mobility, which brings nurtures creativity. Studies show we are already less upwardly mobile than other industrialized countries. And it affects individual health. We already have an infant mortality rate lower than any other developed country—on a par with Cuba’s—and higher disease rates.

Greater inequality also puts more people on public welfare rolls. We already have the highest poverty rate since WWII. It also increases crime rates. With 2.3 million prison inmates, the U.S. already has the highest incarceration rate of any county in the world. This is not to speak of budget cutting effects on financial regulation, or to control environmental pollution, or to replace aging infrastructure, much less modernize industry.

How did all this happen? The decline began in the 1970s with the stagnation of household incomes. Then as Republicans became more conservative under the cry of smaller government, they began cutting incomes and benefits of the lower and middle class earners who create most of our wealth—i.e., are the real producers as well as buyers of our goods and services.

It was done under the Republicans’ supply-side theory that almost all government, collective bargaining and taxes are evil, while tax cuts pay for themselves. But lowering the highest tax bracket shifted the tax burden to the middle and lower income brackets, since payroll taxes weren’t cut. If fact, they were raised to pay for rising social security and Medicare benefits, worsening the growing inequality. Even then, President Reagan had to raise taxes 18 times when he realized the huge deficit it created.

The anti-government crusade continued with the $5.7 trillion in debt created by GW Bush’s tax cuts and unpaid wars, according to the non-partisan Center for Budget and Policy Priorities. More than 50 percent of the tax benefits in fact went to the wealthiest one percent—for capital gains and dividends, a lower maximum income tax rate, accelerated depreciation for companies, and the like.

The resultant increase in the deficit has endangered both social security and Medicare benefits, which mainly support the elderly as well as the lowest wage earners. The result is almost inevitable—the expectation of a ‘new normal’ growth rate with permanently higher unemployment, lower wages for average workers, and reduced social security and Medicare benefits.

In lowering our expectations, ultra-conservatives are having their way, in other words. And it will result in a greater social divide than ever—between the Have and Have-Not states, the educated and less educated, which will create a larger and more permanent Under Class.

But it doesn’t have to be that way. We could go back to a more progressive tax system that nurtures higher growth rates by closing the tax loopholes and raising the maximum income tax bracket back to 39 percent of the Clinton era. We know that President Clinton did it while cutting spending that resulted in budget surpluses from 1997 to 2001. In fact, a wonderful graph by Eliot Spitzer in Slate of the history of marginal tax rates shows that the GDP growth rate has been basically stagnant since 1980 with the decline in marginal income tax rates.

We can also cut entitlement expenses by continuing to implement the new Patient Protection and Affordable Care Act (PPACA, Public Law 111-148); and, following that, the Health Care and Education Reconciliation Act of 2010 (H.R. 4872), which made a number of changes to provisions of PPACA along with significant changes to the federal postsecondary education programs, will both improve preventative care and lower costs, as reported by the Congressional Budget Office.

In fact, allowing the GW Bush cuts to expire in 2012 would halve the deficit in 10 years, according to the Congressional Budget Office (CBO). While continuing the tax cuts for the 2011-2020 time period would add $3.3 trillion to the national debt, comprising $2.65 trillion in foregone tax revenue plus another $0.66 trillion for interest and debt service costs.

But until Republicans realize that shrinking government without policies that redistribute wealth back to the wage and salary earners who produce and spend it, very little growth will happen. And that shrinks the living standard for all of us. It shows policies which hide behind shrinking government really destroy wealth—and taking away the wealth of some takes away better economic growth and prosperity for all.

Harlan Green © 2011

What Will Bring Back Jobs?

Popular Economics Weekly

What policies that will do most to bring back jobs is being sidelined by the budget debate. Everyone agrees boosting aggregate demand; the sum of consumer spending, foreign and domestic investment, exports and government stimulus—is the way to create jobs. The argument is over whether the private or public sectors are better at it.

