Will It Be a 'Hard Landing'?

Popular Economics

“The US LEI receded slightly in August, the first monthly decline since March of this year,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Four out of ten components fell compared to the previous month, with consumer expectations remaining a significant strain on the Index.”

 

LEI

Does the new Fed chairman want to be another Paul Volcker, whose Board of Governors raised the Fed Funds rate to 20 percent to cure the stagflation surge of the 1970s? We don’t need another ‘hard landing’, the economic term for an engineered recession.

New Fed Chair Kevin Warsh said at the most recent FOMC meeting that the Fed would do what it takes to restore confidence in the Federal Reserve to fulfill its mandate of low inflation with maximum employment.

And to make its point the 12 Fed Governors voted unanimously to raise their Fed Funds rate +0.25 percent, thus raising the Prime Rate from 6.75 to 7.00 percent that governs most installment loan and credit card rates.

So the surge in August retail sales might not be a good thing, as much as consumers would like to celebrate another good holiday, since how is the Fed to bring down inflation otherwise when consumers are a major cause of it?

The core personal consumption expenditure index—the version of the Fed’s preferred inflation measure for consumers that excludes food and energy prices—has exceeded the Fed’s 2% target for over 60 months.

The Conference Board’s Index of Economic Indicators (LEI) that attempts to predict future growth has been flashing signals of a slowdown for months per its graph above (downward slope of blue line).

But even the tariffs and Mideast wars haven’t slowed down consumer spending enough. The Fed is saying that it has waited too long to act to bring down inflation, which is endangering economic growth and the U.S. currency.

Chairman Warsh also said five years was too long to wait for the inflation rate to return its 2 percent target rate because of the tariffs and Middle East unrest. It was last this low during the COVID-19 pandemic.

Of course, “The odds of a serious Fed policy mistake are uncomfortably high and rising,” warned Mark Zandi, chief economist at Moody’s Analytics, in a post on X, I quoted last week.

Barron’s Randall Forsythe cites David Rosenberg of Rosenberg Research on what can be the most dangerous mistake, “Unless oil prices come down quickly. The only way by which interest rates bring inflation back to the 2% target is “by destroying enough demand to offset the supply loss. That is a recession by design,” he concludes.

Economists call it a ‘hard landing’. And that has always been the dilemma; how can the Fed boost interest rates just enough to engineer a ‘soft landing’, which means bring inflation back down to its long-term average without causing a recession?

This is the rock and a hard place I’ve been talking about. It can’t be done without real pain.

Harlan Green © 2026

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

Why the Recession Calls?

Financial FAQs

The Conference Board’s Index of Leading Economic Indicators (LEI), a read on actual economic data rather than an opinion survey as its Conference Board’s Consumer Confidence Index, has called a recession. Its Confidence Index is hinting at the same.

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“Besides persistently weak manufacturing new orders and consumer expectation indicators, labor market developments also weighed on the Index with an increase in unemployment claims and a decline in average weekly hours in manufacturing. Overall, the LEI suggests that economic activity will continue to slow.” Conference Board

 Is that really a surprise? President is attempting to bring back a Gilded Age that prevailed in 1900 by steering as much business to his oligarchs and himself as possible by deregulating while slashing government programs that protect all Americans, and rounding up working immigrants that has badly hurt the job market.

The LEI forecasts business activity six months ahead has been forecasting a possible recession for some time, but now says it is here.

Why? “Its widespread weakness among the LEI’s components and a negative growth rate over the past six months triggered the recession signal in August,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.

The graph shows where its LEI components dropped below the horizontal red line at the start of past recessions. The blue line of the LEI graph shows the two recoveries since the 2001 and 2008-09 recessions and its current low in August (gray bars are recessions).

Consumers weren’t much happier in the confidence survey. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—decreased by 1.2 points to 74.8. Expectations remained below the threshold of 80 that typically signals a recession ahead, said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. .

The LEI is nowhere near past recessionary lows, per the graph, and stock indexes are at record highs. Then why does its LEI keep predicting an incipient recession?

It partly because consumers’ appraisal of current job availability declined for the eighth consecutive month in the survey, and it is the most heavily weighted LEI component. We now know what consumers must have already been intuiting. There were -991,000 fewer jobs created over the past year and one half in the Labor Department’s just released benchmark revision.

Chairman Powell has been hinting of late that the Fed has no good choices in deciding whether to ease credit conditions by cutting interest rates or not, because the job market is deteriorating and inflation has been rising since April 2 when Trump first announced his tariff war on the world.

