What's Next?

 Financial FAQs

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2025 is 1.1 percent on May 1, down from 2.4 percent on April 30.”

AtFedGDPNow

What’s next for economic growth? Predictions for Q2 are all over the map since the first quarter GDP went negative with -0.3% GDP growth because businesses boosted their imports ahead of future price hikes caused by the tariffs, and imports are subtracted from exports in the Gross Domestic Product calculation.

The Atlanta Fed’s GDPNow Q2 growth estimate of +1.1 percent gives us an idea of what’s to come. It has already fallen sharply from +2.4 percent because of the negative Q1 surprise, as well as the drop in consumer spending (PCE) and real private fixed investment (e.g., factories), all signs of further slowing.

I see stagflation on the economic horizon, rather than an actual recession since wherever the import taxes being negotiated end up to be, it will raise prices. And the service sector of our economy is still expanding, that includes the leisure, healthcare and transportation sectors.

The Institute for Supply Management said that its service-sector PMI rose to 51.6% in April from 50.8% in the prior month in the largest sector of our economy. The measure of new orders rose to 52.3% in April from 50.4 in the prior month. And the measure of prices paid for services for inputs jumped to 65.1 from 60.9 in the prior month, which is the inflation component of stagflation.

However, Q2 growth is uncertain because no one knows what the tariffs will be (i.e., import taxes). If Q2 GDP should also contract it could indicate we are in a recession, since two consecutive quarters of negative GDP growth have been one tell of a recession.

Torsten Slok, Apollo Global’s chief economist interviewed on CNBC’s Squawk Box predicts if the high tariffs that were. put in place earlier this month remain in effect, odds of a two-quarter contraction in economic output stand at 90 percent, with gross domestic product dropping by 4 percentage points.

But Trump knows this so he will probably bring the tariffs down to the 10 percent minimum already being levied on all 180 countries in the world (that include penguin only islands).

Trump has probably calculated this will ultimately bring in enough tax revenues to enable the tax cuts he wants enacted for his Oligarchs. The rest of Americans will suffer, however, as the budget negotiations will demand spending cuts to everything else except the military and immigration services

So we shouldn’t ignore a recession possibility, since China is the elephant in the room, and could derail everything, since it accounts for most of the holiday season imports, for starters. And any manufacturing renaissance will be years in the offing.

Declining Gross Domestic Product growth isn’t the only measure of recession. The National Bureau of Economic Research (NBER), the official caller of recessions, adds several other indicators, such as when nonfarm payrolls, personal incomes, and industrial production have peaked in a business cycle.

The NBER, a board of top economists, makes the recession call by looking at peaks and troughs of business activity. The last recession was caused by the COVID-19 pandemic shutdown and came after the longest post WWII expansion in history, said the NBER.

“The committee has determined that a peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession. The expansion lasted 128 months, the longest in the history of U.S. business cycles dating back to 1854.”

And small businesses, who thought Trump would bring some relief from regulations as well as lower prices, do not like what they are seeing, I said last week. The National Federation of Independent Business on Tuesday said its Small Business Optimism Index dropped 3.3 points in March to 97.4, falling just below its 51-year average of 98.

Marketplace, a public radio show, said the U.S. Chamber of Commerce sent a letter to the Trump administration this week saying that tariffs pose “significant risks to U.S. employment” and may soon do “irreparable harm” to many small businesses. 

The Chamber, which represents businesses of all sizes, is asking the administration to lift tariffs on any goods that “cannot be made in the U.S.,” establish a tariff exclusion process and automatically exempt small business importers from tariffs.

The problem is that President Trump believes he can use tariffs to wall us off from our allies and trading partners. But wanna be autocrats, such as Trump, are terrible at running economies. The best examples are Turkey’s President Erdogan or Putin, whose economies still suffer from double-digit inflation.

They make decisions for the wrong reasons, because they don’t have to please everyone, just their Oligarchs. But an era of stagflation as happened in the 1970s could cause as much suffering, so stay tuned. Whether recession or prolonged stagflation, it won’t be pretty.

Harlan Green © 2025

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

Another Strong Jobs Report

 Popular Economics Weekly

MarketWatch.com

This was another very strong unemployment report by the Bureau of Labor Statistics (BLS) with 943,000 new nonfarm payroll jobs added in July and most of it in the service industries. Leisure/Hospitality, Government, Education/Health, and Professional/Business added 767,000 of those jobs.

“The unemployment rate declined by 0.5 percentage point to 5.4 percent in July, and the number of unemployed persons fell by 782,000 to 8.7 million,” said the BLS Household Survey. “These measures are down considerably from their highs at the end of the February-April 2020 recession. However, they remain well above their levels prior to the coronavirus (COVID-19) pandemic (3.5 percent and 5.7 million, respectively, in February 2020.”

This is why consumers remain so optimistic, even with alarm bells ringing that economic activity may slow due to the pandemic’s latest surge, as I said last week. Because July’s unemployment report confirms it’s not hurting the jobs market with the 6 million plus job vacancies and employers practically begging their employees to return to work.

Another reason for consumers’ optimism is that average hourly pay rose 4.0 percent and is now above the pre-pandemic level. No wonder, with the 8.7 million still unemployed, many of which may be holding out for better pay and working conditions!

“At the current rate of hiring, the U.S. won’t regain all the lost jobs at least until early 2021 — and it could even take a lot longer than that,” says MarketWatch’s Jeffry Bartash.

How much longer it will take might depend on COVID-19, and the Delta Variant, which is causing a fourth surge in infections, overwhelming some hospitals in Texas, Florida, and other red states that aren’t enforcing a mask mandate.

CDC

“The current 7-day moving average of daily new cases (66,606) increased 64.1% compared with the previous 7-day moving average (40,597),” reports the CDC. “The current 7-day moving average is 73.8% lower than the peak observed on January 10, 2021 (254,063) and is 480.1% higher than the lowest value observed on June 19, 2021 (11,483). A total of 34,722,631 COVID-19 cases have been reported as of July 28.”

That is huge, folks, and even throws into doubt just when and how schools will open this fall. To see the level of community transmission in your county, visit COVID Data Tracker.

Harlan Green © 2021

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Who Is Fully Employed in January?