That shouldn’t be the debate. Given this is the worst downturn since the Great Depression, all stimulus cylinders must be firing. That increases both corporate profits—though already at record levels—and the revenues needed to pay down debt.

Here is why. As Calculated Risk reported recently, there are currently 130.738 million payroll jobs in the U.S. (as of March 2011). There were 130.781 million payroll jobs in January 2000. So there was no increase in total payroll jobs in over eleven years. Only in January 2010 did the number of ‘Hires’ and ‘Job openings’ again begin to rise above the number of ‘Layoffs’, according to the Labor Department’s latest Job Openings and Labor Turnover (JOLTs) survey.

And the median household income in constant dollars was $49,777 in 2009. That is barely above the $49,309 in 1997, and below the $51,100 in 1998. “Just a reminder that many Americans have been struggling for a decade or more. The aughts were a lost decade for most Americans,” said Econoday.

What are the 80 percent of consumers who are fully employed buying? Mostly durable goods, like cars. Manufacturing is leading us out of the recession, in part because of the weak dollar that has goosed exports. Econoday tells us over the past 12 months industrial production has been strong with a 5.9 percent gain and with manufacturing up a notable 6.6 percent.   Manufacturing has been led by durables (up 11.3 percent) with motor vehicles being particularly robust (up 16.3 percent).

So we are in bit of a Catch-22 situation. The weak dollar exchange rate is also worrying deficit hawks, since they believe it endangers foreign investors (mostly the Chinese and Japanese) from investing their excess dollars in the U.S., maybe causing interest rates to rise abruptly. Standard & Poor’s rating agency has put the U.S. on what is essentially a credit watch, saying it didn’t believe Democrats and Republicans would be able to agree on how to reduce the deficit by election year 2012.

Yet the only thing that does reduce budget deficits is growth. Great Britain has proved that with its conservative government that was elected on a drastic spending cut platform. The result is their economic growth has slowed drastically.

The New York Times reported on first year results of Britain’s austerity program in a recent article. “…one year into its own controversial austerity program to plug a gaping fiscal hole, the future is now. And for the moment, the early returns are less than promising,” said the NYTimes. “Retail sales plunged 3.5 percent in March, the sharpest monthly downturn in Britain in 15 years. And a new report by the Center for Economic and Business Research, an independent research group based here, forecasts that real household income will fall by 2 percent this year. That would make Britain’s income squeeze the worst for two consecutive years since the 1930s.” So many British economists now believe they are in danger of a double-dip recession.

This has to be a case of ignorance not being a blissful state. President Roosevelt attempted to balance the budget in 1937 after 4 years of recovery from the first Depression, but it plunged the U.S. into its second Depression, which wasn’t cured until WWII increased government spending (and borrowing) to the tune of 120 percent of GDP. It was only surging post-war growth of the 50s and 60s that brought debt down to 40 percent of GDP where it essentially remained until 1980, when President Reagan and the Republicans again attempted to balance the budget on the back of drastic tax cuts, lowering the top income tax bracket to 39 percent from 48 percent. This resulted in two back-to-back recessions in 1982-83.

So, when one side of the budget debate takes tax increases but not tax cuts off the table, there are two results. Tax cuts only provide limited stimulus, as the Bush tax cuts proved—they increased the deficits from essentially $0 in 2000 to more the $2 trillion in 2008, in spite of low unemployment and inflation. A failure to pay down the budget deficit and invest in needed infrastructure, education and research projects that increase productivity, damages both our economic growth and competitive position in the world.

“Every U.S. policymaker should therefore wake up every morning and remind themselves of the following,” says Econoday.  “There are currently 7.25 million fewer payroll jobs than before the recession started in 2007, with 13.5 million Americans currently unemployed. Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6.1 million have been unemployed for six months or more.

But that won’t happen if we continue to squabble over ideologies, rather than focus on how to create more jobs.

Harlan Green © 2011

What Explains So Many Foreclosures?

