Are Interest Rates Dangerously Low?

Popular Economics Weekly

Graph: FRED

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

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

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

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

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

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

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

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

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

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

Harlan Green © 2018

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

Will 2015 Interest Rates Remain This Low?

The Mortgage Corner

Record low interest rates are holding, in spite of the latest stock market selloffs, and may remain low throughout 2015. Why? Oil prices are still below $50/barrel, and overall prices are falling throughout the developed world. The Eurozone in particular has fallen into such deflationary times that some euro bonds have negative interest rates. That means holders of those bonds have to literally pay interest to hold them (i.e., government issued bonds), believe it or not.

Graph: Trading Economics

This is while the U.S. inflation rate has fallen to 1.3 percent, below the Fed’s 2 percent target that would mean prices are rising enough to sustain economic growth—in part because of those plunging oil prices. And because low oil prices will probably be sustained for at least 2 years, according to energy analysts, Janet Yellen’s Fed shouldn’t be tempted to raise their rates until later this year, if at all.

Oil prices are likely to stay at $60 a barrel or lower for the next two years as US shale extraction continues to suppress prices, according to the International Energy Agency’s latest report. After plunging from $115 a barrel in June to little more than $45 in January, the price of Brent crude has rallied recently, but the IEA said price pressures could have further to go.

“Despite expectations of tightening balances by end-2015, downward market pressures may not have run their course just yet,” the IEA, which advises mainly developed economies on the oil market, said in a monthly report.

There’s another reason for the Fed not to raise rates anytime soon, even though the so-called “confidence fairies” (P Krugman’s term) demand it; which are mainly deficit hawks that see inflation right around the corner, even when there’s none.

Graph: P Krugman

Because we are still not close to full employment, in spite of February’s 5.5 percent unemployment rate. Annual household median incomes after inflation have plunged 7.42 percent since the Great Recession, from $68,931 to $63,815. And history both here and in Europe has shown that tightening credit when household incomes haven’t recovered (either by raising interest rates, or otherwise restricting credit) can stop an economic recovery in its tracks.

That also means today’s long term mortgage rates, such as for the conforming 30-year fixed rate—should remain at or below 4 percent for the rest of 2015. Today, the 30-year conforming rate is 3.75 percent, still a very affordable mortgage.

Harlan Green © 2015

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

Lower Household Debt, Housing, Now Boosting Growth

The Mortgage Corner

In another sign that this could be a better growth year, builder confidence in the market for newly built, single-family homes rose two points to 55 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for August, and housing starts surged. This third consecutive monthly gain brings builder optimism to its highest level since January, and housing starts to the highest level in 8 months.

And housing has been the missing component of GDP growth since the end of the Great Recession, which is another sign that 3 percent plus GDP growth is in the cards for the rest of this year and maybe next year as household formation (mainly the millennial generation of 18 to 36 year-olds finally leaving home) returns to normal levels.

Graph: Wrightson ICAP

All three HMI components posted gains in August. The indices gauging current sales conditions and expectations for future sales each rose two points to 58 and 65, respectively. The index gauging traffic of prospective buyers increased three points to 42.

"Each of the three components of the HMI registered consecutive gains for the past three months, which is a positive sign that builder confidence appears to be firming following an uneven spring," said NAHB Chief Economist David Crowe. "Factors contributing to this rise include sustained job growth, historically low mortgage rates and affordable home prices, which are helping to unleash pent-up demand."

Based in part on the strength in the NAHB index last month, Wrightson ICAP, a leading financial market data provider, expects a third straight solid increase in single-family building permits in today’s July report. Today’s NAHB data suggest that the uptrend in permits will continue into August.

And sure enough, U.S. housing starts jumped 15.7 percent in July, hitting the highest level in eight months. The 1.09 million annual rate of new housing starts topped economist expectations of 975,000. And permits for new construction, a sign of future demand, rose 8.1 percent to an annual rate of 1.05 million from 973,000 in June.

Some lenders are getting around the tight lending conditions and higher risk fees imposed by the Fed on conventional mortgages guaranteed by Fannie Mae and Freddie Mac, in particular. For instance, they are beginning to offer interest only mortgages again, though borrowers have to be qualified at the fully amortized interest rate, rather than the lower interest only payment.