Financial FAQs

MarketWatch

It looks like everyone is employed in the service sector, but manufacturing is sputtering. There were 44,000 new construction jobs and a whopping 72,000 in Education and health services. But manufacturing lost another 12,000 jobs in January; the same as in December.

That is why average hourly earnings (i.e., wages) are barely rising above inflation, and interest rates and inflation remain so low. This ‘goldilocks’ scenario must be due to the 2-year trade war, and now China’s coronavirus pandemic that the World Health Organization has called a “global public-health emergency.”

In other words, American consumers are scooping up lots of cheap consumers goods from other countries, but manufacturers aren’t exporting enough to create a positive balance of payments;
therefore stock and bond prices are gyrating when the world economy doesn’t seem to know what to make of China’s coronavirus that has now spread to some 23 countries, according to latest reports.

Here are the latest coronavirus numbers, according to the Washington Post, as it is approaching the SARS pandemic totals of 2003, and may turn out to be more deadly as the virus mutates into a possibly more virulent strain:

Chinese health officials say they confirmed more than 31,000 cases of the coronavirus, more than 4,800 of them considered severe. The death toll surpassed 1000, with fatalities almost entirely confined to China.

● An additional 41 people on board the Diamond Princess cruise liner, which has been quarantined in Japan, have tested positive for coronavirus, bringing the total to 61.
● Another cruise ship, the Westerdam, is at sea, and its crew is unsure where to go next, after being denied entry to the Philippines, Japan and South Korea. Passengers blame an ill-advised port stop in Hong Kong, where the boat took on many new passengers.
● Two charter flights carrying about 300 Americans out of the virus-hit city of Wuhan are expected to arrive in the United States on Friday. A flight carrying mainly Canadian evacuees landed in Ontario on Friday morning.

So let us take some comfort that American jobs aren’t yet at risk. In fact, the 2003 SARS pandemic occurred during the housing bubble, and record economic growth during that decade. But what followed was the Great Recession.

That’s why most economists aren’t touting January’s very robust job numbers as a harbinger of a better year just yet. There may be more bad news coming, and interest rates are still at record lows, which mean the financial markets are hedging their bets for another rainy day.

Harlan Green © 2020

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

Yuge Payroll Jobs Gain Today

Popular Economics Weekly

The U.S. created 227,000 new jobs in January to mark the largest gain in four months, revealing an economy that has plenty of stamina nearly eight years into a recovery that shows little sign of ending. Retailers, construction firms, financial companies and restaurants led the way in hiring in January, the government said Friday.

Graph: Marketwatch

The unemployment rate rose slightly to 4.8 percent last month, mostly because more people were looking for work, but there is a skills gap with most of the unemployed blue collar workers needing job retraining, rather than additional coal and manufacturing jobs the Trump team has promised and is hoping to generate. This is with job openings ear their record high (5.5 million) and that’s drawing a larger share of Americans back into the labor force.

And a tighter labor market is also forcing firms to pay more to workers, an emerging trend that’s likely to further underpin the recovery. In January, hourly wages rose 0.1 percent to $26 an hour. Over the past 12 months wages have climbed 2.5 percent—faster than the less than 2 percent annual gains that prevailed through most of the recovery.

What does this mean? Maybe some of those unfilled 5.5 million job openings will be filled. But only if the courts lift the immigration ban that will discourage the influx of skilled workers to fill those jobs, as the Trump administration seems caught in the grips of white nationalist wall-builders, at the moment (such as Breitbart’s Steven Bannon), who are very unskilled at writing Executive Orders, it seems.

One example is the chaos reigning over the immigration ban at the moment. The global confusion that has since erupted is the story of a White House that rushed to enact, with little regard for basic governing, a core campaign promise that Mr. Trump made to his most fervent supporters, reports the New York Times.

In his first week in office, Mr. Trump signed other executive actions with little or no legal review, but his order barring refugees has had the most explosive implications. Passengers were barred from flights to the United States, customs and border control officials got instructions at 3 a.m. Saturday and some arrived at their posts later that morning still not knowing how to carry out the president’s orders.

In the jobs report, there was a huge surge in retail payrolls (46,000), professional services (39,000), and construction jobs (36,000), signaling blue collar jobs are strong, with interest rates still near their record lows.

Graph: Econoday

More big news was that the service sector is booming, though it dropped slightly in January. The ISM non-manufacturing, or service sector index "The NMI^® registered 56.5 percent which is 0.1 percentage point lower than the seasonally adjusted December reading of 56.6.

Both prices and employment jumped 2.9 and 2.0 percent, respectively, again signaling a tighter labor market. The sector that includes Health Care & Social Assistance; Finance & Insurance; Public Administration; Accommodation & Food Services; Retail Trade; Construction; still reflects strong growth.

“This represents continued growth in the non-manufacturing sector at a slightly slower rate,” said Anthony Nieves, chair of the Institute for Supply Management^® (ISM^®) Non-Manufacturing Business Survey Committee. “Respondents' comments are mixed indicating both optimism and a degree of uncertainty in the business outlook as a result of the change in government administration."

So this uncertainty is another reason to cancel or modify Trump’s immigration ban, as it hurts more than the seven Muslim countries. Scientists worldwide are now cancelling their participation in US scientific conferences in protest.

Harlan Green © 2017

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

A Record In Job Openings

Financial FAQs

Not only are Nonfarm payrolls averaging some 200,000 jobs per month this year, but the Labor Department’s job openings and labor turnover survey showed 5.87 million openings, an all-time high, while hires increased to 5.23 million from 5.17 million in June. Businesses are creating jobs at a much faster rate than they can be filled, in other words.

The number of job openings are up 1 percent year-over-year. Quits are up 9 percent year-over-year. Quits are voluntary separations, which usually means workers must have found better paying jobs.

Graph: Econoday

The number of people quitting jobs voluntarily was flat at 2.98 million, but that’s still up substantially from the depths of the recession, which signals more worker confidence in the ability to find another job, as I said.

Less heartening was yesterday’s ISM’s Non-Manufacturing (i.e., service sector) survey for July, down 4 points to 51.4. This is the lowest rate of composite growth for this sample of the whole cycle since February 2010. But that may be a fluke, as new orders in past months were as high as 60 percent. It could be a catch-up month, in other words, as businesses sell off past months’ inventories.

