Still Flying Blind--Part II

 Financial FAQs

“Hiring has been choppy of late as employers weather cautious consumers and an uncertain macroeconomic environment. And while November's slowdown was broad-based, it was led by a pullback among small businesses.” ADP

wallpaperaccess.com

We know why consumer confidence has plunged to a new post-pandemic low. We have no news of current economic conditions to guide consumers and investors, much less what may happen next, so the U.S. economy is still flying blind.

The November unemployment report comes out on December 16, for instance, (skipping October’s report) after the Fed’s FOMC meet that decides whether another rate cut is appropriate, so we have only the ‘unofficial’ ADP private payrolls report on employment that showed -32,000 private payrolls were lost in November.

The goods sector of the U.S. economy, including Construction and Manufacturing, lost -19,000 jobs. The service sector lost -12,000 overall, though Education, Health and Leisure activities added +46,000 jobs in the sector.

September’s last ‘official’ unemployment report with 119,000 payroll jobs was ok, but that was before the government lock down. And the U.S. economy had averaged just 38,600 new jobs since April and the tariff announcements.

Dr. Nela Richardson Chief Economist, ADP said it best in the survey. Small businesses aren’t hiring because of the uncertain tariffs, since some 90 percent of small businesses import their products that are sold in the U.S.

September retail sales also reported before the shutdown. Retail sales are growing more dependent on a smaller group of consumers. The top 10% of earners in the U.S. accounted for nearly 50% of spending in the second quarter, the highest level it’s been since this data first started being collected in 1989, according to Moody’s Analytics.

And the poor ISM manufacturing index numbers show the manufacturing sector has been contracting for the past nine months.

“A closely followed manufacturing index fell to a four-month low of 48.2% in November from 48.7% in the prior month, the Institute for Supply Management said Monday. Any number below 50% signals contraction,.” MarketWatch

The Federal Reserve will probably lower interest rates another -0.25%, but next year is a rate tossup because of the inflation worries, as almost no tariff agreements have been ratified by congress and signed.

We still have a lot of postponed economic data from the government shutdown, in other words, such as personal consumption and spending data (PCE) that the Fed prefers to measure inflation. We know that annual consumer CPI inflation had jumped to 3% in September, also before the shutdown, and will probably go higher as the tariff costs are passed on to consumers and businesses.

It’s obvious that we are living in uncertain times, and the old Republican playbook of tax cuts combined with DOGE and Project 25 slashing of government benefits are hurting the 90 percent of Americans still living paycheck to paycheck, as I’ve said.

Is that enough to cause a recession, in spite of the stock market’s boost supporting the top 10 percent of Americans that can still afford more than the basic necessities?

It won’t take much to tip US into a recession. The data we need to predict the future will eventually come out. Then we will know if not only the manufacturing sector is contracting—e.g., employment, capital expenditures, and personal income—which are the other major components that determine whether we are in a recession.

Harlan Green © 2025

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

Irrational Exuberance is Back

 Financial FAQs

“How errors of human judgment can infect even the smartest people, thanks to overconfidence, lack of attention to details, and excessive trust in the judgments of others, stemming from a failure to understand that others are not making independent judgments but are themselves following still others—the blind leading the blind.” Robert Shiller, Irrational Exuberance

FREDS&P

Both the DOW and S&P 500 indexes of the largest publicly traded companies in the U.S. are at record levels, despite Donald Trump having just raised tariffs on 90 countries that he doesn’t like for some reason. April 2 was the last time he made such an announcement and the S&P plunged 828 pts. on the same day (see dip in graph), and the DOW more than 1,000 pts. before resuming their climb.

Yet the financial markets aren’t panicking this time, maybe for the wrong reasons. Their over enthusiasm, which was first termed irrational exuberance by Fed Chair Alan Greenspan in the mid-1990s as a warning that stocks were overpriced, has created a new asset bubble much like the dot-com asset bubble, and housing bubble that led to the Great Recession.

And such massive overinvestment in new technologies such as the current AI investment boom haven’t turned out well, historically.

Nobel Laureate Robert Shiller first wrote about it in his 2000 book, Irrational Exuberance, just before the bursting of the dot-com speculative bubble, which was precipitated by overinvestment in communication technologies such as the nationwide laying of fiber optic cables.

He said at the time: “I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others' successes and partly through a gamblers' excitement.^”

Companies are investing $trillions in developing AI, which is powering the largest Magnificent 7 tech stocks such as Apple and Facebook to record highs. Market analysts on CNBC have noted that ten stocks are driving 40 percent of the market’s current rally.

Yet just 9.4% of U.S. businesses used AI in July, including machine learning, natural language processing, virtual agents, and voice recognition, according to the Census Bureau as cited by Barron’s Megan Leonhardt.

S&P members’ current earnings per share reflect this. Stock prices have climbed to 29 times earnings which, according to Professor Shiller’s research, is approaching irrational exuberance territory. This is double the S&P’s historical EPS average price of 15 times earnings over the past 100 years that Dr. Shiller has researched.