And, the July 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices showed a continued easing of lending standards and terms for many types of loan categories amid a broad-based pickup in loan demand. “Although many banks reported having eased standards for prime residential real estate (RRE) loans,” said the report, “respondents generally indicated little change in standards and terms for other types of loans to households.”

However, a few large banks had eased standards, increased credit limits, and reduced the minimum required credit score for credit card loans. Banks also reported having experienced stronger demand over the past three months, on net, for many more loan categories than on the April survey.

The good news, though, was that many of the new Quality Mortgage standards imposed by the CPFB (i.e., 43 percent maximum debt-to-income ratios, no interest only provisions) don’t apply to GSE guaranteed mortgages, if they meet the stricter conforming underwriting criteria.

What all this means is that banks are willing to lend again, which should put some of that cash savings’ hoard back to work that is held by banks and wealthy individuals. Market Watch’s Rex Nutting has reported on this extensively.

Graph: Marketwatch

“The majority of Americans are doing their patriotic bit, spending nearly everything they earn,” writes Nutting. “ A recent report from the Fed showed that little more than a third of families are able to save any money at all after they pay their bills each month. More than 60 percent say they couldn’t come up with $400 in an emergency without borrowing or pawning something.”

The bottom line is that most people are saving next to nothing, while just a few are saving a large amount of their personal disposable income (i.e., after taxes). A recent bankrate.com survey found that the top 1 percent save some 36 percent of their income, whereas the overall personal savings rate for all Americans is still not much more the 5 percent at present.

It speaks to the unequal income distribution since the end of the Great Recession, with lower and middle class income earners actually losing income—in part due to the housing bust—and those able to profit from the rise in financial markets garnering almost 100 percent of the income gain since then. Those who do save are saving a ton — more than $1.2 trillion a year of the $10.8 trillion held in financial assets, rather than investing in productive capacity.

Harlan Green © 2014

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

Economic Recovery Is For Real

Popular Economics Weekly

We are already in July, and can now see that the US economic recovery is for real, in spite of the past winter. Even economic growth is picking up, so that second quarter Gross Domestic Product might surpass 4 percent, cancelling out the minus -2.9 percent decline in Q1. Many economists believe that Q1 was an aberration, or may even have been in error to be revised upward in coming months.

Graph: Marketwatch

Consumer confidence is also returning to normal, though its index was as high as 110 in the 1990’s the index has yet to return to 90, which prevailed before the housing crash. The final Reuters / University of Michigan consumer sentiment index for June increased to 82.5 from the May reading of 81.9, and was up from the preliminary June reading of 81.2.

Graph: Calculated Risk

Consumer incomes and spending have also to increase, since they are the largest component of economic growth. Right now, so-called Real Disposable Income (after taxes and inflation) is just at 2 percent, and it must rise at least to 3 percent to increase the GDP to 3 percent plus, and so fuller employment.

Graph: Econoday

How soon may that happen? Much will depend on GDP growth in the coming months, and that will depend on a continuing housing revival. Existing-home sales are back to 5 million units annually and prices in the West are rising most sharply, according to the latest New York Federal Reserve consumer survey, with cities such as San Francisco, Los Angeles and San Diego up double digits.

So there is no problem with upper income buyers. It is the entry-level, first time homebuyers that are having the most difficult time, says NAR chief economist Lawrence Yun.

“The flourishing stock market the last few years has propelled sales in the higher price brackets, while sales for homes under $250,000 are 10 percent behind last year’s pace. Meanwhile, apartment rents are expected to rise 8 percent cumulatively over the next two years because of tight availability,” said Yun. “Solid income growth and a slight easing in underwriting standards are needed to encourage first-time buyer participation, especially as renting becomes less affordable.”

Even better news was that perceptions on earnings and the job market seemed to improve. Median earnings growth expectations increased to 2.5 percent from 2 percent, driven mostly by respondents with no college education. The mean probability of finding a job in three months among the currently employed (if current job was lost) rose to 51.8 percent, a new 13-month high, the New York Fed said.

Harlan Green © 2014

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

Losing Fannie and Freddie—A Terrible Idea

Financial FAQs

There was a reason Fannie Mae (Federal National Mortgage Association) and Freddy Mac (Federal Home loan Mortgage Corporation) were government created entities, before they became private corporations in the 1970s.  They encouraged homeownership at a time when owning a home was only for the wealthiest.  Though Fannie Mae—the  Federal National Mortgage Association—was created in 1938 as part of the New Deal, it became important after WWII when the most basic 50 percent down payment on a 15-year fixed rate loan was available.  Payments were prohibitively expensive for those just entering the middle class.