The September rate cut of -0.25% was the first since last December and Powell said there will probably be two more cuts by the end of the year to support more job creation.

Why the job weakness? There were just 22,000 hires and the unemployment rate rose to 4.3% in August. The hires were in the Leisure/Hospitality, Education and Health sectors. Manufacturing, Construction, Professional Services and Government (state and local included) lost jobs. And initial jobless claims for workman’s comp have risen to a three-year high.

And there is widespread weakness among most of the LEI’s components, such as fewer hours worked. Businesses had in effect stopped adding workers, because not knowing what the final tariff rates may be. This is enough to shake consumers’ confidence in their future.

Add to that the demoralizing effect on hourly wage earners in construction, manufacturing that require manual labor and mostly employ immigrants, the target of the ICE raids.

The financial markets are more focused on how to spend the record profits of big business, hence the hysteria over AI, TikTok, IPOs, and the irrational exuberance that has driven the stock indexes to record highs.

In fact, it’s what is looking increasingly like the last Gilded Age where a small group of the extra-wealthy partied while the US economy as a whole declines.

It can be reversed, of course, if Republicans have enough cajónes to stop Trump from weakening almost every sector of the American economy that creates growth, from consumer and environmental protections, healthcare, to national security (e.g., NATO by alienating our allies).

Consumers are extremely on edge and their behavior determines what happens next, and the poorest largely live in the red states. Republicans will be the most affected.

Harlan Green © 2025

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

 

Second Quarter Growth Estimates Decline

 Popular Economics Weekly

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2025 is 2.4 percent on July 18, unchanged from July 17 after rounding. After this morning’s housing starts release from the US Census Bureau, the nowcast of second-quarter real residential investment growth decreased from -6.4 percent to -7.0 percent.” Atlanta Federal Reserve Bank

AtlantaFed

The Atlanta Fed’s GDPNow estimate of second quarter growth is why the Federal Reserve may drop interest rates at their September FOMC meeting if estimates for second quarter growth continue to decline (green line in graph). There is hope that the second quarter would look better than Q1’s negative -0.5% shrinkage. But that was based on the premise that there would be actual tariff agreements.

And now Trump is threatening Brazil with 50 percent tariffs over ex-President Bolsanaro’s criminal conviction.

We will see the first official estimate of second quarter economic growth on July 31, but most economists are warning of the uncertainty affecting growth predictions. The DOGE cost-cutting was meant to increase efficiency, but in fact is reducing it by eviscerating programs that only the federal government can do.

Much of it is being cut from scientific research that is the seed corn for the future prosperity and safety of Americans, for instance. There are large cuts in Health & Human Service for future disease cures (medical research), the USEPA in climate research, and even climate forecasting. FEMA cost-cutting made it slow to respond to the Kerrville, Texas flash flood, and unprepared to save more lives.

The Conference Board’s Index of Leading Economic Indicators (LEI) that predicts future growth is also turning negative, despite Republican touts that Trump’s just passed Terrible Tax Bill will boost growth from the many tax breaks and reduced regulations being handed to corporations.

“The US LEI fell further in June,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “For a second month in a row, the stock price rally was the main support of the LEI. But this was not enough to offset still very low consumer expectations, weak new orders in manufacturing, and a third consecutive month of rising initial claims for unemployment insurance.”

Stocks have been rallying of late on the belief that TACO Trump will ultimately relent on many of his tariff threats that would boost inflation and reduce the likelihood of lower interest rates that businesses and consumers have been hoping for.

Consumers will still be the final arbiter of Q2 growth since they make up 70 percent of GDP, and they are now timing the tariff announcements. Retail sales had declined in May but picked up in June when it looked like any tariff hikes would be delayed once more.

Lower tariffs would certainly be better for future growth, since consumers also like it that way.

Harlan Green © 2025

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

U.S. Already in Recession?

 Financial FAQs

The Conference Board Leading Economic Index® (LEI) for the US ticked down by 0.1% in May 2025 to 99.0 (2016=100), after declining by 1.4% in April (revised downward from –1.0% originally reported). The LEI has fallen by 2.7% in the six-month period ending May 2025, a much faster rate of decline than the 1.4% contraction over the previous six months.

ConferenceBoard

Are we already in a recession? The Fed doesn’t think so, but the Conference Board’s Index of Leading Economic Indicators conjectures we will be in a recession soon, if not already. The LEI is a tricky read because it looks at indicators spanning longer periods, hence its name.