Graph: Econoday

This should also keep the Fed from raising interest rates until at least December, since the jobs report of last week was a letdown, as well. The composite score is no fluke, says Econoday, with new orders for service sector products falling nearly 9 points to 51.4 for their lowest score since December 2013. New export orders are a particular disappointment, also down a steep 9 points and in contraction at 46.5 which is also the lowest score since December 2013. And backlog orders are also in contraction, down 1-1/2 points to 49.5.

Moody’s Investors Service, the bond rating firm, doesn’t see this lull as more than a blip, at least. The U.S.’s Aaa credit rating is safe no matter who wins the presidential election, according to Moody’s in a new report on Wednesday.

“The outcome of the forthcoming presidential election will not impact the Aaa stable credit rating of the United States, regardless whether Donald Trump or Hillary Clinton is elected,” the report says. “This is because the U.S.’s rating reflects the country’s very high degree of economic, institutional and government financial strength and its very low susceptibility to event risk,” says Moody’s, naming the four factors in its sovereign bond rating methodology.

What to make of the current weakness? It could be a summer lull, as businesses wait for the results of Brexit negotiations, the Presidential election, and maybe even China’s growth to resume.

Harlan Green © 2016

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

Service Sector Economy Booming

Financial FAQs

There was a huge jump in the U.S. service sector economy, our largest sector, some 67 percent of all U.S. economic activity. This is why we keep growing while most other developed and emerging economies aren’t.

"The Institute of Supply Management’s non-manufacturing index registered 55.7 percent in April, 1.2 percentage points higher than the March reading of 54.5 percent. This represents continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index decreased to 58.8 percent, 1 percentage point lower than the March reading of 59.8 percent, reflecting growth for the 81st consecutive month, at a slower rate in April.”

Even more importantly, the New Orders Index registered 59.9 percent, 3.2 percentage points higher than the reading of 56.7 percent in March, said the ISM press release. The Employment Index increased 2.7 percentage points to 53 percent from the March reading of 50.3 percent and indicates growth for the second consecutive month.

Graph: Calculated Risk

The service sector is booming because it includes most consumer-based services, such as Wholesale Trade; Health Care & Social Assistance; Utilities; Finance & Insurance; Real Estate, Rental & Leasing; Construction; Agriculture, Forestry, Fishing & Hunting; Public Administration; Professional, Scientific & Technical Services; and Retail Trade. The four industries reporting contraction in April are: Other Services; Mining; Transportation & Warehousing; and Educational Services.

So they are all the businesses that cater to consumers. In fact, the index is back to the highs of pre-recession 2005-2006. Much this is due to the rising consumer demand for goods and services as we approach full employment.

Even the Prices Index increased 4.3 percentage points from the March reading of 49.1 percent to 53.4 percent, indicating prices increased in April for the first time in three months and counteracting the recent deflationary trend that comes mostly from falling commodity and energy prices. According to the NMI®, 13 non-manufacturing industries reported growth in April. The majority of the respondents’ comments reflect optimism about the business climate and the direction of the economy.

What other factors favor higher growth this year, in spite of the initial estimate of 0.5 percent GDP growth in Q1? Even the manufacturing sector is showing better growth this spring. April's 50.8 (i.e., more than 50 percent of manufacturing supply managers surveyed means growth) for the ISM manufacturing index may be moderately below expectations for 51.5 but details in the report are positive,” says Econoday. “New orders did slow by 2.5 points but the level at 55.8 still points to a very solid rate of growth.

New export orders, offering positive evidence on the effects of the lower dollar, are also positive, unchanged at 52.5 which isn't dramatically above breakeven 50 but is still very solid for this reading and the best since December 2014. Backlog orders are still rising, though just barely at 50.5, but this along with March's 51.0 are the best two months for this reading also since December 2014.

So, continued growth in both sectors of the economy—with the service sector particularly strong—is reason for optimism that we can yet achieve 3 percent GDP growth this year.

Harlan Green © 2016

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

Service Sector, Job Openings Show More Growth

Financial FAQs

More economic data this week make job and growth prospects for 2016 look even better. And this is on top of the very strong March employment report. The March ISM Non-manufacturing index (i.e., for the service sector) rose to 54.5 percent, up from 53.4 percent in February. The employment index increased in March to 50.3 percent, up from 49.7 percent in February. These are wow numbers!

The Non-Manufacturing Business Activity Index increased to 59.8 percent, 2 percentage points higher than the February reading of 57.8 percent, reflecting growth for the 80th consecutive month, with a faster rate in March. And the New Orders Index registered 56.7 percent, 1.2 percentage points higher than the reading of 55.5 percent in February.

Note: Any number above 50 indicates more than 50 percent of the surveyed purchasing managers say their companies are expanding in those areas.

Graph: Calculated Risk

 

So are we approaching full employment, the holy grail of most economists and the Fed’s overriding mandate, as we’ve been saying? This is even though the unemployment rate rose a notch to 5 percent from 4.9 percent. But it was because more Americans joined the labor force, the Labor Department said Friday. The size of the labor force has increased by more than 2 million people in the past five months, a clear sign that jobs are easier to find.

And the Labor Department’s just released JOLTS report shows there are more job openings that are being filled. The number of hires increased to 5.4 million (+297,000) in February, the highest level since November 2006. The number of hires increased for total private (+278,000) and was little changed for government. Hires increased in retail trade (+102,000), accommodation and food services (+78,000), educational services (+44,000), and state and local government, excluding education (+25,000). Hires declined in mining and logging (-9,000). In the regions, hires increased in the South. Until now, government (including state and local) hiring has been almost non-existent during the recovery.

Large numbers of hires and separations occur every month throughout the business cycle, but we don’t see the whole labor picture until the monthly JOLTS (Job Openings and Labor Turnover Summary) report comes out.

Net employment change results from the relationship between hires and separations. When the number of hires exceeds the number of separations, employment rises, even if the hires level is steady or declining. Conversely, when the number of hires is less than the number of separations, employment declines, even if the hires level is steady or rising. And, over the 12 months ending in February, hires totaled 62.1 million and separations totaled 59.4 million, yielding a net employment gain of 2.7 million, says the Bureau of Labor Statistics.