Fannie Mae and Freddie Mac, Government-Sponsored Enterprises, or GSEs, filled the void with 30-year fixed rate mortgages, loans that private banks thought too risky.  Banks have always preferred short-term construction loans, or lines of credit that shortened their risk profiles.

And so the federal government created hybrid agencies that set up strict standards for so-called conventional, conforming mortgages.  These were mortgages that conformed to stricter underwriting standards set up by Fannie and Freddie.

And now some in Congress want to abolish them altogether, and replace them with what is basically a privately-funded secondary market mechanism for packaging and selling guaranteed mortgages with sky-high capital requirements that will raise interest rates, putting even more consumers out of the housing market.

Firstly, the only problem with the GSEs in their current form was that they were undercapitalized.  And because they were undercapitalized they suffered the same fate as all the undercapitalized major banks bailed out by TARP funds.  The only difference was that they were made wards of the government, which is what they were prior to the ‘70s, anyway.  And they are now pouring $billions back into the US Treasury, some $203 billion to date since the recovery, when they were lent $188 billion.

So there is no reason to dissolve them and every reason to keep them as viable GSEs.  This is mainly because their underwriting criteria have been the gold standard for borrower qualification, requiring income and asset verification, and assessing the likelihood this condition would continue, as we said.

That is why their default rates have about returned to historical levels, while so-called Private-Label mortgages—those originated by banks that don’t meet the stricter conforming standards—have default rates still in the 6 percent rage, 3 times the Fannie/Freddie rate.

The latest proposal, by committee chairmen, Tim Johnson, a Democrat from South Dakota, and Mike Crapo of Idaho, the ranking Republican, have come up with a compromise that provides an explicit government guarantee for mortgages, but only after private investors have taken the first losses. The plan would set up a new federal regulator, called the Federal Mortgage Insurance Corporation, to provide the guarantee and regulate the system.

Having private investors take first losses, in lieu of Fannie and Freddie’s current stockholders, is a terrible idea because banks are much more risk averse.  That’s why Fannie and Freddie currently originate some 60 percent of all residential mortgages since the end of the Great Recession.

Graph: WSJ/Inside Mortgage Finance

The new agreement would establish the Federal Mortgage Insurance Corporation as the insurer of last resort, but would require 10 percent private capital reserves, which is the rub. The guarantee, provided for a fee equivalent to 0.1 percent interest, would not kick in until the private reserves were wiped out. Fannie and Freddie would have remained solvent during the housing crisis if they had kept 4 percent of their capital in reserve.

The bill would create a single platform to standardize mortgage-backed securities, which are investment vehicles created by bundling mortgages and then selling off pieces of the bundle to spread the risk of default.

The bill would also set a minimum down payment of 5 percent, except for first-time home buyers, who would have to put down 3.5 percent for the mortgage to qualify for the guarantee. Some advocates have said they would prefer that the down payment amounts be left to the new regulator, who could adjust them in response to economic conditions.

The increased capital requirements and the government guarantee would raise the cost of borrowing for homeowners, said economist Mark Zandi, because the risks of the system would no longer be borne by all taxpayers. He estimated that interest rates would increase by 0.4 to 0.5 percentage points. 

This would put Fannie/Freddie fixed rate conforming mortgages at or above 5 percent at rates that prevailed on the runup to the housing bust, when households hadn’t lost so much income and accumulated record debts.  That is not the case today, for most Americans, needless to say.

The bill could therefore eliminate the affordable housing goals that governed Fannie and Freddie, which required them to make a certain number of loans to people with low incomes but which some advocates said were easily gamed and worked to discourage lending in particularly expensive markets.

John Taylor, president and chief executive of the National Community Reinvestment Coalition, said he had been assured that lenders would be encouraged to offer loans to low-income families through incentive pricing or would be required to do so by the regulator.

Really?  It depends on the types of “encouragement” given to banks.  They don’t have public service goals unless required to, such as the Community Reinvest Act, that combatted red-lining, because lenders tended to avoid lending in lower-income neighborhoods.  This is because they are required to maximize their profits, and affordable loans are by their nature very low profit margin entities.