The Conference Board’s index of Leading Economic Indicators is now signaling that a recession might have begun in May 2025, though Fed Chair Jerome Powell and the Fed Governors don’t think so. Powell said after last Wednesday’s FOMC meeting that interest rates will stay on hold for now.

“The economy is in solid shape, so the labor market is not crying out for a rate cut,” said Powell. (Therefore, the Fed has time to “learn” more about the economy.)

However, Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board, said “With the substantial negatively revised drop in April and the further downtick in May, the six-month growth rate of the Index has become more negative, triggering the recession signal,”

The Conference Board creates several surveys, including the Consumer Confidence Index, so it puts the most weight on consumer expectations for business conditions, which has been dropping sharply in its surveys.

And the ISM’s New Order Index as well as private housing building permits have continued to decline as well, thanks to the Fed’s intransigence on reducing interest rates further.

So the LEI is hedging its bets just as the Fed is doing by taking a longer wait and see. “The Conference Board does not anticipate recession, but we do expect a significant slowdown in economic growth in 2025 compared to 2024, with real GDP growing at 1.6% this year and persistent tariff effects potentially leading to further deceleration in 2026.”

Federal Reserve President Chris Waller, one of the Fed Governors, is a dissenter: “I don’t think [the inflation impact of Trump’s tariffs] is going to be that big,” Waller said in an interview on CNBC. “I think we have room to bring [rates] down in July (the next FOMC meeting)”

Almost everyone in congress and President Trump also want lower rates because the new fiscal budget’s annual interest expense could be close to $1 trillion annually on approximately $38 trillion in debt.

This is unsustainable, so everyone is waiting to see if the Republican congress succeeds in driving the U.S. economy over the cliff with their new fiscal budget. Then what good will any amount of import taxes (tariffs) do to fill the debt void?

It’s becoming evident that Republicans will do anything to get their tax cuts, and Democrats don’t seem to be shouting loud enough to win at least two Republican House members to their side that don’t want to bankrupt the U. S. economy.

That’s all they require to block the looming budget disaster. This is while it looks like Trump’s tariffs will ultimately equal those in 1930. And we know the 1930 Smoot-Hawley tariffs that raised prices on imports was one of the reasons for the Great Depression.

Harlan Green © 2025

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

Consumers Are Unhappy

 Financial FAQs

“Consumer confidence declined for a fifth consecutive month in April, falling to levels not seen since the onset of the COVID pandemic,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “The decline was largely driven by consumers’ expectations. The three expectation components—business conditions, employment prospects, and future income—all deteriorated sharply, reflecting pervasive pessimism about the future.”

The University of Michigan’s Sentiment Survey Index has also declined for five consecutive months, from 74 to 50.8. It’s mainly about the growing inflation fears.

“Year-ahead inflation expectations surged from 6.5% last month to 7.3% this month. This month’s rise was seen among Democrats and Republicans alike. Long-run inflation expectations lifted from 4.4% in April to 4.6% in May, reflecting a particularly large monthly jump among Republicans.” Survey Director Joanne Hsu.

Why so much doom and gloom in surveys while consumers are still fully employed? Consumers don’t like uncertainty any more than businesses. and their lack of confidence could have an even larger impact on economic growth than uncertainty in the financial markets.

Consumer activity drives two-thirds of economic growth, and a recession begins when a majority begin to save more than they spend for a prolonged period. There are many ways to measure this, such as a growing cutback in retail sales.

Retail sales rose just 0.1% in April. That’s a big comedown from a 1.7% spike in March that marked the biggest increase in more than two years because consumers bought ahead of the April 2 tariff announcements that imports from all 180 countries in the world would be taxed at least 10 percent.

FREDretailsales

Retail sales account for one-third of consumer spending and and shoppers have been hunting for more bargains. Sales have declined in three of the past 13 months as portrayed in the FRED graph and were flat another three months, but are still 4.7 percent higher in a year.

Motor vehicle and parts dealers were up 9.4 percent (±1.8 percent) from last year because consumers knew that motor vehicle import taxes (i.e., tariffs) of at least 25 percent had already been announced, while food service and drinking places were up 7.8 percent (±1.8 percent) from April 2024.

The Conference Board’s Index of Leading Economic Indicators (LEI), another growth indicator that attempts to predict future growth, showed more weakness.

“The US LEI for March pointed to slowing economic activity ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “March’s decline was concentrated among three components that weakened amid soaring economic uncertainty ahead of pending tariff announcements: 1) consumer expectations dropped further, 2) stock prices recorded their largest monthly decline since September 2022, and 3) new orders in manufacturing softened.