Graph: Marketwatch

 

Lastly, and maybe the major determinate of future growth, is the record expansion of the labor force. Marketwatch economist Rex Nutting reports the U.S. labor force grew at the fastest pace on record in the past six months, according to Labor Department data released recently.

“After years of stagnant labor-force growth or even declines," said Nutting, "millions of potential workers are joining or rejoining the workforce. In just the past six months, the labor force (which consists of everyone who holds a job plus everyone who is actively searching for work) has increased by 2.4 million. Almost all of them are finding work. Employment has increased by the same amount since September.”

It is the most since at least 1948, when the BLS first began measuring the size of the labor force. The old record of 2.1 million was set in July 1973, says Nutting. That is leading to a lot of hires, folks, now mainly in the service sector that pays lower wages, but very good for future growth prospects.

Harlan Green © 2016

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

Minimum Wages vs. Maximum Profits?

Financial FAQs

Corporate profits are at all-time highs, and workers compensation at all-time lows, as fast food workers continue to strike for higher minimum wages. Yet business interests still maintain maximum profits have to be a corporation’s primary consideration. In fact, it would be breaking their corporate charters to operate otherwise!

Actually, not so. Maximizing corporate profits at the expense of everything else—such as environmental pollution—is no longer allowed. And workers have some protections, such as safety regulations under OSHA, and limitations on the number of work hour’s minimum compensation. Then why has the glorification of profit maximization enriched stockholders and CEOs, but not their employees?

One answer is the resistance of businesses to raising the minimum wage. Some states have raised the minimum wage, such as California, and cities such as Seattle. But it’s still $7.25 per hour for most states. This is even though many studies show that higher wages create greater prosperity overall. For instance, Australia, where the minimum wage for adult, full-time workers is $16.87 per hour, currently has a 3.1 percent annual GDP growth rate, vs. 2.5 percent in the U.S.

Nobelist Joseph Stiglitz, an advocate of greater income equality has said, “Our current brand of capitalism is an ersatz capitalism. For proof of this...we have monopolies and oligopolies making persistently high profits. C.E.O.s enjoy incomes that are on average 295 times that of the typical worker, a much higher ratio than in the past, without any evidence of a proportionate increase in productivity.”

Graph: EPI

The hourly compensation of a typical worker grew in tandem with productivity from 1948–1973. But after 1973, productivity grew strongly, especially after 1995, while the typical worker’s compensation was relatively stagnant. This divergence of pay and productivity has meant that many workers were not benefitting from productivity growth—the economy could afford higher pay but it was not providing it.

A new survey of Harvard Business Alumni by the Harvard Business School entitled A Troubling Divergence in the U.S. Economy highlighted several of the reasons. Business leaders in America are reluctant to hire full-time workers. Instead, many prefer investing in technology to perform work, outsourcing to third parties, or hiring part-time workers. Only 27 percent of respondents reported that their firms engage with institutions like community colleges to prepare students with workforce skills.

And when it comes to updating the public infrastructure that would support greater productivity, forty-two percent of Business School respondents reported that the condition of infrastructure like airports, ports, and roads had declined over the past three years. For every respondent who thought infrastructure had improved, nearly five felt it had worsened.

In fact, private sector growth has been lacking in both job creation and investment in plants and equipment over the past 5 years since the official end of the Great Recession. Private sector capital stock, at 22 years of age, is the oldest it has been since 1958, said economist David Rosenberg, and is strongly suggestive of an upgrade cycle (not to mention the fact that America's spending on public infrastructure at a 20-year low!).

Graph: Calculated Risk

The Calculated Risk graph pictures public sector jobs of both the national and state governments. It grew during Mr. Carter's term (up 1,304,000), during Mr. Reagan's terms (up 1,414,000), during Mr. G.H.W. Bush's term (up 1,127,000), during Mr. Clinton's terms (up 1,934,000), and during Mr. G.W. Bush's terms (up 1,744,000 jobs).

However the public sector has declined significantly since Mr. Obama took office (down 682,000 jobs). These job losses have mostly been at the state and local level, but more recently at the Federal level.  Needless to say, this has been a significant drag on overall employment.

Is it all due to the Great Recession? We think not. The voices of wage and salary earners have been drowned out since then, and raising the minimum wage has not been made a priority by either party in Congress, or the White House to date. That is the tragedy, and the real solution to this continuing economic malaise.

The most recent protests are part of a two-year campaign to raise awareness of the plight of the fast-food worker, the latest having taken place in May. While the demonstrations haven’t led to an increase in the federal minimum wage, some states and localities have upped the minimum wage. Seattle raised the minimum wage to $15 an hour and Massachusetts residents will soon see an $11-an-hour minimum wage, according to NBC News. McDonald's Corp. is on record saying it supports a federal minimum wage increase, but not to $15 an hour, as demanded by its workers.

Harlan Green © 2014

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

Mortgage Delinquencies Continue to Decline

The Mortgage Corner

The good news is that foreclosure rates continue to fall, though delinquencies more than 90 days late are fluctuating with the season, according to Lender Processing Services (LPS) in their Mortgage Monitor report for September. According to LPS, 6.46 percent of mortgages were delinquent in September, up from 6.20 percent in August. But LPS reported that 2.63 percent of mortgages were in the foreclosure process, down from 3.86 percent in September 2012, in this graph that begins in June 1995.

This is great news, and due mainly to the increase in housing values that has allowed many homeowners to either refinance or sell their homes.

Graph: Calculated Risk

This gives a total of 9.03 percent delinquent or in foreclosure. It breaks down as, according to Calculated Risk:
• 1,935,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,331,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,328,000 loans in foreclosure process.

Meanwhile, CoreLogic reports that home prices nationwide, including distressed sales, increased 12 percent on a year-over-year basis in September 2013 year over year. This change represents the 19th consecutive monthly year-over-year increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 0.2 percent in September 2013 compared to August 2013.

Graph: Calculated Risk

Excluding distressed sales, home prices increased on a year-over-year basis by 10.8 percent in September 2013 compared to September 2012. On a month-over-month basis, excluding distressed sales, home prices increased 0.3 percent in September 2013 compared to August 2013. Distressed sales include short sales and real estate owned (REO) transactions.