So if not allowed to return as private corporations with stockholders bearing the risk, then at least keep them under some form of government control—there are many forms this can take, including strict regulations to protect their underwriting standards.  But there has to be enough capital, as is the lesson learned with commercial banks, as well.

Harlan Green © 2014

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

Existing-Home Sales Slow in January

The Mortgage Corner

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 5.1 percent to a seasonally adjusted annual rate of 4.62 million in January from 4.87 million in December, and are 5.1 percent below the 4.87 million-unit pace in January 2013.

Last month’s level of activity was the slowest since July 2012, when it stood at 4.59 million, and signals the effect of low inventories and rising interest rates that have cut mortgage applications to their lowest level in a year.

Total housing inventory at the end of January rose 2.2 percent to 1.90 million existing homes available for sale, which represents a 4.9-month supply at the current sales pace, up from 4.6 months in December. Unsold inventory is 7.3 percent above a year ago, when there was a 4.4-month supply.  But both rates are far below the  6-month inventory level in more normal times.

Graph: Calculated Risk

Meanwhile, mortgage applications are down for the year.  The MBA’s weekly mortgage applications refinance survey is down 70 percent since May, and its purchase index is down 8 percent in a year.

Graph: Calculated Risk

This is even though 30-year fixed conforming rates are down to 4.0 percent since the latest signs of slowing factory activity and job creation over the past 2 months.

But the slowdown may be temporary, as the NY Fed’s just released Q4 Household Debt and Credit Report said consumers are paying down their debts while spending more.  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.

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 boost 2014 housing sales? 

We believe so, because of the tremendous pent up demand generated by 5 years of subpar housing construction that has reduced inventories, much lower delinquency rates, and a growing population that is boosting housing demand.

Harlan Green © 2014

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

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

Higher Economic Growth In 2014

Financial FAQs

We should be seeing a huge jump in economic growth this year. Why? Most economists are saying businesses are more optimistic with the federal budget agreement for 2 years, and no more tax increases hanging over consumers (and businesses). Republicans even finally agreed to spend $1.1 trillion this fiscal year—that is, until September when another fiscal year begins.

I maintain the increase in government spending, healthier state tax coffers, and a reviving housing sector with housing prices up 13.6 percent annually according the S&P Case-Shiller Home Price Index, will be the main reasons for faster growth and more job creation this year.

We know this because the Census Bureau’s JOLTS report now shows 4 million job openings, and a rising ‘quit’ rate, which means job seekers are feeling optimistic enough about their prospects to voluntarily leave their current job.

Graph: Wrightson-ICAP

“After having risen by an average of 0.5 percent per month from the beginning of 2011 to the middle of 2013,” says Wrightson-ICAP, “the number of voluntary quits since July has climbed by 2.0% per month. The quit rate is important on two levels: it is both a general measure of worker confidence that tells us something about developments in the labor market, and it is a direct contributor to worker mobility, which is a key driver of productivity growth. (Matching workers to better jobs contributes to overall economic efficiency.)”

The best sign of an improvement in business optimism is the boost in capital expenditures. That expectation is based on a variety of factors, including the recent strength in the ISM factory orders index, a pick-up in capital spending plans by small businesses, and strong balance sheets and ample financing for larger companies. The capacity utilization data in Friday’s industrial production report reinforced that expectation. Total capacity utilization climbed to 79.2%, which is only one percentage point below the long-run (1972-2012) average that the Fed publishes as a reference point.

Wrightson-ICAP agrees with me on this, also. “As the aggregate level of capacity utilization rises, says Wrightson, many individual sectors are approaching or surpassing their previous cyclical highs. In the December data published last week, industries accounting for 33 percent of the Fed’s industrial production index had operating rates that were equal to or greater than their peaks in the previous cycle.

Graph: Wrightson-ICAP

There are other factors, as well, such as the pickup in consumer spending with higher December retail sales, and consumer confidence. This could lead to a GDP growth rate in the mid-3 percent range for 2014, up from the average 2 percent growth rate of late. It is a huge jump and just reflects the pent up demand for everything, as household balance sheets are turning positive and businesses begin to spend the cash they have been hoarding.