Manufacturing will be hardest hit, because Trump’s tariffs will bring higher inflation and interest rates, which especially hurts manufacturers because they need to borrow lots of money to build their factories. The LEI survey reported new manufacturing orders were already softening.

This will defeat what he says is the main reason for tariffs—bringing manufacturers home—as will the immigration crackdown, which reduces the working age population at a time of worker shortage. The Manufacturing Institute and Deloitte accounting firm have projected that manufacturing will need an additional 3.8 million workers by 2033. Where will they come from?

In fact, this tells us it’s not the real reason for his tariffs, since he is more concerned about cutting taxes and federal spending that would also disincentivize more domestic manufacturing investment.

No, it looks like Trump’s chaotic tariff war will create bottlenecks last seen during the COVID-19 pandemic or worse, unless he relents.

We know what those supply interruptions did to economic growth during the pandemic and why it took the succeeding Biden administration four years to fix with its bipartisan New, New Deal legislation.

Harlan Green © 2025

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

Higher Tariffs = Stagflation

 Financial FAQs

“Any tariff causes consumers to shift from imported goods to domestically produced alternatives that are more expensive, inferior in quality, or just not quite what they want. But with a low tariff domestic alternatives will be only a little bit worse than the imports they replace; with a high tariff many of the domestic goods consumers buy will be a lot worse than the imports they replace. Nobelist Paul Krugman

Federal Reserve Chairman Jerome Powell said in his latest remarks that the Trump tariffs were much higher than the Fed had expected. It has unsettled the financial markets so much that Fed officials don’t know whether it’s smarter to lower or raise interest rates.

Conference Board

The Conference Board’s Index of Leading Economic Indicators (LEI) gives one read of our economic future for the rest of the year. And it’s pointing to stagflation rather than recession.

“The US LEI for March pointed to slowing economic activity ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “March’s decline was concentrated among three components that weakened amid soaring economic uncertainty ahead of pending tariff announcements: 1) consumer expectations dropped further, 2) stock prices recorded their largest monthly decline since September 2022, and 3) new orders in manufacturing softened.

The stock and bond markets continued to decline on the Monday after Easter—the DOW down -972 points. So, no sign of an economic resurrection there. The stagnation component is because Trump is fighting an imagined immigration war that is reducing our workforce, which is causing a labor shortage during a time of full employment. The two to three million surge in new immigrants during Biden’s term made US the fastest growing economy in the world.

And the tariff war will bring create bottlenecks once again as it did during the COVID-19 pandemic, which is when it caused the inflation component of stagflation to skyrocket and the Fed to raise interest rates to combat it.

It’s becoming more obvious what Trump means by using his “gut’ to make decisions. It’s why his “batshitcrazy” tariff decisions, in the words of Paul Krugman, are causing such chaos. Foreign governments can’t make decisions on gut instincts and so are pulling their U.S. investments, causing the stock and bond selloffs. Gold is the current flight to quality shelter in lieu of the traditional bond play.

That means he lives by his own Laws of the Jungle, where might Trumps right, and only knows how to bully rather than reason. So it’s no surprise that Trump lurches from one tariff proposal to another without researching any of its effects, causing world markets to lose faith in the full faith and credit of the U.S. Dollar and Treasury bonds.

Adam Posen, a former official at both the Federal Reserve and the Bank of England, said in a speech this week that the U.S. could suffer the biggest “stagflationary” shock in decades.

“We may get recession, we may not, but we are going to get inflation either way,” he said, as cited by MarketWatch. Even if Trump strikes deals with various countries, tariffs are likely to remain in place (at least 10 percent). These measures would raise prices, increase inflation and slow the economy — the recipe for a period of stagflation.

Harlan Green © 2025

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

Elevated Rates Endangering Economy

 Financial FAQs

Early predictions show first quarter economic growth picking up, but a little-known indicator of future growth, the Conference Board’s Index of Leading Economic Indicators (LEI) in March highlighted the danger that high interest rates hold for future growth.

The LEI’s year-over-year growth remains negative, but is on an upward trend

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“Overall, the Index points to a fragile—even if not recessionary—outlook for the U.S. economy. Indeed, rising consumer debt, elevated interest rates, and persistent inflation pressures continue to pose risks to economic activity in 2024,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.

And the Atlanta Federal reserve boosted their GDPNow estimate of Q1 growth once again.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 2.9 percent on April 16, up from 2.8 percent on April 15, after the increase of first-quarter real personal consumption expenditures growth and first-quarter real gross private domestic investment growth.”