The bottom line is that housing values should continue to increase, in spite of the shutdown, because overall business activity continues to improve in both the manufacturing and non-manufacturing (service industries) sectors. The October Purchasing Managers’ Non-Manufacturing Business Activity Index increased to 59.7 percent, which is 4.6 percentage points higher than the 55.1 percent reported in September, reflecting growth for the 51st consecutive month. Though the New Orders Index decreased by 2.8 percentage points to 56.8 percent (maybe because of the government shutdown), the Employment Index increased 3.5 percentage points to 56.2 percent, indicating growth in employment for the 15th consecutive month.

Harlan Green © 2013

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

Expanding Service Sector Will Boost Growth

Financial FAQs

Why are stock indexes breaking records? Part of it is because of record corporate profits (which affects price-to-earnings ratios), up 20 annually since the end of 2008, as well as good job news that is boosting investor optimism. The bulk of the nation's economy is growing strongly and looks to continue to grow strongly in 2013. The ISM's non-manufacturing (service sector) index rose nearly one point to a higher-than-expected level of 56.0. It means 56 percent of respondents reported a stronger pace of overall growth relative to what was already a strong rate in January.

Graph: Econoday

New orders are up a very sharp 3.8 points to 58.2 with backlogs posting a 5.5 point jump to a very strong 55.0. New orders coming in and old orders piling up is a good mix for the employment outlook. And non-manufacturers are already hiring, at 57.2 which may be down three tenths from January but is still an exceptionally strong rate of monthly employment growth.

Add to that the Labor Department’s 236,000 increase in payrolls and drop to 7.7 percent unemployment rate, and we see a more certain business environment, now that most of the budget battles have been resolved. It didn’t seem to matter who won, in other words. And 179,000 of the added jobs were in the service sector, vs. 67,000 in the goods-producing sector, which highlights why the service sector is the main engine of growth.

The ISM's manufacturing report also had very good news with accelerating monthly growth for general activity, reflected in a 1.1 point gain for the headline index to 54.2, and acceleration in new orders which jumped 4.5 points to a very strong 57.8. A plus in this report is strength in new orders for exports are also accelerating, to 53.5 for a 3-1/2 point gain. Total backlogs are especially strong in the ISM report, at 55.0 for a big 7-1/2 point gain, which means exports will be picking up again.

Graph: Econoday

The only question mark is the consumer sector, which powers 70 percent of activity. The consumer continues to take on new debt at a steady and strong clip but whether it points to rising consumer demand is uncertain. Consumer credit rose $14.6 billion in December vs. a revised $15.9 billion in November, and $14.0 billion in October. But the revolving, credit-card side hasn’t been adding to the total. Revolving credit has been very flat, up a little bit one month and then down a little bit the next and is down $3.6 billion in the latest data. This could limit spending.

The service sector and manufacturing indexes are the best measure of overall economic activity, and so point to much better growth in 2013.

Harlan Green © 2013

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

Fourth Quarter Economic Growth Higher

Popular Economics Weekly

We are seeing a boost in Q4 economic growth, in spite of “fiscal cliff” worries. Service sector growth has increased significantly, job formation is accelerating, and real estate is coming back to life, thanks mostly to more jobs.

The service sector is our largest business sector and its ISM's non-manufacturing index rose five tenths to 54.7 with business activity over 60 for the first time since February. New orders are near 60 at 58.1 for a more than three point gain and the best reading since March. But employment is barely over 50, at 50.3 for a nearly five point monthly dip for the worst reading since July. Businesses are doing more with less as seen in this morning's productivity report and in the details of this report. But still, the gain in activity and orders is good news and other indicators show jobs increasing.

Graph: Econoday

The Non-Manufacturing Business Activity Index registered 61.2 percent, which is 5.8 percentage points higher than the 55.4 percent reported in October, reflecting growth for the 40th consecutive month. The New Orders Index increased by 3.3 percentage points to 58.1 percent. And overall growth is accelerating.

Graph: Econoday

Even more important was the upward revision in Q3 Gross Domestic Product growth to 2.7 percent, which will boost fourth quarter growth as well. Real GDP growth for the third quarter was revised up significantly because of a large inventory buildup, rather than increased sales.  But the Commerce Department raised the second estimate to 2.7 percent annualized, from the advance estimate of 2.0 and second quarter rate of 1.3 percent.

And we know that real estate activity has picked up, because housing prices are rising. The Case-Shiller Index has been rising since January. Improvement was really evident in the year-on-year rate which is up to plus 3.0 percent from plus 2.2 and plus 1.1 percent in the prior two months. Gains were in nearly all 20 cities, with Phoenix and San Diego prices rising the most.

Graph: Econoday

And the Conference Board’s consumer confidence index in November was steady and firm with buying plans for homes a special positive. The consumer confidence index rose to a new recovery high of 73.7 in November from an upwardly revised 73.1 in October. Strength was centered in the expectations component which is up 1.1 points to 85.1.

Graph: Econoday

Lastly, the most positive indicator of future sales is pending home sales up a very strong 5.2 percent even with the impact of Hurricane Sandy.  This is based on only a fractional decline in the Northeast, at least in the October report. The Midwest showed a very strong gain as did the South. The NAR’s October pending home sales index is at a five-year high.

Graph: Econoday

Real estate has seen falling foreclosure inventories, as well. And Hurricane Sandy will give a big boost to reconstruction of much of the Atlantic seacoast, boosting construction employment. So 2013 could be a very good year for economic growth, if as I believe any fiscal cliff issues will be resolved sometime early next year.

Harlan Green © 2012

Why the Terrible Payroll Report?

The Labor Department’s (BLS) August unemployment report showing ZERO (0) nonfarm payrolls growth was a shocker, when seasonally adjusted. Though expectations were low, no one had predicted absolutely no increase in hiring. But wait a minute. Aren’t 4 million jobs created and 4 million jobs lost on average every month, according to the Labor Department?