The markets seem to be ignoring Trump’s erratic behavior for other reasons as well. This is in part because of investors’ belief that inflation is mild, though still rising. The Fed’s favored PCE inflation index for June increased 2.6 percent. Excluding food and energy, the PCE price index increased 2.8 percent from one year ago, still above the Federal Reserve target inflation rate.

And the long-awaited interest rate cuts financial markets haven been hoping for could begin in September after the very weak July unemployment report that caused Trump to fire the BLS Director.

The markets are also ignoring the damage Trump’s higher tariffs will cause to economic growth. History has shown that stagflation is a recurring problem, even during the COVID-19 pandemic. Supply chains dried up then as the world economies shut down, elevating inflation. And supply deliveries have already slowed from the effects of Trump’s on-again, off-again executive orders, as countries look for ways to reroute their exports.

Maybe the greatest sign of irrational exuberance is investors’ assumption that TACO Trump will eventually settle tariffs back to the 10 to 15 percent rates that he initially promised. But when?

Trump and Republicans have always had a problem with the truth and economic facts (like who benefits most from tax cuts), as has been pointed out by those professionals whose job it is to ascertain the facts (with many losing their jobs because of it).

Irrational exuberance has seriously damaged financial markets in the past and caused $trillions in losses. It happens when investors ignore financial facts that aren’t convenient or follow the herd rather than make the effort to read below the headlines.

What will happen this time when market investors realize this administration doesn’t believe in the facts at all?

Harlan Green © 2025

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

Republicans' Dystopian Dream

 Popular Economics Weekly

“I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.” Grover Norquist, Republican.

Grover Norquist, founder and president of Americans for Tax Reform in a 2001 NPR interview intoned above what has been the Republican Party’s dream—a federal government so small that it might one day disappear except for a strong military, with no public services that protect all Americans and bind us together as a nation, regardless of creed or color.

It has been the Republicans’ wish since at least Ronald Reagan’s “government is the problem” declaration as he attempted to downsize government by cutting taxes and ignoring laws (IranContra) when he could get away with it.

Donald Trump has now been chosen to fulfill their dream. He is effectively destroying many of those institutions through a very calculated mismanagement by choosing incompetence over competence, domination over cooperation. The problem is the US economy can’t function at all without a well-functioning central government since at least Roosevelt’s New Deal.

It takes healthy people and businesses protected from the ravages of a catastrophic climate to be productive. Yet Republicans via Trump are eliminating the institutions that protect our environment, healthcare and social services. They even attempted to abolish Obamacare more than 30 times, the only private al health service that insures 30 million Americans even with existing medical conditions.

And now Republicans want to add more tax cuts to our $36 trillion national debt that is 121 percent of our GDP, as portrayed below. Economists are predicting the tax cuts will add an additional $5.8 trillion to the national debt. But they can’t bring their budget hawks who oppose such debt to agree without cutting more social services, such as to social security and Medicaid.

GDP%federaldebt

The legacy of the Republicans’ dystopian dream by Trump would return America to a past century of horrific wars and pestilences, and not only be the destruction of our Democracy and freedoms we take for granted but raises the possibility of another worldwide recession or depression.

The price paid to date has been $Trillions in stock and bond market losses in just the five days as President Trump attempts to bend the rest of the world to his will with a tariff war, which is another, maybe disastrous demonstration of his incompetence and maybe worse, his mental deterioration as he writes countless executive orders that have little validity in law.

Consumers are now beginning to realize the damage Trump is causing. In further bad news, the University of Michigan’s gauge of consumer sentiment fell to 50.8 in a preliminary April reading from 57.0 in the prior month.

And inflation expectations of those surveyed rose to the highest level since 1981, which was the stagflation era that caused the Federal Reserve to raise its Fed Funds rate to 20 percent.

“Consumers report multiple warning signs that raise the risk of recession: expectations for business conditions, personal finances, incomes, inflation, and labor markets all continued to deteriorate this month,” said Survey Director Joanne Hsu.

When will Republicans wake up enough to realize their dystopian dream is becoming the nightmare of Donald Trump’s dog-eat-dog primal world in which ultimately no one can survive?

Harlan Green © 2025

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

Stagflation Vs. Recession?

 Popular Economics Weekly

Total nonfarm payroll employment rose by 228,000 in March, and the unemployment rate changed little at 4.2 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in social assistance, and in transportation and warehousing. BLS.gov

FREDunemployment

Is the good March unemployment report a sign of stagflation or recession? The 228,000 jobs created and unemployment rate just up to 4.2 percent may not mean much with Trump’s declared trade war on the rest of the world. It could be the calm before the storm.

President Trump’s completely insane “Liberation Day” announcement of tariffs on 180 countries including uninhabited islands could be creating a worldwide depression as countries decide whether to do business with US or go elsewhere.s It could slow down foreign trade to a trickle with the product shortages that will ensue, as happened with the COVID-19 induced supply shortages.