We know why elevated interest rates pose a danger to growth. They hurt the manufacturing and housing sectors, for starters, that rely on investment spending to build new equipment or new housing, which is directly affected by the cost of money—and there are 7 percent fixed-rate mortgages for homebuyers and owners wanting to refinance.

Manufacturing is just beginning to come out of the doldrums. The Institute for Supply Management’s latest purchasing managers index for US manufacturing, a monthly survey that gauges economic activity, rose more than expected in March to a reading of 50.3, the first time the index has registered expansion since September 2022.

And Existing-home sales slipped in March, according to the National Association of Realtors^®. Among the four major U.S. regions, sales slid in the Midwest, South and West, but rose in the Northeast for the first time since November 2023. Year-over-year, sales decreased in all regions.

“Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves,” said NAR Chief Economist Lawrence Yun. “There are nearly six million more jobs now compared to pre-COVID highs, which suggests more aspiring home buyers exist in the market.”

The Federal Reserve’s Beige Book, based on anecdotal evidence from the 12 districts collected over the past six weeks, was favorable in that it showed softening of activities that boost inflation.

“Economic activity increased slightly, on balance, since early January, with eight Districts reporting slight to modest growth in activity, three others reporting no change, and one District noting a slight softening. Several reports cited heightened price sensitivity by consumers and noted that households continued to trade down and to shift spending away from discretionary goods.”

So maybe the Fed’s credit restrictions are slowing consumer spending, but a far greater danger is that it penalizes producers that make the things businesses and consumers buy, making them more costly, thereby keeping prices higher.

The Conference Board’s LEI best illustrates the problem. The Fed’s efforts to lower inflation are stymied by its own inaction on bringing down interest rates, which are continuing to climb in some markets.

The LEI has stalled, fluctuating at a breakeven point between growth and recession. It decreased by 0.3 percent in March 2024 to 102.4 (2016=100), after increasing by 0.2 percent in February. Over the six-month period between September 2023 and March 2024, the LEI contracted by 2.2 percent—a smaller decrease than the 3.4 percent decline over the previous six months.

The best way to lower the price of things is to make more things, which  means in part lowering the cost of money to make them.

Harlan Green © 2024

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

Q3 GDP Unchanged

Popular Economics Weekly 

FRED

The Commerce Department’s final estimate of third quarter U.S. economic growth was unchanged at 2.1 percent, as strong consumer spending was offset by weaker business investment and shrinking inventories.

Consumers were the difference, as they kept up spending at a 3.2 percent annual pace, which was not quite as strong as the second quarter’s very strong 4.6 percent rate but enough to counteract the drop in business investment and inventories. Companies are not restocking their shelves as if they expect things to improve next year, in other words.

In fact there was a significant decline in spending that would create future growth. Q3 investments in structures fell 2.3 percent and spending on equipment declined 9.9 percent.

Why? Corporate profits are declining. Adjusted pretax corporate profits were revised in the final estimate to show a -0.2 percent decline instead of a +0.2 percent increase. Profits have fallen 1.2 percent in the past year, suggesting that business investment is unlikely to accelerate anytime soon.

The Business Roundtable on Wednesday said an index that measures CEOs’ outlook for the economy fell for the seventh quarter in a row, adding to doubts about future growth. The index slipped 2.5 points to 76.7, a bit below its historic average, reports MarketWatch.

Once again CEOs are saying the trade fight with China is widely viewed to have weakened the global economy, dampened U.S. exports and hurt American manufacturers.

“CEOs remain cautious in the face of uncertainty over trade policy and an associated slowdown in global growth and the U.S. manufacturing sector, which is currently contracting,” said the Roundtable.

This is while another indicator of future growth was basically flat. 

“The US Leading Economic Index (LEI) was unchanged in November after three consecutive monthly declines. Strength in residential construction, financial markets, and consumers’ outlook offset weakness in manufacturing and labor markets,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “While the six-month growth rate of the LEI remains slightly negative, the Index suggests that economic growth is likely to stabilize around 2 percent in 2020.”

This is what happens when corporate profits decline. It has to mean CEOs will eventually cut back on hiring as well. Stocks are rallying to record highs on news that a Phase I trade agreement with China should be signed in January. But its details are extremely vague, as China says it doesn’t want to buy all the agricultural products that Trump is demanding to help him in his re-election, for starters.