The Mortgage Corner

The delinquency rate for mortgage loans on one-to-four-unit residential properties dropped to a seasonally adjusted rate of 9.85 percent of all loans outstanding as of the end of the second quarter of 2010, a decrease of 21 basis points from the first quarter of 2010, and an increase of 61 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. But is it only the recession that explains such horrendous numbers, the worst since the 50 percent default rate of the Depression?

Of course the recent recession and burst housing bubble have contributed to much of the foreclosure problem, but studies by the FDIC have shown deeper, underlying causes. In fact, the foreclosure rate has been rising since the 1970s, when it was as low as 0.2 percent.

“These latest delinquency numbers contain a mixture of somewhat good news and somewhat bad news.  The good news is that foreclosure starts are down and the inventory of homes anywhere in the process of foreclosure fell for the first time since 2006 and had the largest drop since 2005.  The fact that both the 90+ delinquency rate fell and the foreclosure start rate fell means that a significant number of these seriously delinquent loans have been successfully modified and reclassified as performing, current loans,” said Jay Brinkmann, MBA’s chief economist.

So-called underlying causes are worth studying because many factors go into the foreclosure pot besides the usual reasons of divorce and job loss. And though underlying causes may not directly precipitate a foreclosure, they make economic shocks such as job losses incurred during recessions harder to weather. There is of course a direct correlation between job losses and unemployment. Florida and Nevada with 12 and 14 percent unemployment rates, respectively, also have the highest delinquency rates.

The most obvious underlying trend studied by the FDIC is the rise in loan amounts as a percentage—or loan-to-value (ltv)—of the purchase price. The ltv for new mortgages has risen to almost 80 percent, from as low as 58 percent in the 1950s. This has particularly hurt homeowners whose housing values have plunged during this recession.

Another startling fact is the rise of mortgages not serviced by their lenders—i.e., that have been sold to investors. Today, 60 percent of new mortgages are sold to investors in the so-called secondary markets, when it was below 20 percent in the 1970s, according to the FDIC. This larger percentage of so-called service-released mortgages correlates with higher delinquency rates, probably because the originating lender (who is no longer responsible for servicing the loan) has in many cases loosened their underwriting standards—especially for the no income/no documentation subprime mortgages.

Today on a seasonally adjusted basis, the overall delinquency rate has decreased, driven by decreases in the rate for fixed rate loans and VA loans. However, ARM and FHA loans saw increases this quarter, said the MBA survey. The seasonally adjusted delinquency rate stood at 5.98 percent for prime fixed loans, 13.75 percent for prime ARM loans, 25.19 percent for subprime fixed loans, 29.50 percent for subprime ARM loans, 13.29 percent for FHA loans, and 7.79 percent for VA loans.

“Ultimately the housing story, whether it is delinquencies, homes sales or housing starts, is an employment story.  Only when we see a consistent increase in employment will we see an increase in sales and starts, and a sustained improvement in the delinquency numbers.  Until we see the increase in the number of households that comes with an increase in the number of paychecks, all measures of the health of the housing industry will continue to be weak,” said MBA’s Brinkmann.

The study’s conclusion is that “shocks to individual lifestyles or “trigger events,” such as divorce or job loss, have increased the risk of default. But “…the (overall) risk posture of individuals has increased, especially as individuals increasingly leverage their homes as part of a broader strategy of managing their overall wealth portfolio.”

And though during good times such underlying factors may not surface as proximate causes, they increase the risk of foreclosure during economic downturns.

Harlan Green © 2010

When Will Real Estate Recover?

The Mortgage Corner

The real estate market looks to be in limbo, but there is optimism that growing pent up demand will prevail as the jobs market improves. Although new-home construction has been stagnant, it hasn’t fallen substantially, while commercial property values are beginning to recover.

Single-family housing starts were virtually unchanged from the previous month at a seasonally adjusted annual rate of 454,000 units in June. Meanwhile, a 21.5 percent decline on the more volatile multifamily side weighed down the overall housing production number, which fell 5 percent to a 549,000-unit rate.