Looking at past history in the FRED graph of the unemployment rate to predict what will happen next, with the six gray bars indicating recessions since 1980, won’t help much. The unemployment rate rose sharply after the last recessions began.

Only someone as crazy as Trump believes he can take on the whole world and they won’t retaliate. It also makes no economic sense to base the tariffs on the budget imbalances of goods but not services. We export more services, such as software, than we receive from the EU, for instance, says Nobel laureate Paul Krugman, which brings the actual trade deficit with the EU close to zero. Was this dreamt up by Musk’s DOGE teenagers, I wonder?

There are many other factors that determine the start of a recession, such as economic growth. We already have predictions that Q1 GDP could shrink for the first time since the COVID-19 recession.

Chief economist Torsten Slok of Apollo Global says a recession can happen if the tariff hikes are not negotiated down in the next couple of months.

Fed Chair Powell believes a stagflationary period is more likely in his latest remarks. “While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected,” he said at a business journalism conference in Virginia. “The same is likely to be true of the economic effects which will include higher inflation and slower growth (which is the definition of stagflation).”

The 228,000 new jobs created in March didn’t prevent the continuing financial market meltdown, as investors are waiting to hear who will retaliate against Trump’s “Liberation Day” tariff hikes. The DOW Jones lost more than -$2200 points on Friday.

China was the first to respond with retaliatory tariffs, announcing that 34 percent. Trump’s 34 percent levy means the total of all tariffs on Chinese imports now totals 54 percent.

“China urges the United States to immediately cancel its unilateral tariff measures and resolve trade differences through consultation in an equal, respectful and mutually beneficial manner,” the ministry said, according to a Google translation.

Vietnam is also offering to negotiate, but it wants zero reciprocal tariffs, whereas Trump is saying that a bottom-line 10 percent tariff rate will remain on all imports.

I also see a period of stagflation with the strong employment data. The 228,000 nonfarm payroll increase was slightly higher than the average monthly gain of 158,000 over the prior 12 months, which is why I see slower growth rather than a recession this year. But all bets are off if the tariffs aren’t negotiated down.

Interest rates are plunging as fears of a recession mount and Realtors are already reacting. Lawrence Yun, the NAR’s chief economist says, “The future direction of the economy remains uncertain due to tariff wars and potential negotiations. In the meantime, interest rates on FHA and VA loans could soon drop below 6% in a matter of days. Rates on conventional and jumbo loans are also declining as money shifts from stocks to bonds. The current job additions and decreasing rates are likely to lead to more home sales…Be prepared.

$Trillions have already been lost because of Trump choosing to be the bully and fight with congress and the courts rather than negotiate the tariff hikes and DOGE job cuts up front. And Americans, as well as much of the world, will be paying for it.

Harlan Green © 2025

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

Fewer Jobs Available

 Financial FAQs

“It’s gotten harder for the unemployed to find work: Job openings in the U.S. fell at the end of 2024 to the second lowest level since the end of the pandemic.” MarketWatch

FREDjobopenings

Job vacancies reported by the Bureau of Labor Statistics have dropped from 8.2 million to 7.6 million openings in just one month. And this is becoming worrisome with the financial markets’ uncertainty over the effects of the federal government efficiency drive that President Trump is promising.

“It’s also taking people who lose a job a lot longer to find one. The number of people collecting unemployment benefits has risen to the highest level since 2018 if the pandemic years are omitted,” said Marketwatch.

This is having an impact on consumer confidence, needless to say, since consumers tend to become more cautious in their spending ways at such times. The Conference Board survey wasn’t upbeat.

“All five components of the Index deteriorated but consumers’ assessments of the present situation experienced the largest decline. Notably, views of current labor market conditions fell for the first time since September, while assessments of business conditions weakened for the second month in a row,” said its Chief Economist, Dana Peterson.

Why the doubts when the just elected Republicans are touting they can cure the budget deficit with a tariff war, which the Wall Street Journal just headlined was “The Dumbest Trade War in History.”

None of this is supposed to happen under the U.S.-Mexico-Canada trade agreement that Mr. Trump negotiated and signed in his first term, according to WSJ’s Editorial Board.

“The U.S. willingness to ignore its treaty obligations, even with friends, won’t make other countries eager to do deals. Maybe Mr. Trump will claim victory and pull back if he wins some token concessions. But if a North American trade war persists, it will qualify as one of the dumbest in history,” says the WSJ.

Then there are the ongoing deportations which will hurt service industries like leisure, transportation, healthcare, and construction which employ a majority of immigrants, especially in the smaller businesses.

The number of job vacancies reported by companies was lowest after the 2008 Great Recession and began the steady climb to 7 million just before the COVID-19 pandemic 7.6 million job openings has stabilized over the past several months, indicating that the job market and so the unemployment report hasn’t changed. There were 5.5 million hires and 5.3 million separations (i.e., left their jobs), indicating that some 200,000 new jobs were created, which will be confirmed in Friday’s official unemployment report.