That is to say, there are too many details to still be worked out. And there is so much geopolitical uncertainty that companies will have to deal with in the New Year—Brexit, the EU maybe in recession, Trump’s impeachment trial, Russian interference with the 2020 election, etc.

So lots to worry about. The CEOs are saying why not keep some cash on hand for the next rainy day?

Harlan Green © 2019

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

Homeowners Preserve Rising Equity

The Mortgage Corner

Graph: MarketWatch/Black Knight

American homeowners have amassed a record $6 trillion in equity in their properties, according to a study by real estate data firm Black Knight, a figure boosted by surging home prices and a trend of owners staying put longer. But rising interest rates and caution resulting from the housing troubles of a decade ago are limiting how much of that equity is getting tapped.

“As the second quarter came to a close, the total amount of tappable equity available to homeowners with mortgages surpassed the $6 trillion mark for the first time in history,” said Ben Graboske, executive vice president of Black Knight’s Data & Analytics division. “There is now $636 billion more tappable equity available than at the start of 2018, and nearly three times as much compared to the bottom of the market in 2012.”

Homeowners are staying in their homes longer in part because of fears of another housing bust that was part of the Great Recession, in other words. In 2016 and 2017 sellers had stayed in their homes a median 10 years, up from a median of six years all the way back to 1985. This is also because there are fewer homes to buy as housing inventories have shrunk drastically.

Inventory of starter and tradeup homes were down 12-13 percent compared to a year ago, one of the biggest drops in years, Trulia chief economist Ralph McLaughlin said. McLaughlin is hoping that rising home prices will entice more owners to sell, even though mortgage rates have risen from their low of 3.5 percent to 4.25 percent for a 30-year fixed conforming loan with a 1 point origination fee. But that is still historically low, when fixed mortgage rates were in the 6 percent range just a few years ago, and even as high as 16 percent in the mid-1980s.

Existing-home sales are still strong, however, according to the National Association of Realtors. Total existing-home sales, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, did not change from July and remained at a seasonally adjusted rate of 5.34 million in August. Sales are now down 1.5 percent from a year ago (5.42 million in August 2017).  

Lawrence Yun, NAR chief economist, says the decline in existing home sales appears to have hit a plateau with robust regional sales. “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum,” he said. “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.”

Graph: Calculated Risk

Higher interest rates aren’t stopping new homes from being built, either. August Housing starts jumped 9.2 percent to a 1.282 million annualized rate which is well above July's upwardly revised 1.174 million rate, according to the U.S. Census Bureau. But permits, which are the forward looking component of the report, fell 5.7 percent to a 1.229 million rate.

Looking at starts, multi-family construction that has slowed 29 percent to a 406,000 rate for year-on-year growth, which had been in the negative column, was up 38 percent. Single-family homes, which are the more important of the readings, rose 1.9 percent to an 876,000 rate that, however, is fractionally lower than a year ago, down 0.2 percent.

Where do interest rates go from here? The Conference Board has predicted economic growth could average 3 percent or higher for the rest of this year, which will continue to boost interest rates somewhat. Their leading economic index rose 0.4 percent in August following even stronger gains in the prior two months, the Conference Board said Thursday. The LEI is a gauge of 10 economic indicators meant to signal peaks and valleys in the business cycle and the broader economy.

But our take is there just isn’t enough consumer demand to push rates much higher. Consumers have been paying down their overall debt as a percentage of household income, as well as borrowing less. It is corporations that loaded up on easy money the past several years and now have to worry about paying it back if there is a downturn.

Harlan Green © 2018

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

Housing Sales, Leading Economic Indicators, Higher

The Mortgage Corner

Higher new and existing-home sales, and continued economic growth are the reason the Fed raised their overnight rate into a range between 1.5 to 1.75 percent on Wednesday. Even with consistently low inventory levels and faster price growth, existing-home sales bounced back in February after two straight months of declines, according to the National Association of Realtors.

And The Conference Board Leading Economic Index (LEI) for the U.S. that measures future growth possibilities increased 0.6 percent in February to 108.7 (2016 = 100), following a 0.8 percent increase in January, and a 0.7 percent increase in December. It points to accelerating growth this year.

Total existing-home sales, https://www.nar.realtor/existing-home-sales , which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, grew 3.0 percent to a seasonally adjusted annual rate of 5.54 million in February from 5.38 million in January. After last month’s increase, sales are now 1.1 percent above a year ago.