So the Federal Reserve will probably continue with its tapering of QE3 purchases that will cause long term interest rates to continue to rise. But it’s still the beginning of this business cycle, believe it or not. And there is almost no inflation, which will keep interest rates from rising too fast.

Harlan Green © 2014

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

New-Home Sales Soaring

The Mortgage Corner

There aren’t enough new homes being built, apparently, as new U.S. homes sold at an annual rate of 444,000 in October, up 25.4 percent from 354,000 in September, the U.S. Census Bureau said Wednesday. And the inventory of new homes for sale plunged to a post-recession low of 4.9 months, which puts for-sale inventories back into 1960 levels.

Graph: Econoday

Lower interest rates are also holding, as more Federal Reserve Governors are saying that QE3 tapering of securities’ purchases shouldn’t begin until the unemployment rate actually drops below 6.5 percent, from its current 7.1 percent. And economists don’t see that happening for at least another year.

The collection of sales data for both months was delayed by the federal shutdown, prompting the government to release the information on the same day. Demand in October was strong across the country, with double-digit percent gains in all four major regions. Part of what drove sales was a decline in prices and more demand for lower-prices homes, a trend that typically emerges in the colder months.

The median price of new homes fell 5.3 percent to $245,800 in October. That's the lowest level since November 2012. The supply of new homes on the U.S. market, meanwhile, sank to 4.9 months in October at the current sales pace from 6.4 months in September. This is while new home sales are 21.6 percent higher compared to one year ago.

We mustn’t forget that the Federal Housing Finance Authority (FHFA) is also delaying any drop in conforming loan limits below $417,000 through 2014, which has to be heartening home buyers. As such a lower restriction on loan amounts would affect entry-level, lower-priced homes in particular.

Inventory levels are in fact back to levels last seen in 1997 to 2005 in this Calculated Risk graph that dates back to 1963. This is spurred the housing construction boom that boosted the housing bubble. But with all the restriction on mortgage lenders initiated by both the Federal Reserve and Dodd-Frank, Consumer Protection Finance Bureau, we don’t see the likelihood of another housing bubble. The homeownership rate has dropped to 64 percent from its high of 68 percent during the bubble. And with household incomes and debt loads that haven’t recovered from the Great Recession, there is little chance a bubble would re-occur anytime soon, if ever.

Graph: Calculated Risk

In spite of this news, existing-home prices were building steam through September based on S&P Case Shiller, indicating overall demand is still strong. The 20-city index rose an adjusted 1.0 percent in September vs monthly gains of 0.9 percent and 0.6 percent in the prior two months. Very respectable gains swept all 20 cities for the second month in a row, led this time by Atlanta at plus 1.9 percent followed by a string of cities out West where S&P says there's talk now of a housing bubble.

But we know S&P tends to be overly conservative in their projections. Most of the price gains were either in Las Vegas, or the California coastal cities of San Francisco, Los Angeles and San Diego, beneficiaries of the fast-growing Silicon Valley economy. So most of the growth in sale prices can be attributed to real economic growth, rather than the financial speculation that occurred on Wall Street leading to the Great Recession.

Harlan Green © 2013

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

What Should We Be Thankful For?

Financial FAQs

There is still much we can be thankful for this Thanksgiving, in spite of tax raises and government spending cuts that affect mostly the poorest—whether it’s less food stamps, early child care, environmental protection, and maybe even fewer funds to fully implement the Affordable Care Act.

We finally have almost-universal health care, 92.7 percent of our workforce is employed, and we are better off than the Europeans. Europe is still in recession after 4 years of austerity policies that have resulted in sky-high unemployment rates, rather than benefiting from the quantitative easing policies that our Federal Reserve has initiated since September 2012 that has kept even long term interest rates at record lows.

So we can be thankful that Ben Bernanke is the current Fed Chairman. And in January pro-labor economist Janet Yellen will be the new Federal Reserve Chairman. I believe we can therefore look forward to continued low interest rates leading to greater job creation for some years to come.

We mustn’t listen to those Austerians that keep crying stocks and even real estate might be re-inflating asset bubbles, as happened with the recent housing bubble. Household income isn’t growing enough, and consumer debt is still too high to re-ignite any bubbles, though it is returning to more sustainable levels.