All three major stock market indexes have been seesawing since Trump enacted, then suspended the Mexican and Canadian tariffs, but not the Chinese 10% tariff. So, it is really up to the new administration to calm the markets, if they don’t want more investors to head for the exits.

And how will the threatened firing of FBI agents calm the waters? Who will then protect us from domestic and foreign terrorists?

Harlan Green © 2025

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

A Disappointing Jobs Report?

 Popular Economics Weekly

MarketWatch.com

Not everyone is eager to go back to work, according to this morning’s unemployment report. The US economy added just 266,000 new nonfarm payroll jobs in April. Leisure and hospitality led the way with 331,000 jobs and governments added 48,000 new jobs.

“Both the unemployment rate, at 6.1 percent, and the number of unemployed persons, at 9.8 million, were little changed in April,” said the US Bureau of Labor Statistics. “These measures are down considerably from their recent highs in April 2020 but remain well above their levels prior to the coronavirus (COVID-19) pandemic (3.5 percent and 5.7 million, respectively, in February 2020).”

Transportation/warehousing and Professional/business sectors had 153,000 fewer jobs that would be normal for this time of year, since the jobs numbers are adjusted for seasonal factors. There was a pause in hiring in those sectors probably because they couldn’t find enough workers, since there has been no slowdown in business activity in both the manufacturing and service sectors of the economy.

This is in part because the government’s various aid programs are enabling more women to stay at home until their children go back to the slowly opening schools, and many of the 8 million that were laid off are still receiving good unemployment benefits.

The good news is that the size of the labor force grew by 430,000 in April to 161 million, close to the 164.5 million working before the pandemic when the unemployment rate was 3.6 percent.

“The shortfall in new jobs in April is likely just temporary,” said MarketWatch’s Jeffry Bartash in his comments on this morning’s disappointing nonfarm payroll report. “Falling coronavirus cases and massive federal stimulus have turbocharged the economy and job openings have surged. The U.S. is still set up for a summer of strong economic growth, especially if the coronavirus is mostly squelched.”

Employment by local governments also rose 31,000 in April as more schools reopened. Some very essential workers neglected until now—bus drivers, cafeteria workers and other personnel had been unable to work with schools closed, while employment declined in retail, health care, transportation and manufacturing, as I said.

Reuters’ ICAP says “The deceleration in payroll growth this month is not an argument for easier monetary policy.  As Chair Powell keeps reminding everyone, virus-related constraints are the key variable in the outlook.  For much of the past year, the major effect of those constraints was to restrict demand. Given the large number of employers who say they cannot find enough new workers, it is clear that the deceleration in hiring in April was not due to insufficient demand.”

This is only the beginning of what will be a decade-long recovery, with much of it to come from the just-passed American Recovery Act, and upcoming American Jobs Plan, a requested total of more than $4 trillion in additional government spending that will create even more good jobs.

The real question with all this stimulus spending is what will full employment look like in the years to come? Will there continue to be a labor shortage, for instance, with the current declining US birth rate and lower immigration numbers?

It must be one reason the financial markets are boosting tech companies’ stock values (i.e., NASDAQ). They are betting on a big 5G future need for more robots and Artificial Intelligence that will be needed to supplement what could be a looming labor shortage.

Harlan Green © 2021

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

No Surprises in Q2 GDP. ADP Employment

 Financial FAQs

FREDGDP

The last estimate of Q2 GDP was barely changed, contracting at -31.4 percent vs. -31.7 percent in the second estimate, but that isn’t dampening the stock market, as it looks like the upcoming first estimate of third quarter GDP growth will be positive, maybe ending the pandemic-induced recession.

Tomorrow’s ‘official’ Labor Department unemployment report should tell us more about third quarter growth, with the first Q3 estimate coming out at the end of October..

Why the consumers’ optimism, just as Covid-19 infection rates are beginning to rise again? Americans’ spending rose 1 percent in August for the fourth month in a row, stemming largely from the massive infusion of federal aid for the unemployed, and the reopening of more businesses. But the increase was the smallest since the U.S. reopened and pointed to a slower economic recovery.

Incomes had declined by 2.7 percent because of the end of government aid in July, the biggest drop since early in the pandemic, but spending is still positive due to accumulated savings from the lockdowns. The personal savings of 14.1 percent is still almost twice as high as it was before the pandemic.

ADP

And ADP reported on Wednesday that 749,000 private nonfarm payroll jobs were created in September, with most of the jobs in midsize (259k) and large (297k) companies. It is probably a sign that Friday’s Labor Department unemployment report will show at least 1 million new private payroll jobs being created as well.

Another positive growth sign was that initial jobless claims filed through state programs dropped to 837,000 in the week ended Sept. 26 from a revised 873,000 in the prior week, the Labor Department said Thursday.

And an estimated 650,120 people also filed new claims under the Pandemic Unemployment Assistance Act, the federal law that temporarily made self-employed workers eligible for benefits for the first time ever. That put the number of actual or unadjusted new claims at 1.49 million.