"As our most recent member surveys have indicated, builders remain very cautious in light of the sluggish pace of the economic recovery and the hesitancy they are seeing among potential home buyers," noted Bob Jones, chairman of the National Association of Home Builders (NAHB). "However, today's report is actually somewhat encouraging, because it indicates that single-family production is stabilizing following an expected lull that occurred with the end of the home buyer tax credit program."

Commercial real estate is also showing improvement, according to Moody’s, reaching its low point in January 2010. The Moody’s commercial same-property index has mirrored the Case-Shiller Home price Index improvement, which began its rise in March ‘09, but began its price rise 9 months later, in other words.

U.S. commercial real estate prices increased 3.6 percent in May, the second consecutive monthly increase, as measured by Moody’s/REAL Commercial Property Price Indices CPPI. Commercial real estate prices in April rose 1.7 percent.

“We expect commercial real estate prices to remain choppy in the coming months,” said Moody’s Managing Director Nick Levidy in a release Monday. “The positive news of increasing prices over the past two months is tempered by low transaction volumes, forecasts for slowing macroeconomic growth and the rising risk of a double dip recession.”

Existing-home sales are also stagnant, and may have already experienced a minor double dip. Its future depends on the number of foreclosures still to happen, as a recent study said that in fact banks are selling more homes via REO sales than builders at the moment. Stats show that nationwide, in late 2006 new homes accounted for nearly 20 percent of all transactions, but in early 2009 the new home share was down to 14 percent, and starting in that month there were more REO sales in the preceding 12 month period than new homes sold. So for the last year and a half, banks have sold more houses than home builders, according to Calculated Risk.

Existing-home sales were at a seasonally adjusted annual rate of 5.66 million units in May, down 2.2 percent from an upwardly revised surge of 5.79 million units in April. May closings are 19.2 percent above the 4.75 million-unit level in May 2009, so sales are still positive year-over-year.

The Obama’s Administration’s Comprehensive Housing Initiative has been helping to keep homes out of foreclosure. Its July joint report by HUD and the U.S. Treasury said record low rates have helped more than 7.2 million homeowners to refinance since April of 2009, “resulting in more stable home prices and $12.9 billion in total borrower savings”.

And, HAMP (the Home Affordable Modification Program) has helped over twice as many homeowners compared to foreclosure completions: Nearly three million borrowers have received restructured mortgages since April 2009, outpacing the 1.24 million foreclosure completions for the same period. As more families are able to remain in their homes, household assets continue to rise with $1.1 trillion in home equity gained since April 2009, said the report. A continuation of commercial real estate improvement will be a signal that businesses are recovering, as will job creation, which then will give a boost to residential sales as well.

Harlan Green © 2010

The Debt Fallacy

Financial FAQs

The European debt crisis has re-triggered the debate over budget deficits, and even whether Europe’s problems could trigger a ‘double-dip’ return to recession in our own economy. The contention is that Europe will be burdened with debt for years to come, which slows their economic growth.

What has Europe to do with our own economy? It is mainly the relationship between currencies. When the euro is high, then our exports are cheaper, helping manufacturing employment in particular. So the reverse case boosts European exports and reduces ours. And the euro’s value has plunged as investors fled to dollar denominated investments.

But a more general debate is whether governments should incur additional debts to cure such financial crises as we are now weathering. Keynesian economists say that government stimulus spending is crucial to any recovery, since it boosts demand for new products and services. But that only happens if it is directed to consumers—who account for up to 70 percent of economic activity.

So-called supply-side policies boost the producers by giving tax cuts directly to investors and businesses, in the hopes that it will induce businesses to expand and create more jobs. However, that didn’t happen during the last recovery. The 5 million jobs created from 2000-08 was the lowest total since WWII.