 

Graph: Calculated Risk

Consumer debts have declined to the lowest level in 30 years, according to the Federal Reserve’s just released Q2 2013 Household Debt Service and Financial Obligations Ratios report. This will boost consumer spending, and housing values. The enclosed graph dating back to 1980 shows that the overall Household Debt Service ratio (red line) is actually lower than it was in 1980, while the Homeowner Mortgage (blue line) and Consumer (yellow line) ratios are back to 1980 levels.

We can also be thankful that the housing market is in recovery, with prices up some 13.3 percent just this year, according the Case-Shiller Index, reducing mortgage default and foreclosure rates. That is largely because of the Fed’s low interest rates that are helping consumers to pay down their debts.

A good report that few see is the Bureau of Labor Statistics’ JOLTS report of job openings, layoffs and transfers. Job openings are basically back to 2005 levels. But because many more millions have joined the labor force since then, it hasn’t yet brought us closer to full employment.

Graph: Econoday

There were 3.913 million job openings in September, up from 3.844 million in August. The number of job openings decreased in arts, entertainment, and recreation and was little changed in all remaining industries and in all four regions. But it reflects the 204,000 payroll jobs created in October, which shows job creation increasing faster than previously.

The number of hires in September was 4.585 million, essentially unchanged from 4.559 million in August. The number of hires was little changed for total private and government, as well as for all industries and all four regions. There were 4.426 million total separations in September, little changed from 4.405 million in August.

So there is more to be done to boost economic growth. But I see the cup as half full, and the economic odds are it will continue to fill.

Harlan Green © 2013

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

Is Builder Optimism, New Home Construction Faltering?

The Mortgage Corner

Will new-home construction falter, now that interest rates are rising and consumers remain unsettled over Washington’s political gridlock that prevents any legislation being passed that would aid economic growth?

Builder confidence in the market for newly built, single-family homes was unchanged in November from a downwardly revised level of 54, reported the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This means that for the sixth consecutive month, more builders have viewed market conditions as good than poor, since any index value above 50 percent, means a majority of builders report growing activity. But that hasn’t spurred more new-home construction, which is stuck at early spring levels.

Graph: Calculated Risk

“Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road,” said NAHB Chairman Rick Judson. “Meanwhile, builders continue to face challenges related to rising construction costs and low appraisals.”

“Policy and economic uncertainty is undermining consumer confidence,” said NAHB Chief Economist David Crowe. “The fact that builder confidence remains above 50 is an encouraging sign, considering the unresolved debt and federal budget issues cause builders and consumers to remain on the sideline.”

New-home construction has basically stalled since April and the beginning of interest rates increases due to the Fed’s hints that QE3 could end. This will hurt economic growth and employment, since new-home construction makes up a large part of economic growth these days, with other growth components are being constrained by lower government and consumer spending.

Graph: Calculated Risk

There has been a significant increase in new home sales this year.  Sales of new single-family houses in August 2013 were at a seasonally adjusted annual rate of 421,000, according to estimates by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.9 percent above the revised July rate of 390,000 and is 12.6 percent above the August 2012 estimate of 374,000
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Though year-over-year increases have slowed - August only saw a year-over-year increase of 12.6 percent, but Calculated Risk’s Bill McBride still expects new home sales to be up 15 percent to 20 percent for the year.  That follows an annual increase of 21 percent in 2012.

The seasonally adjusted estimate of new houses for sale at the end of August was 175,000. This represents a supply of 5.0 months at the current sales rate. It means that new home construction has not taken up the slack in supply, and might slow new-home sales.

The initial third Quarter GDP growth was 2.8 percent, up from 2.5 percent in Q2. And residential real estate activity was a large part of that increase. So we will need more new-home construction to keep growth at that level.

Harlan Green © 2013

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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

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Deflation is the Danger

Financial FAQs

The Federal Reserve is about to announce their decision on when to begin tapering their purchases of securities at next Tuesday’s FOMC meeting. Among other issues is whether there is any danger of future inflation from continuing the $85 billion per month in purchases. The taper talk is not making many economists happy, needless to say, with the Fed admitting growth is not even up to their previous forecasts.

“As a central bank, you are lowering your growth forecast, inflation is running low, and hiring is slowing and you are going to taper your asset purchases?” said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former member of the Federal Reserve Board’s forecasting staff. “That is a communications challenge.”