Ah, there’s the rub. When Labor “seasonally adjusts” the jobs’ numbers it is really counting any increase or decrease over normal hiring for that season, as we’ve said in past columns. For instance, during the summer months, since it finds a seasonal increase of approx. 1 million jobs from youths entering the labor force, it subtracts that 1 million from any actual increase in hiring before calculating the final Household survey increase or decrease via algorithmic formulas. This is while Establishment survey of nonfarm payrolls seasonal adjustment actually added jobs in August, as education payrolls can decline as much as 20 percent during the summer months, necessitating adding a seasonal adjustment factor.

We see more with JOLTS, the July BLS Job Openings and Labor Turnover Survey (It lags by one month), which shows the actual job totals. The number of job openings surprised us by climbing to a new cyclical high of 3.228 million positions, and the quit rate was a little higher than expected with 1.95 million workers voluntarily leaving their jobs for other opportunities. However, the number of new hires in the month slipped back to a six month low of 3.984 million, suggesting slightly less dynamism in recent months, said Wrightson ICAP. So employment numbers are at best an estimation, and can be the elephant in the room when attempting to predict future economic activity. In fact, the BLS itself says that it can only be 90 percent to get within 100,000 of the real numbers!

Chart: Wrightson ICAP

Since the seasonal adjustment is never very accurate it keeps getting adjusted when the more accurate state initial unemployment insurance claims come in. For instance, July’s payrolls were adjusted downward from 117,000 to 85,000, and June dropped from 46,000 to 20,000 net nonfarm payroll jobs. And Barron’s economist Gene Epstein mentions that as many as 75,000 private payrolls jobs might have been lost by the (just settled) Verizon strike in August.

And both the service and manufacturing sectors are showing more strength in August. An unexpected one-point increase in orders contributed to an unexpected rebound in the ISM non-manufacturing survey. The 0.6 increase to 53.3 was small but surprising nonetheless. The employment index fell by less than one point to 51.6, which, over time would be consistent with somewhat stronger payroll growth than was reported on Friday.

Chart: Wrightson ICAP

The overall business activity index, which is the most subjective component, slipped just half a point to 55.6. That index remains a couple of points above the recent lows reached in the April-June period, and suggests that the non-manufacturing sector does not see signs of an imminent collapse.

Another indicator arguing against a double dip is the Chicago Purchasing Managers Index. Business in the Chicago area this month did not slow as much as expected with the purchasers' index coming in at 56.5, down only 2.3 points from July. August's rate is comfortably over 50 to indicate solid growth in the area's economy though at a slightly slower rate than July. Chicago's sample, which includes both non-manufacturing and manufacturing firms, is considered a good proxy for overall GDP growth.

Econoday reports it shows solid but slowing growth for new orders and production. The new orders index rose to 56.9, compared to 59.4 in July. Production came in at 57.8, down from 64.3 in July but well over breakeven. Supplier deliveries slower substantially which is a sign of strong business activity. These results were surprisingly solid given the run of negative indications on August business conditions that included extremely weak readings on consumer spirits and a run of regional manufacturing reports reporting contraction.

Why aren’t more jobs being created? Corporations with a $2 trillion cash hoard and record profits aren’t the problem. They would hire more if they could sell more. So additional demand has to be created by financing additional projects that create private jobs, like rebuilding our aging infrastructure. The American Society of Civil Engineers has calculated that the deferred maintenance of our public transportation system alone will cost $2 trillion to bring up to modern standards.

Inflation also isn’t the problem. The 10-year Treasury bond yield is now under 2 percent. And Nobelist Paul Krugman said recently there are only 2 numbers that tell us what we have to do to grow the economy. The record low yield of the 10-year Treasury Bond, and 0 net nonfarm payroll growth in August. So the problem at the moment is the lack of political will in Congress to create more jobs, not the private sector who would certainly hire more workers if they had work for them.

Harlan Green © 2011

What Are the Future Jobs?

Popular Economics Weekly

Many well-paying American jobs are not disappearing—neither into computers, nor overseas, says the Bureau of Labor Statistics (BLS). And there will be a terrific need to repair and rebuild our aging infrastructure—to the tune of $2 trillion over the next 5 years if we want to bring it up to standard, according to the American Society of Civil Engineers.

Total employment is expected to increase by 10 percent from 2008 to 2018. However, the 15.3 million jobs expected to be added by 2018 will not be evenly distributed across major industry and occupational groups. Changes in consumer demand, improvements in technology, and many other factors will contribute to the continually changing employment structure of the U.S. economy.

Many will be service jobs—in health care, construction, and professional services followed by business, management and financial services. The shift in the U.S. economy away from goods-producing in favor of service-providing is expected to continue, says the BLS. Service-providing industries are anticipated to generate approximately 14.5 million new wage and salary jobs in the next 10 years. As with goods-producing industries, growth among service-providing industries will vary.

Construction. Employment in construction is expected to rise 19 percent. Demand for commercial construction and an increase in road, bridge, and tunnel construction will account for the bulk of job growth.

Manufacturing. Overall employment in this sector will decline by 9 percent as productivity gains, automation, and international competition adversely affect employment in most manufacturing industries. Employment in household appliance manufacturing is expected to decline by 24 percent over the decade. Similarly, employment in machinery manufacturing, apparel manufacturing, and computer and electronic product manufacturing will decline as well. However, employment in a few manufacturing industries will increase. For example, employment in pharmaceutical and medicine manufacturing is expected to grow by 6 percent by 2018; however, this increase is expected to add only 17,600 new jobs.

It’s no surprise therefore that college degrees will be even more necessary for future employment. Bachelor degree holders and higher have just a 4 percent unemployment rate, those with some College or an Associate Degree hover around 8 percent unemployment, while High School grads or less educated are above 10 percent.

Occupations in the associate degree category are projected to grow the fastest, at about 19 percent. In addition, occupations in the master’s and first professional degree categories are anticipated to grow by about 18 percent each, and occupations in the bachelor’s and doctoral degree categories are expected to grow by about 17 percent each. However, occupations in the on-the-job training categories are expected to grow by 8 percent each.

Harlan Green © 2011

Jobs Are Returning

Popular Economics Weekly

Can we finally say jobs are returning? Nonfarm payroll employment rose by 244,000 in April, and the unemployment rate edged up to 9.0 percent, but only because more people were looking for work, according to the U.S. Bureau of Labor Statistics. This is while the change in total nonfarm payroll employment for February was revised upward from +194,000 to +235,000, and for March was revised from +216,000 to +221,000.