Nobelist and New York Times columnist Paul Krugman came up with an interesting conclusion on just that subject. Were we better off under the supply-side policies of President Reagan in the 1980s who wanted to funnel more money to the supply-side, or of Clinton in the 1990s who wanted it to go to consumers, was his question.

“Here’s what I think,” said Krugman, “inflation did have to be brought down — and Paul Volcker, not Reagan, did what was necessary. But the rest — slashing taxes on the rich, breaking the unions, letting inflation erode the minimum wage — wasn’t necessary at all. We could have gone on with a more progressive tax system, a stronger labor movement, and so on.”

The stimulus spending is definitely working. The Congressional Budget Office reported the latest results of the $787 billion American Recovery and Reinvestment Act (ARRA) under this headline:

New CBO Report Finds ARRA has Preserved or Created up to 2.8 Million Jobs

While the report focuses primarily on the first quarter of 2010, CBO also includes new projections of the Recovery Act’s jobs impact through 2012. It finds that in the current quarter (the second quarter of 2010), there are 1.4 million to 3.4 million more jobs in the economy because of ARRA, and it predicts that ARRA’s jobs impact will peak this fall, when there will be 1.4 million to 3.7 million more jobs because of the legislation.

This is in line with the latest unemployment report, which showed 290,000 payroll jobs created in April, following a revised 230,000 advance in March, and 39,000 rise in February. April's boost topped the market estimate for a 200,000 gain. Net combined revisions for March and February were up a 121,000-including turning February from negative to positive. But the key number is private payrolls as Census hiring added 66,000 to April's jobs, compared to adding 48,000 the prior month. Private nonfarm employment increased 231,000, following a 174,000 rise in March.

The real key to refuting the ‘debt fallacy’ is the benefit government stimulus does for consumers’ pocketbooks, and that is also looking better. Consumers are getting healthier— at least financially, as income gains enable them to spend and save more, with inflation almost non-existent. The headline PCE price index was unchanged in April-easing from up 0.1 percent in March. The core rate also was soft, gaining only 0.1 percent and matching both March and the consensus forecast.

Personal income posted a solid 0.4 percent increase for April, matching the gain the month before. The April figure came in slightly lower than the market forecast for a 0.5 percent boost. Importantly, the latest increase is in what really counts as the wages & salaries component advanced 0.4 percent after rising 0.3 percent in March.

The good news is that consumers are finding more greenbacks in their wallets and this should support additional spending and the recovery. The consumer on average is now pulling its weight in the recovery, while inflation remains benign.

What about paying back the $11 trillion in public debt? We can follow the post-WW II scenario, when it was 120 percent of GDP. That debt was paid down quickly in the post-war recovery. Today it is approaching 90 percent, because this was the worst downturn since the Great Depression. So once again the key to a recovery is keeping consumers healthy with more jobs and higher incomes.

Among ARRA’s most effective provisions for saving and creating jobs, according to CBO’s estimates, are direct purchases of goods and services by the federal government, transfer payments to states (such as extra Medicaid funding), and transfer payments to individuals (such as increased food stamp benefits and additional weeks of unemployment benefits). CBO’s estimates indicate that tax cuts are less effective job producers, and tax cuts for higher-income people and corporations have very low bang for the buck.

Harlan Green © 2010

No More ‘Double-Dip’ Talk

Popular Economics Weekly

“Irrational Exuberance” author Robert Shiller in an eye-opening Sunday NYTimes op-ed maintains there is still chance of a double-dip recession. But it could happen over years, rather than months. “I use the definition of a double-dip recession that doesn’t emphasize the short term,” he says. “I see it as beginning with a recession in which unemployment rises to a high level and then falls at a disappointingly slow rate.”

The problem with such a definition is that only the Great Depression fits his description. The double-dip occurred in 1937, 4 years after the 1929-1933 depression, when most economists say President Roosevelt prematurely attempted to balance his budget! So is Professor Shiller guilty of his own irrational pessimism?