In fact, deflation is the danger to economic growth at present, not inflation. For inflation is a sign of economic growth, yet prices have barely risen if one looks at the major inflation indexes, like the CPI or Personal Consumption price index. The so-called PCE price index is the main inflation indicator liked by the Federal Reserve, and it is running far below the Fed’s preferred target of 2 to 2.5 percent.

Graph: Econoday

Only an increased demand for goods and services will push up prices longer term, outside of short-term bottle necks in supply chains. So without some inflation, the gap cannot be closed between debt loads and income levels, and the economy cannot grow out of its debt hole.

We have not had an inflationary environment since the 1970s, and that was ‘cured’ by then Fed Chairman Paul Volcker with his double-digit interest rates that brought down double-digit inflation but caused double-digit unemployment and the 1981, 1983 recessions.

That also brought the era of lower taxation and double-digit federal budget deficits during the 1980s. And the emphasis on holding down inflation—resulting in 2 decades of low inflation that was called the “Great Moderation”—has meant slower economic growth, and less productive investment since then, as well as 2 further recessions in the last decade, including the Great Recession.

Graph: Econoday

And it has meant less income for the 80 percent of consumers who are wage earners. Real Personal Disposable income growth, particularly since the Great Recession, has been basically non-existent. And that has meant consumers had less money to spend, hence the slow-growth ‘new normal’ economists have been talking about.

It also means that little progress was seen in PCE inflation getting to the Fed's goal of 2 to 2.5 percent, as we said. Year-on-year, headline prices were up 1.4 percent in July versus 1.3 percent in June. The core held steady at 1.2 percent compared to June.

The result is still-depressed consumer confidence. The latest University of Michigan sentiment survey showed recession-level worries, four years after the end of the Great Recession. Consumer sentiment so far this month has fallen to its lowest level since early in the year, to 76.8 vs. 82.1 for final August and vs. 80.0 at mid-month August.

The cause of the noticeable weakness has to be flat income growth, in spite of increased hiring. Most of the jobs increase has been in the lower-paying retail and health care sectors.

Graph: Calculated Risk

Why such non-existent income growth for Main Street, and why do we need more inflation? The answer has to be that very few are benefitting from this economic recovery with heavy debt loads still holding back both government and consumer spending. The top 10 percent of earners took more than half of the country’s total income in 2012, the highest level recorded since the government began collecting the relevant data a century ago, according to an updated study by Saez and Piketty.

“These results suggest the Great Recession has only depressed top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s,” Mr. Saez, an economist at the University of California, Berkeley, wrote in his analysis of the data.

The income share of the top 1 percent of earners in 2012 returned to the same level as before both the Great Recession and the Great Depression: just above 20 percent, jumping to about 22.5 percent in 2012 from 19.7 percent in 2011, said their study. And that is the real problem. Consumers cannot spend what they cannot earn.

Harlan Green © 2013

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How To Lower That Household Debt?

Financial FAQs

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

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

Graph: WSJ Marketwatch/Federal Reserve NY

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

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

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

Graph: Ezra Klein

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

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

Harlan Green © 2013

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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

Existing-Home Sales, Inventories Climbing

The Mortgage Corner

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 0.6 percent to a seasonally adjusted annual rate of 4.97 million in April, reports the National Association of Realtors. This could be a trend, as housing inventories are also increasing, while foreclosure rates continue to fall, allowing more homes on the market. Sales activity is 9.7 percent above the 4.53 million-unit level in April 2012.

Graph: Calculated Risk

Total housing inventory at the end of April rose 11.9 percent, a seasonal increase to 2.16 million existing homes available for sale, a 5.2-month supply at the current sales pace, compared with 4.7 months in March. Listed inventory is 13.6 percent below a year ago, when there was a 6.6-month supply, with current availability tighter in the lower price ranges. Inventories are improving, but more homes need to be available for sale to continue the upward trend.

Lawrence Yun, NAR chief economist, said the market is solidly recovering.  “The robust housing market recovery is occurring in spite of tight access to credit and limited inventory.  Without these frictions, existing-home sales easily would be well above the 5-million unit pace,” he said.  “Buyer traffic is 31 percent stronger than a year ago, but sales are running only about 10 percent higher.  It’s become quite clear that the only way to tame price growth to a manageable, healthy pace is higher levels of new home construction.”