With commodity (oil, gas, and food) prices still sky high, the Mideast having its own revolutions, and Bin Laden dead, consumers are beginning to shop again, businesses are hiring, and even new-home construction may awaken from its coma.

This means the private sector is finally beginning to put people back to work, and it will create a virtuous cycle. Jobs = more purchasing power = more jobs = etc.

Gains were seen in goods-producing and service-providing sectors. Goods-producing jobs posted a 44,000 boost, following a 37,000 rise in March. For the latest month, manufacturing jobs increased 29,000 after a 22,000 gain in March. Even construction expanded though with a modest 5,000, following a 2,000 uptick the prior month. Mining jumped 11,000 in April.

This is while governments continued to lose jobs. Government jobs fell 24,000, following a 10,000 dip in February, while the private sector added 268,000 jobs. Private service-providing jobs increased 244,000 after a 194,000 rise in March. Trade & transportation was up 71,000 in April with 57,000 coming from retail trade. Other notable gains included professional & business services, up 51,000; health care, up 37,000; and leisure & hospitality, up 46,000.

The unemployment rate ticked up to 9.0 percent from 8.8 percent in March in the Household survey, however, because more began looking for work (+205,000). So are we finally turning the corner on unemployment? All signs point to higher growth ahead. Increased tax revenues have already pushed the debt ceiling deadline back another month, and increased tax revenues are what is needed to bring down the actual deficit as a percentage of Gross Domestic Product.

We know the economy slowed during the first quarter of 2011. However, the detail shows moderate forward momentum. First quarter GDP growth eased to a 1.8 percent annualized pace, following a 3.1 percent boost in the fourth quarter.

It was largely due to a sharp upturn in imports, says Econoday (Import totals are deducted from exports as part of the GDP calculations.), a deceleration in personal consumption, a larger decrease in federal government spending, and decelerations in nonresidential fixed investment and in exports. They were partly offset by a sharp upturn in private inventory investment.

Nonetheless, relative strength was seen in personal spending, investment in equipment & software, and inventory investment.  Exports also continued to rise although not as rapidly as earlier.  Weakness included a drop in government purchases, nonresidential structures, and residential structures. 

The good news is that consumer spending, which makes up almost 70 percent of GDP activity, is now leading the recovery, taking over from the manufacturing sector. This is in part because personal income has been increasing. Wages & salaries rose a moderate 0.3 percent in March, softening a little from 0.4 percent in February, while spending is growing at almost 5 percent annually. 

Harlan Green © 2011

Who Are The Job Creators?

Popular Economics Weekly

The November unemployment report was bad news, after a string of good jobs reports, so it is important to understand what spurs job creation. The unemployment rate based on a small sampling of both the salaried and self employed rose to 9.8 percent. The broader payroll survey of businesses showed a net increase of 39,000 nonfarm payroll jobs—50,000 in private industry less 11,000 government jobs lost.

So based on the jobs’ numbers, the recovery is shaping up to be not V or U-shaped, but W-shaped. That is, the recovery that began in earnest when the various government stimulus programs kicked in—TARP (for banks), ARRA (for infrastructure and job creation), HAMP (for mortgage modification), and the Fed’s purchase of Treasury and Mortgage backed securities—reversed when the effects of the stimulus spending weakened.

Most of the TARP monies have been repaid, as well as the ARRA monies that have created or saved between 1.5 to 3.5 million jobs, according to the Congressional Budget Office, and the small number of mortgage modifications are barely making a dent in home foreclosures.

What should not be hard to understand is that private businesses begin to hire only when they see sustainable demand for their goods and services increase. That demand comes both from consumers and businesses, investors and producers, in both the private and government sectors. All use those goods and services, so when the private sector shrank in 2007 government stepped in, but it could not make up for all the private sector demand that was lost (something like a $6 trillion shortfall).

The private sector meanwhile has been sitting on their money. Corporations with a year of record profits have more than $1.8 trillion in cash salted away, banks have $1 trillion in excess reserves they are not using, and even consumers have been paying down debts faster and saving more than they have spent.

So the recovery which began January 2008 abruptly stalled when that aid declined. In part this was because state and local governments then began to shed jobs as their revenues shrank. It is only in 2010 that private business is beginning to hire again to the tune of 86,000 per month since January 2010. Both the manufacturing and service sectors have been expanding and are now hiring again.

The reason hiring has been slow, is that companies have been squeezing out as much output as possible from the current workforce instead of adding to payrolls—investing in more technology to replace workers—which is why productivity for the third quarter got a boost. Nonfarm business productivity for the third quarter was revised up to a 2.3 percent gain from the initial estimate of 1.9 percent, as we said last week.

The Institute for Supply Management’s November manufacturing survey, the best indicator of domestic manufacturing activity, shows businesses are continuing to add employees. The 57.5 index level for employment is very strong.

The ISM's non-manufacturing index rose seven tenths to 55.0, the highest reading in six months and reflecting strong monthly gains for new orders and employment. The latter gain, taking the component to 52.7 for its strongest reading of the recovery, is notable given the softness in the employment report. This report's employment index, until this month, had been very flat indicating that non-manufacturers had been reluctant to hire. Unadjusted gains for retail and corporate management led the month's employment gain.

So there is a broad misconception that only jobs created by the private sector—though desirable—are the only engine of sustainable economic growth. Government always has been, and will continue to be a partner in this growth. Especially in a modern and overcrowded world where the water we drink, the air we breathe, the resources we consume, as well as our neighborhoods have to be preserved and protected.

And both governments and the private sector have to borrow to be able to function effectively. So those who decry government spending are really ignoring the obvious—that we will always have business cycles with recurring recessions that don’t ‘cure’ themselves.

We have to remember, though, all this depends on a continuing demand for goods and services, which in turn needs readily available credit. Banks are only now beginning to lend again to small businesses, as various small business sentiment surveys indicate. Such optimism must continue to grow for the hiring to continue.