There is little likelihood of a double-dip for several reasons. Hiring is picking up in the wake of record corporate profits over the past 2 quarters, the huge amount of stimulus spending—some $3 trillion plus is just now taking effect and, confidence levels are not falling in spite of the current stock market correction.

Corporate profits in the fourth quarter surged to an annualized $1.270 trillion from $1.174 trillion the prior quarter, as we reported last week. Profits in the fourth quarter were up an annualized 37.0 percent, following a 68.0 percent jump the prior quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are up 51.8 percent on a year-on-year basis.

This is the major reason stocks have recovered. The New York Times’ Paul Lim says there are rising expectations for corporate profits among Wall Street analysts (i.e., their ‘animal spirits’ are rising, not falling). So based on their 2010 earnings estimate, the ‘forward’ price-to-earnings ratio of the S&P 500 has slipped to 13.7 percent from 15.3 percent less than one month ago. And Dr. Shiller maintains in his book, Irrational Exuberance, a price-to-earnings ratio of 13-14 percent increases the odds 15 percent that stock prices will increase rather than decrease.

It is true unemployment has remained high compared to past recessions, as we said last week. But payroll jobs in April grew a healthy 290,000, following a revised 230,000 advance in March, and 39,000 rise in February. And net combined revisions for March and February were up a 121,000—including turning February from negative to positive. Do we have to repeat the fact that payrolls have risen for four consecutive months and in five of the last six? April’s boost was the largest in four years, by the way.

It’s hard to argue that we are still in recession with this string of gains, as we have said, even though the gains are mostly on Wall Street to date, with corporate profits soaring. Of course consumers don’t yet feel they are sharing in it, which is the basis for Shiller’s pessimism.

“From 2007 to 2009, there was widespread concern about the risk of an economic depression, but that scare has been abating”, he continues. “Since mid-2009, it has been replaced by the milder worry of a double-dip recession, as a count of Web searches for those terms on Google Insights suggests. And with that depression scare still fresh in our minds, sensitivity to the possibility of another downturn remains high.”

The Conference Board's consumer confidence report rose strongly for a second straight month, up about 5-1/2 points in April to 57.9. The gain is centered in expectations which jumped 7 points to 77.4, reflecting rising optimism over the outlook for business conditions and easing pessimism on the outlook for employment and income.

The assessment of the present situation also improved with the index rising more than 3-1/2 points but to a still severely depressed level of 28.6, reports Econoday. Pessimism is easing with fewer describing current business conditions as bad and fewer describing jobs as hard to get (45.0 percent vs. March's 46.3 percent). Other details show a jump in buying plans for cars and major appliances though buying plans for homes are still under water. Inflation expectations, despite the month's rise in gasoline prices, eased slightly.

So the recovery is finally beginning for Main Street. I like Calculated Risk’s chart on this. According to the Labor Department’s JOLT report (Job Openings and Labor Turnover Summary), there were 4.242 million hires in March (Seasonally Adjusted), and 4.016 million total separations, or 226 thousand net jobs gained. Notice that total job separations have been dropping since January ‘09, while the number of both job openings and hires has been rising since mid-2009, the probable end of this recession.

So even though the unemployment rate is declining slowly, it is already a long term trend, folks. And though the median duration of unemployment rose to 21.6 weeks from 20.0 weeks in March and the percentage of unemployed, marginally attached and part time is still above 16 percent of the workforce, it is mainly because more people are optimistic about finding a job (805,000 actually rejoined the workforce in April).

It’s true that short-term attitudes can change on a dime, as the DOW’s 900 point drop proves. But the longer term trend of “public thinking”, as Shiller calls it, seems to be greater optimism rather than pessimism. Just look at comparisons to other post-WWII recessions done by Calculated risk. It shows that the two longest jobless recoveries were during Republican administrations—Bush I &II—which were ruled by an ideology that opposed government stimulus spending. The Obama Administration has taken the opposite attack—pump as much government stimulus as possible into the economy to speed up the recovery. And it seems to be working.

Harlan Green © 2010