So more workers are returning to their workplace, but the question will still be whether the continuing job creation trend remains positive, given that the fall and winter pandemic/flu season is just beginning.

Harlan Green © 2020

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

Why the Housing Boom...?

 

The Mortgage Corner

Calculated Risk

Total existing-home sales, https://www.nar.realtor/existing-home-sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, are booming.  They jumped 24.7 percent from June to a seasonally-adjusted annual rate of 5.86 million in July. The previous record monthly increase in sales was 20.7 percent in June of this year. Sales as a whole rose year-over-year, up 8.7 percent from a year ago (5.39 million in July 2019).

And residential construction is almost up to the February high that had been nursed by the Fed’s push for record low interest rates that have boosted purchase and refinance mortgage applications to record volumes as well.

Why the housing boom in the middle of a worldwide pandemic that is killing millions?

Interest rates are at record lows, for one thing. And the recession is probably over for a certain segment of our populace. The numbers also show there is also a tremendous pent up demand from the missing spring months due to the pandemic shutdown that normally boosts housing sales.

The conforming 30-year fixed rate is now below 3.0 percent for a one point origination fee, and jumbo conforming is just 1/8^th percent higher! In fact, the best lenders are offering 2.75 percent at zero points for the 30-year conforming fixed rate.

“The housing market is well past the recovery phase and is now booming with higher home sales compared to the pre-pandemic days,” said Lawrence Yun, NAR’s chief economist. “With the sizable shift in remote work, current homeowners are looking for larger homes and this will lead to a secondary level of demand even into 2021.”

Reuters news reports housing starts (i.e., new construction) jumped 23 percent last month versus their forecast of a 3 percent gain, with single-family starts up 8 percent from an upward-revised June level and the more volatile multi-family sector spiking 58 percent. (This had to be because of rising rents and rising demand due to the housing shortage,)

However, overall starts remain 4.5 percent below their February level, with single-family starts down 9 percent since then and multi-family starts up 4 percent.  Single-family permits are up 17 percent and multi-family permits up 22 percent, a very strong sign of future construction activity.  It brought the level of single-family permits to within 1 percent of the February total, while multi-family permits, which bounce around a lot, are up sharply from February.

Construction will have to pick up even more with housing inventories at record lows. Total housing inventory at the end of July totaled 1.50 million units, down from both 2.6 percent in June and 21.1 percent from one year ago (1.90 million). Unsold inventory sits at a 3.1-month supply at the current sales pace, down from 3.9 months in June and down from the 4.2-month figure recorded in July 2019; which is way below the more normal 5-6 month supply.

“Housing has clearly been a bright spot during the pandemic and the sharp rebound in builder confidence over the summer has led NAHB to upgrade its forecast for single-family starts, which are now projected to show only a slight decline for 2020,” said NAHB Chief Economist Robert Dietz. “Single-family construction is benefiting from low interest rates and a noticeable suburban shift in housing demand to suburbs, exurbs and rural markets as renters and buyers seek out more affordable, lower density markets.”

The median existing-home price for all housing types in July was $304,100, up 8.5 percent from July 2019 ($280,400), as prices rose in every region. July’s national price increase marks 101 straight months of year-over-year gains. For the first time ever, national median home prices breached the $300,000 level.

This verifies what we are seeing in the financial markets. The recession seems to be over for the top 10 percent of income earners. Many of them have gone back to work, or have white collar jobs and work from home, or don’t have to work because they are so-called ‘rentiers’ that live off their soaring asset values, as seen in the record rise in the S&P 500 index.

What happens next with the inevitable surge in COVID-19 cases this fall, school openings and the ordinary flu season, as I’ve said? Probably not much to the DOW and bonds, or even housing, when all this is over.

However, the rest of the economy not driven by the top 10 percent of income owners, such as actual consumer spending on staples and durable goods, is another story. Nor will corporations see the need to ‘pay it forward’ for future generations, unless we can find a better way to create living wages for the other 90 percent of adult-age workers; most of them still unemployed.

Harlan Green © 2020

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

Recession Has Arrived, No Big Surprise!

Financial FAQs

The Dow plunged 1,862 points on Thursday, as the Business Cycle Dating Committee of the National Bureau of Economic Research, which maintains a chronology of the peaks and troughs in economic activity in the United States, had just determined that a peak in monthly US economic activity occurred in February 2020.

The NBER press release said, “…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. The previous record was held by the business expansion that lasted for 120 months from March 1991 to March 2001.”

And Fed Chairman Jerome Powell gave some further bad news. The Federal Reserve on Wednesday slashed its estimate for U.S. gross domestic product this year to -6.5 percent, yes minus 6.5 percent, when many economists were predicting a return to growth by the end of the year. It also raised its median forecast for 2020 unemployment to 9.3 percent.

Powell and the Fed Governors are saying we could have several years of very slow growth. This is exactly what happened from the 1918-20 Spanish flu pandemic, the only real historical comparison. That recession lasted from 1920-22 before growth resumed and became what is known as the “Roaring Twenties”, as I’ve said.