Harlan Green © 2010

QE2 Will Stimulate Economic Growth

Popular Economics Weekly

In a bid to stimulate banks to lend more by increasing their reserves, the Federal Reserve announced QE2 (Quantitative Easing 2). It will be buying up to $600 billion in Treasury securities from banks who hold them. We have no doubt this will kick start economic growth for several reasons. Not least, because there are signs of an additional pickup in both investment and hiring among small businesses.

In a New York Times’ column by Gretchen Morgenson, Ian Shepherdson of High Frequency Economics—noted for predicting the housing bust—sees growth increasing in the small business sector that creates the most jobs, because of a pickup in commercial and industrial bank lending.

And as commercial and industrial lending expands, Shepherdson maintains, it will unleash a pent-up demand among smaller companies for capital equipment, software, vehicles and other goods:

“The depression in small business pretty much explains everything in the weakness of this cycle,” he said. “I reckon in the last cycle they accounted for two-thirds of all new job creation. Not only are they big, they are better job-creation engines than big companies, which are more inclined to do their new hiring offshore.”

The deficit hawks maintain this will stimulate inflation down the road, because it puts too much money in circulation. But in fact buying back securities that banks have purchased from the U.S. Treasury doesn’t directly put money in the pockets of the consumers who spend it. It builds up banks’ cash reserves, which enables them to lend to small, as well as large businesses, as we have said.

Fed Chairman Bernanke downplayed the inflation danger in a recent Washington Post Op-ed: “Our earlier use of this policy approach (QE1) had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable, he said.”

The big news was that October private nonfarm payrolls (excluding government jobs) jumped by 159,000, and September was revised upward to 107,000. With wages and hours worked also increasing, it looks like credit is already expanding. In fact, the $30 billion small business credit bill passed recently will also inject additional liquidity into small businesses.

Average hourly earnings gained 0.2 percent in October after rising 0.1 percent in September, while the average workweek for all workers edged up to 34.3 hours from 34.2 hours in October. The workweek has been on a rebound since mid-2009.  Between the gains in temp workers and the average workweek, one should expect a pickup in hiring as these two series typically rise before overall employment.

Service sector activity in October —which accounted for 154,000 of the 157,000 private payroll pickup—followed the manufacturing sector surge. So the bulk of the economy picked up steam in October, according to the ISM's non-manufacturing index which rose 1.1 points in October to 54.3.  This survey of ISM members covers services, construction, mining, agriculture, and forestry.

And lastly, motor vehicles sales continued to surge, as all 3 Detroit automakers reported surging profits, with GM on track to pay back its government bailout with an upcoming IPO. Combined domestic and import nameplate autos and light trucks (includes minivans, vans, and SUVs) jumped 4.2 percent to an annualized pace of 12.3 million units. While still below the cash for clunkers recent peak of 14.2 million in August 2009, the October number represents nearly steady growth from the recession low.

Deficit hawks tend to forget that some inflation is necessary for an economy to grow. The Japanese deflationary experience is crucial to understanding this. That is why the Fed is still in effect easing credit conditions by adding to bank reserves. And why small businesses should be the biggest beneficiaries of QE2.

Harlan Green © 2010

Payrolls Are Key to Recovery

Are the rise in payroll jobs a key to this recovery? An analysis of payroll jobs in April show a healthy 290,000 increase, following a revised 230,000 advance in March, and 39,000 rise in February. Net combined revisions for March and February were up 121,000—including turning February from negative to positive. A continued payroll jobs increase will put a definite end to this Great Recession.

Payrolls have risen for four consecutive months and in five of the last six. And April’s boost was the largest in four years. It’s hard to argue that we are still in recession with this string of gains, even though more than 72 percent believe so in a recent NBC poll.

Why the continued pessimism? Because the recovery has been so uneven. The payroll data reveal why. Gains were widespread in the manufacturing sector, but not in the service-producing sector, where most of the jobs are today. Goods-producing jobs increased 65,000 after a 55,000 rebound in March. Manufacturing employment surged 44,000, following a 19,000 advance in March. Construction jobs even continued a comeback with a 14,000 rise, after rebounding 26,000 in March. Mining jobs rose 7,000 in April.

Private service-providing employment did gain 166,000 in April, following a 119,000 boost the month before. Latest strength was in professional & business services, up 80,000; leisure & hospitality, up 45,000; and education & health services, up 35,000. But wages are still stagnant, though hours worked has picked up, as employers try to maximize profits by pushing their workers harder, rather than add to their workforce.

Wage inflation is ‘nonexistent’, in other words, but it is hard to tell initially if weakness is related to shifts in the composition of hiring, though that likely partially explains the weakness, says Econoday. Average hourly earnings were flat in April, following a 0.1 percent dip in March.

So what is holding consumers back? The biggest negative was the unemployment rate rising to 9.9 percent from 9.7 percent in February. Nonetheless, there is positive news from the household survey as the jump was due to an 805,000 surge in the labor force. April household employment actually jumped 550,000. Basically, discouraged workers see hope of employment and have jumped back into the labor force. Essentially, the spike in the labor force points to optimism on the part of workers.

Workers remain hopeful, in other words, but progress in bringing down the unemployment rate is going to be slow. The median duration of unemployment rose to 21.6 weeks from 20.0 weeks in March.

Recent improvement in jobs may be spilling over into greater willingness by consumers to spend—and, in turn, this is bolstering the recovery. In fact, personal spending strengthened and outpaced income. Personal Consumption Expenditures posted a 0.6 percent boost in March, following a 0.5 percent jump the month before. Spending was led by a surge in motor vehicle purchases as seen in a 3.6 percent spike in durables. Nondurables advanced 0.3 percent and services rose 0.2 percent.

It is probably corporate profits that will determine future job growth, as we said last week, and profits are soaring. Profits in the fourth quarter were up an annualized 37.0 percent, following a 68.0 percent jump the prior quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are up 51.8 percent on a year-on-year basis.

Other factors than employment and corporate profits spur economic growth, of course. Manufacturing has grown in large part because the weak dollar has caused exports to soar. Exports are up 3.2 percent in March and more than 20 percent in a year. And forward momentum is building as the ISM’s manufacturing new orders index continued its rebound to reach a strong 65.7, where 50 or less is no growth. New orders have been in positive territory for 10 straight months.

Harlan Green © 2010