Graph: Econoday

Lawrence Yun, NAR chief economist, says sales were uneven across the country in February but did increase nicely overall. “A big jump in existing sales in the South and West last month helped the housing market recover from a two-month sales slump,” he said. “The very healthy U.S. economy and labor market are creating a sizeable interest in buying a home in early 2018. However, even as seasonal inventory gains helped boost sales last month, home prices – especially in the West – shot up considerably. Affordability continues to be a pressing issue because new and existing housing supply is still severely subpar.”

New-home sales are also surging, up 2.2 percent annually in February reports the Commerce Department, and 9.4 percent in 2017 overall. Inventories are also up to a 5.9-month supply and the median sales price in February was $326,800, nearly 10 percent higher than a year ago.

Graph: Econoday

And, “The U.S. LEI rose again, despite a sharp downturn in stock markets and weakness in housing construction in February,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The LEI points to robust economic growth throughout 2018. Its six-month growth rate has not been this high since the first quarter of 2011. While the Federal Reserve is on track to continue raising its benchmark rate for the rest of the year, the recent weakness in residential construction and stock prices – important leading indicators - should be monitored closely.”

What recent weakness? Single-family starts, which are key to restocking the new home market, rose 2.9 percent to a 902,000 rate which is up 2.9 percent from this time last year.  Director Ozyildirim was really talking about the fears of a trade war with Trump’s tariffs on China and Japan about to be enacted. The administration is exempting Australia, Brazil, S Korea, Great Britain, EU, Mexico and Canada at the moment.

Total housing inventory at the end of February rose 4.6 percent to 1.59 million existing homes available for sale, said the NAR, but is still 8.1 percent lower than a year ago (1.73 million) and has fallen year-over-year for 33 consecutive months. Unsold inventory is at a 3.4-month supply at the current sales pace (3.8 months a year ago).

What about future interest rates? Fed Chairman Powell wants to toe the “middle ground” on rates, which means raising them slowly this year, as he sees no inflation at all on the horizon. The problem with raising interest rates with so little inflation is it crimps household spending and so growth. This particular set of conditions—raising interest rates with little inflation—has always been the precursor to a recession.

Harlan Green © 2018

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

Big Boost In Housing Construction

The Mortgage Corner

Nationwide housing starts rose 13.7 percent in October to a seasonally adjusted annual rate of 1.29 million units after a slight upward revision to the September reading, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. This is the highest housing production reading since October 2016, when total starts hit a post-recession high of 1.33 million.

And today’s huge 1.2 percent rise in the Conference Board’s Index of Leading Economic Indicators for October (that predicts future growth trends) should be a sign that housing construction will continue to ramp up in 2018.  Construction needs to catch up to rising household formation as more of the millennial generation’s 18-38 year-olds—the largest generation in history—are now forming their own living arrangements.

“The growth of the LEI, coupled with widespread strengths among its components, suggests that solid growth in the US economy will continue through the holiday season and into the new year,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board.

Graph: Econoday

Rising housing starts are because a total of 3 Quantitative Easings by the Fed has kept interest rates at record lows since 2009; where they still are today. For instance, the 30-yr conformed fixed rate is @ 3.50 percent for one origination point, which was unheard of before the various QE bond buying programs begun under Fed Chair Ben Bernanke.

I reported last week that new-home sales shot up 19 percent in September to a consensus crushing annualized rate of 667,000. This is the largest percentage gain in 28 years, folks, which accentuates the rising demand for housing.

The Census Bureau reported ownership increased to 63.9 percent of total households in the third quarter, the highest level since 2014. It is creeping up to the 65 percent historical ownership rate, but remains below the 69 percent clocked at the peak of the housing bubble a decade ago.

“We are seeing solid, steady production growth that is consistent with NAHB’s forecast for continued strengthening of the single-family sector,” said NAHB Chief Economist Robert Dietz. “As the job market and overall economy continue to firm, we should see demand for housing increase as we head into 2018.”

Regionally in October, combined single- and multifamily housing production rose 42.2 percent in the Northeast, 18.4 percent in the Midwest and 17.2 percent in the South. Starts fell 3.7 percent in the West.

Why has it taken so long for the housing market to recover? Fewer new households are being formed that would require a home of their own. A 2016 San Francisco Fed study by economist Fred Furlong on household formation concluded:

“…ownership rates increased during the housing boom of the late 1990s and early 2000s, but fell after 2007. Ownership rates have been driven down by several factors including tougher credit requirements, rising foreclosures, and deteriorating household finances since the Great Recession.”

It is also true that many young adults chose alternative residential choices such as living with parents, other relatives, or friends. There is also a correlation between these living arrangements and both the rise in student debt and the decline in marriage rates.
So we know why the Fed has kept interest rates this low for almost seven years!