Reuters

However, just reported initial claims for unemployment was better news as it is continuing to decline per the above graph. It fell to 355K to 1.542 million in the week of June 6 in seasonally adjusted terms, another sign that the work shutdown is ending, which could shorten the recession. 

Reuters ICAP news says “Our guess is that employment will rise again on a net basis in June as more workers are called back from temporary layoffs, but at the same time there continues to be a heavy flow of new job losses as the corporate sector re-evaluates the post-pandemic outlook.” 

Reuters

And lastly, we have the just released the JOLTS report (Job Openings and Labor Turnover Survey - above graph) that counts the number of hires and layoffs each month confirming that hiring tumbled 1.6 million to a record low 3.5 million in April. Job openings declined 965,000 to 5.0 million on the last business day of April, the lowest since December 2014 when six to seven million job openings had been the norm for the past several years.

How do we make sense of all this news? Firstly, ignore the stock market for now as worthy of any prediction of future prosperity. It’s attempting to parse discounted earnings at least six months from now. And who knows what earnings will be even in one year?

Also, if a vaccine in developed by the end of this year or early next year, as Dr. Fauci keeps hoping, how will it be distributed to most of the earth’s now 8 billion in population? Because no one will be safe until we all are safe, if we want to resume normal economic activity, which has no borders.

So I am maintaining it will be at least two years before consumers or producers return to what would be normal activity.  BTW, what will be the ‘new normal’ everyone is talking about when people can safely gather again in large shopping mall or stadium crowds, for instance? The health care experts are saying mask wearing and social-distancing must be part of it.

 Harlan Green © 2020

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

Employment Rise is Big Surprise!

Financial FAQs

MarketWatch.com

What happened? American workers are suddenly going back on the job; at least 2.5 million of them, according to the Labor Department. That knocks down the number of unemployed to maybe 20 million, and surprised economists.

A private payroll survey (ADP) that precedes the government’s had said on Thursday their estimate of -2.8 million jobs lost had caused them to lower their guess for the official BLS number (on Friday) to the -4 million to -5 million range, versus an earlier forecast of -8 million. 

“These improvements in the labor market reflected a limited resumption of economic activity that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic and efforts to contain it,” said the Bureau of Labor Statistics (BLS). “In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade. By contrast, employment in government continued to decline sharply.”

In fact, American businesses have been going back to work for more than one month, especially in the airline, automobile, leisure and hospitality industries, per the BLS.

American Airlines said Thursday that it expects to fly in July about 55 percent of the domestic capacity that was flown during July 2019, as load factor improved 55 percent at the end of May from 15 percent for the month of April.

“We’re seeing a slow but steady rise in domestic demand,” said Vasu Raja, senior vice president of network strategy. “After a careful review of data, we’ve built a July schedule to match.”

Airline travel has picked up substantially, in other words. On Wednesday, the International Air Transport Association (IATA) said daily flights increased by 30 percent between April 21 and May 27. The IATA said the improvement in the data suggests “the industry has seen the bottom of the crisis, provided there is no recurrence.”

And tens of thousands of autoworkers started streaming back into car and truck plants across the South and Midwest in May, “a critical step toward bringing the nation’s largest manufacturing industry back to life,” according to the NYTimes.

Ford, General Motors, and Fiat Chrysler restarted, after Toyota, Honda and Tesla began reopening plants. Hyundai restarted a plant in Alabama on May 4, according to the NYTimes.

The manufacturing sector lost 1.32 million jobs in April, but gained 225,000 jobs back in May. The so-called underemployment rate that includes part timers and those who have stopped looking for a job recently fell to 21.2 percent from 22.8 percent in April. But it was just 7 percent in February, so the latest payroll numbers are nothing to crow about.

Cities such as Detroit have also announced that hundreds of its employees are returning to work. Detroit Mayor Mike Duggan revealed to Detroit Regional Chamber President and CEO Sandy K. Baruah that the city is preparing “to send hundreds back to work in areas like cutting grass, road work, and construction.”

The DOW Jones is up more than 900 at this writing, and S&P 500 up more than 90 points on the surprise news. It looks like many companies called back their workers at the earliest opportunity with either emails or texts after two months of layoffs, thus escaping the notice of statisticians.

Is this improvement just a blip, as COVID-19 infection rates continue to climb in most of the country? We have to assume this will continue as more of the economy opens this summer, and demonstrations against police brutality continue.

Any real improvements will also depend on how returning workers are treated at their job places. Will they follow CDC guidelines of workers safety with appropriate disinfection protocols, including the continued wearing of masks and social-distancing?

Today’s financial market euphoria smacks of an irrational exuberance based in the belief that further disruptions due to the pandemic and street protests will  not last long, when it's better to act rationally in such times.

Harlan Green © 2020

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

Q4 Economic Growth…Watch Out Below!