Meanwhile, according to the First Look report for April by Lender Processing Services (LPS), the percent of loans delinquent decreased in April compared to March, and declined about 10 percent year-over-year, reports Calculated Risk. Also the percent of loans in the foreclosure process declined further in April and were down almost 25 percent over the last year.

LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.21 percent from 6.59 percent in March. Note: the normal rate for delinquencies is around 4.5 to 5 percent. The percent of loans in the actual foreclosure process declined to 3.1 percent in April from 3.37 percent in March, but that is still higher than pre-recession levels.

One danger signal to a continued housing recovery are rising mortgage rates, however. They have been rising from as low as 3.25% for the conforming 30-year fixed rate to 3.625 percent today.  And this has caused mortgage applications to drop. The Refinance Index decreased 12 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.

“Mortgage rates increased to their highest level since March last week, leading to the largest single week drop in refinance applications this year,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “The refinance index has fallen almost 19 percent over the past two weeks and is back to its lowest level since late March. Purchase activity declined over the week but is still running about 10 percent above last year’s pace at this time.”

Given consumers’ slow growing incomes, such low interest rates have been the main driver of housing sales. We can only hope the Federal Reserve continues its Quantitative Easing purchases of securities to keep interest rates low enough for housing to fully recover.

Harlan Green © 2013

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Consumer Sentiment, Leading Indicators Signal Higher Growth

Popular Economics Weekly

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

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

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

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

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

Graph: Calculated Risk

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

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

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

Graph: Haver Analytics

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

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

Harlan Green © 2013

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

Consumer Debt Falls to Pre-Recession Level

Financial FAQs

The total amount of debt held by Americans fell again in the first three months of 2013 and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday. The level of household debt fell by $110 billion, or 1 percent, to $11.23 trillion, mainly because consumers reduced their mortgage obligations and used credit cards less. Household debt is now 11.4 Percent lower vs. a peak of $12.68 trillion in 2008.

Graph: New York Federal Reserve

This is one reason retail sales are holding up. Mortgage debt slid to $7.93 trillion from $8.03 trillion in the fourth quarter to mark the lowest amount since late 2006. Mortgage debt fell in the first quarter even though more home loans were issued than in the prior quarter.

Delinquency rates improved across the board: mortgages (5.4 percent from 5.6 percent), HELOC (3.2 percent from 3.5 percent), auto loans (3.9 percent from 4.0 percent), credit cards (10.2 percent from 10.6 percent) and student loans (11.2 percent from 11.7 percent).  The overall 90+ day delinquency rate dropped from 6.3 percent to 6.0 percent this quarter, below the 8.7 percent peak from three years ago.

“After a temporary deceleration in the previous quarter, the data suggest that household deleveraging has resumed its previous trajectory,” said Wilbert van der Klaauw, senior vice president and economist at the New York Fed. “We’ll look to see if this pace of debt reduction and delinquency improvements will persist in upcoming quarters.”

Retail sales beat expectation in April, up 0.1 percent, 3.75 percent in a year, following a drop of 0.5 percent in March (originally down 0.4 percent). Analysts forecast a 0.3 percent decline. Motor vehicles were unexpectedly up 1.0 percent after a 0.6 percent dip in March. Unit new motor vehicle sales slipped in April but from high levels, according to manufacturers' data. Core strength was in building materials & garden equipment; clothing; nonstore retailers; general merchandise; and food services & drinking places. There may be some seasonality issues but discretionary spending appears to be picking up.

Graph: Econoday

Other positive developments in the Q1 New York Fed report included a rise in the share of 30-60 day delinquent mortgage balances that transitioned to current and a decline in the rate at which current mortgages transition into delinquency.  Nearly 35 percent of 30-60 day delinquent balances became current compared to 28 percent in the previous quarter. Moreover, 1.6 percent of current balances became delinquent compared to 1.8 percent in the previous quarter.   
Highlights from the report include:

• Outstanding student loan debt increased $20 billion to $986 billion.
• Total mortgage debt decreased to $7.93 trillion from $8.03 trillion.   
• Auto loans increased $11 billion to $794 billion.
• Credit card balances decreased $19 billion to $660 billion.
• HELOC balances fell $11 billion to $552 billion. 
• Mortgage originations rose for the sixth consecutive quarter, to $577 billion.

Inflation and energy prices in particular are declining, giving consumers more room to spend, which will boost Q2 economic growth as well.

Harlan Green © 2013

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