“But there are signs that a readjustment is imminent,” said Furlong. “The current population share of young adults is fairly close to the share that existed at the start of the most recent housing boom. Also, while more young people are living with their parents, they are forming their own households, albeit later in life, leading to higher headship rates over time. Mr. Furlong notes that U.S. Census Bureau projections suggest that household formations will average about 1.5 million per year through 2020, which is much better than the 900,000 annual averages of the last 5 years.”

This will continue to boost housing demand, needless to say. Overall permit issuance in October was up 5.9 percent to a seasonally adjusted annual rate of 1.297 million units. Single-family permits rose 1.9 percent to 839,000 units while multifamily permits fell 9.5 percent to 458,000.

An increased supply will also help housing prices, since buying or renting a home has become increasingly expensive for the younger generations.  Continued economic growth will also encourage more millennials—heretofore burdened with student debt and an inadequate housing supply—to strike out on their own.

Harlan Green © 2017

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

Housing Construction Rebounds, For How Long?

The Mortgage Corner

The Conference Board’s Index of Leading Indicators (LEI) that predicts future growth says it is being boosted by a rebound in housing starts, which means more badly needed new homes being built. Its June report posted a 0.6 percent gain. Permits had been soft through most of the spring before gaining sharply in this week's housing starts report.

But there’s concern over how long this might last, though I predict full employment and the prospect of low interest rates for the rest of this year could prolong the trend.

Starts for all homes jumped 8.3 percent in June to a 1.215 million annualized rate with permits up 7.4 percent to a 1.254 million rate. As weak as the details were in the prior report, is how strong they are in the latest. Single-family permits rose a huge 4.1 percent to an 811,000 rate with multi-family permits up 13.9 percent to 443,000. Permits are strongest in the Midwest followed by the West and South.

Graph: Econoday

Actual starts for single-family homes rose 6.3 percent in June's report to 849,000 with multi-family up 13.3 percent to 366,000. The Northeast is in front followed by the Midwest. Starts in the West are up slightly and are down noticeably in the South, probably due to all the errant weather, including floods and a few tornadoes.

The LEI tracks 12 indicators of growth, including interest rates spreads and hours worked. The fact that housing permits provided the biggest boost to the LEI means that housing is probably a leading indicator of future growth as it has been in past recoveries. So why has it taken so long for housing construction and sales to catch fire? The busted housing bubble left millions of vacant homes first had to be reabsorbed into the housing market.

Then all those homeowners that lost their homes had to reestablish their credit bonafides. This is while Fannie Mae and Freddie Mac haven’t sufficiently lowered their credit and loan qualifying requirements that would add some 1 million prospective homebuyers to the list of eligibles, according to the Urban Institute.

Then there is the millennial generation saddled with all that student debt that the current administration doesn’t want to forgive or amend terms. The list goes on and on, in other words, for what needs to be done to make housing more affordable.

The NAHB, or National Association of Home Builders, also puts out a builder sentiment index that attempts to predict future activity, but which may lag housing starts data. The report cites the effects of high lumber costs on home builders in showing construction, for instance, but shows slower activity evenly divided among the 3 components in its index.

Higher future sales still lead for 73 percent of respondents with higher present sales at 70 percent of those polled. But only 48 percent report higher traffic, which is below the breakeven 50 percent for the 2nd month in a row. Regionally, the West remains the strongest for homebuilders followed by the Midwest and South and the Northeast far behind. So is optimism leading reality, if fewer buyers are lookng?

These are still terrific numbers, however, and it looks like lower interest rates are here for the rest of this year, with the conforming 30-year fixed rate holding at 3.50 percent for one origination point in California.

Why are rates still at such record lows with the Fed having already raised their overnight rate 3 times to 1.25 percent? Consumers aren’t borrowing more, which would increase loan rates.

Graph: Econoday

For instance, retail sales are still stuck below what is considered to be a robust demand for more goods and services. Annual sales are under 3 percent for the first time since August last year with the 3-month average below 4 percent. And 6 percent annual sales increases have been the norm during past recoveries.

This really means a certain middle and upper segment of income earners are doing well, but not the rest of US. The boosting of the minimum wage in the more prosperous cities and states is a start, but that is happening in only a handful of states, as I’ve said.

Much more needs to be done, in other words, to help the still record income inequality that haunts this laggard recovery from the Greatest Recession since the Great Depression.

Harlan Green © 2017

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