Popular Economics Weekly

We might have a problem with economic growth in the fourth quarter, thanks in part to Republicans’ 2017 tax cuts that were to stimulate longer term growth and jobs, believe it or not. The New York and Atlanta Federal Reserve estimate seasonally adjusted Q4 GDP growth to drop to just 0.3 to 0.4 percent, from Q3’s initial estimate of 1.9 percent growth, Merrill Lynch has a slightly more optimistic forecast of 1.5 percent.

This is a terrible number, if accurate. These are so-called early “nowcasts” based on very preliminary data, so much could change by Q4. But there has been a steady decline in growth from last year’s tax cut-fueled surge that is mirrored by the latest retail and industrial production figures.

Why were the tax cuts a bust? Fedex’s 2018 $1.6 billion tax “windfall” is a good example of what happened to that windfall, according to the New York Times. Fedex promised that the U.S. economy would see a “renaissance of capital investment” from the huge capital gains tax cut. But it never happened.

“If anything, the companies that received the biggest tax cuts increased their capital investments by less, on average,” said the Times article. The result was increased CEO salaries and massive stock buybacks, which benefited stockholders, but not their employees that received no salary boosts, or bonuses from the largesse.

“Fedex reaped big savings, bringing its effective tax rate to less than zero in fiscal year 2018 from 34 percent in fiscal year 2017,” continued the Times. The result was more financial engineering, rather than productive investments that would boost growth.

The Atlanta Fed nowcast said, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2019 is 0.3 percent on November 15, down from 1.0 percent on November 8. After this morning's retail trade releases from the U.S. Census Bureau, and this morning's industrial production report from the Federal Reserve Board of Governors, the nowcasts of fourth-quarter real personal consumption expenditures growth and fourth-quarter real gross private domestic investment growth decreased from 2.1 percent and -2.3 percent, respectively, to 1.7 percent and -4.4 percent, respectively.”

Calculated Risk

The steady decline in retail and food service sales ex-gasoline—a more reliable indicator of sales volume—is worrisome because it mirrors consumer behavior, which is the main driver of economic growth at present. Consumers have been saving more and spending less this year. Sales slowed to a 3.9 percent annual increase from what has historically been in the 5-6 percent range since 2011. This is even though consumers have remained optimistic about future prospects in the latest consumer sentiment surveys.

Calculated Risk

Industrial Production is also declining. Total industrial production was 1.1 percent lower in October than it was a year earlier. Capacity utilization for the industrial sector decreased 0.8 percentage point in October to 76.7 percent, a rate that is 3.1 percentage points below its long-run (1972–2018) average.

Small businesses that answer the National Federation of Small Business survey are still upbeat. “The small business optimism index showed modest but wide improvement in October, at 102.4 which is at the high end of expectations and up 6 tenths from what was an unexpectedly weak September. Eight of the index's 10 components improved in October led by plans to increase inventories and including increased plans to make capital outlays. Earnings trends, however, fell sharply and current job openings edged lower. And continued earnings decline is a problem."

Industrial production and consumer spending are really the two main components of growth.

Earnings have begun to decline, in a word, and who knows how much more earnings may fall with declining capital investment, which is the seed corn of future growth?

Harlan Green © 2019

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

What is a Common Sense Stock Market?

Financial FAQs

Pundits and stock traders seem to believe Friday and Monday’s stock “massacre” was caused by too-quick trigger fingers—in computers controlled by algorithms, not people.

Whereas, investors and traders using their common sense would have seen the ‘yuge’ drop in valuations made no sense for many of the S&P 500 stocks of the largest US corporations that were making record profits.  Then they might not have oversold their holdings, as happened to those with the trigger-finger algorithms.

For instance, Boeing’s common stock price dropped $20 in a day when news came out that its profits are increasing and there are predictions of large future cash flows from its booming airline and defense businesses. And corporations such as Boeing will be saving $billions in future taxes due to the lower corporate tax rate.

What about the rest of the economy? Stocks have historically been a prediction of future economic activity, since they are priced at a discount to future earnings. So the total annual return of capital gains plus dividends can be a prediction of a company’s financial health.

Nobel laureate economist Robert Shiller in his best-selling Irrational Exuberance, a historical analysis of stock and bond yields, says stocks have earned $7 per year on average in capital gains plus dividends, bonds 4 percent per year for the past 100 years. 

And Dr. Shiller said Price-to-earnings ratios, another measure of stock values, averaged 15 to 1 historically. Today, the S&P P/E ratio is 17, meaning 17 times earnings, which is high, but not that high. In fact, the stock P/E’s reached 26 times earnings just before the Great Depression, and an oxygen-deprived 44 times earnings in 2000 on the eve of the dot-com crash.

That was why Dr.Shiller and Fed Chairman Alan Greenspan sounded the alarm over the  irrational exuberance that was “infecting” investors at the time. Dr. Greenspan’s famous warning was given in 1996, four years before the 2000 crash, when he said: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

Japan has finally worked their way out of two decades of virtual deflation at a tremendous cost to growth, because of their spate of irrational exuberance. They now rank behind China and the European Union in the size of their economy.

Our stock market is in a similar circumstance today when too much money is chasing 50 percent fewer publicly listed stocks than in 1996, as I said in yesterday’s column. And there are already indications that corporations will be doing more of the same with the new tax savings.

But there is good news for employees. Friday’s unemployment report unveiled the largest pay increase in years. Average hourly earnings jumped to a year-on-year expansion best of 2.9 percent.  This is while the Fed’s core PCE inflation index is just 1.5 percent, way below its 2 percent stated target.

Graph: Econoday

Wages and salaries, the actual hourly incomes of normal working stiffs that excludes interest-bearing bank accounts, rental income, retirement benefits, stock dividends or annuities, actually rose year-on-year to 4.9 percent for its 5th straight climb and is now at its highest rate since November 2015.

And the just released JOLTS report of job hires and openings showed more workers quitting jobs voluntarily, which means they were finding better paying jobs. Job openings have slowed a bit, down 2.8 percent in December to 5.811 million, whereas Hires are steady, down fractionally in the month to 5.488 million. But that is keeping the spread between openings and hires also steady, at 323,000—which means 323,000 net job openings that haven’t been filled.

This might be why wages and salaries are finally increasing faster than the inflation rate, but it can also be that minimum wages in coastal states in particular are creeping toward $15 per hour by 2022, since 80 percent of the workforce depends on wages and salaries.

What should we make of the possibility of more irrational exuberance pushing stock valuations too high? Corporate profits will increase with the tax cuts, wages and salaries are soaring, and inflation is far away from the 2 percent target.

I believe investors should focus on price-to-earnings ratios, which also tell us whether stock prices have strayed too far from actual earnings.  Dr. Shiller warns irrational exuberance could infect investors again, if the S&P P/E ratio strays once more into the mid-twenties.

Harlan Green © 2018

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

Why the ‘Yuge’ Stock Market Selloff?

Popular Economics Weekly

Stock indexes had the largest one-day drop in history today; what happened? The quick answer is that too much money is chasing too few stocks, believe it or not. The record low interest rates—the 10-year treasury yield just dropped back to 2.75 percent from 2.85 percent before Friday’s selloff—is an indication of the huge cash hoard held by corporations and Wall Street from the successive Quantitative Easing programs by Central Banks that have kept interest rates at record lows.

This is while a Credit Suisse report released last March titled “The Incredible Shrinking Universe of U.S. Stocks,” says between 1996 and 2016, the number of publicly-listed stocks in the U.S. fell by roughly 50 percent — from more than 7,300 to fewer than 3,600 — while rising about 50 percent in other developed nations.

Why do corporations and their Republican lobbyists keep pushing for lower taxes, as I said in an earlier column? They say it will create more jobs. But, alas, that isn’t shown by the record. An excellent New York Times Op-ed by Sarah Anderson at the Institute for Policy Studies points out that many corporations create very few jobs with those profits.

She reported on 92 public-held American corporations between 2008-15 that pay less than 20 percent in taxes. They had a median job growth rate of 1 percent vs. 6 percent for all private sector corporations during that time. And 48 of those companies actually cut 438,000 jobs, while their chief executives’ pay last year averaged nearly $15 million, compared with the $13 million average for all S&P 500 companies.

This should tell us who doesn’t use their profits to increase productivity and growth of their markets; as well as where corporate profits are spent; on stock buybacks that have reduced the number of outstanding publicly listed shares to enhance stockholder returns and CEO paychecks.

It means huge swings in stock prices from too much money chasing too few stocks, should traders panic; which is what they did today and Friday. Yet the panic selling had no underlying reason. Factory orders and the service sector economy is growing even faster than last year while the unemployment rate is still stuck at 4.1 percent and maybe going lower as fewer unemployed workers are even available to fill jobs.

The year-on-year growth for durable orders in the factory sector which has been sloping higher, is now 11.5 percent in December from 8.7 percent in November. This a sign that manufacturing growth is still trending higher, while the ISM non-manufacturing index is at an almost all-time high of 59; which means 59 percent of those surveyed see increased growth in the service sector.

Graph: Econoday

The ISM non-manufacturing sample is also reporting some of the very best conditions in the 20-year history of this series, reports Econoday and the ISM. New orders are arguably more important than any composite result and the reading, at 62.7, is back at last year's peak. Employment is a special standout, up more than 5 points to a very rare plus 60 score of 61.6 which is by the far the best of the post-2008 expansion.

So what to make of the 'yuge' selloff? Some traders are saying it was a series of electronic trading “glitches” that sent prices plunging for no economic reason, and stock prices fall below their intrinsic valuations. Algorithms were at fault on selling billions of shares on the click of a button that had been pre-programmed to sell when prices dropped to a certain level, while other algorithms were programmed not to buy while stocks continued to fall.

It meant computers were chasing each other’s tails; as if they had them. That’s what happens when algorithms rule over common sense, and traders lose their common sense.

Harlan Green © 2018

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