Lower Household Debt, Housing, Now Boosting Growth

The Mortgage Corner

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

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

Graph: Wrightson ICAP

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

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

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

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

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

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

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

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

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

Graph: Marketwatch

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

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

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

Harlan Green © 2014

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

JOLTS and Decline of Household Debt

Financial FAQs

There is a direct correlation between the increase in job openings announced in the Labor Department’s JOLTS (Job Openings and Labor Turnover) report, and declining household debt. How so? The increase in job opportunities—the number of job openings (yellow in graph) is up 7.6 percent year-over-year compared to January 2013, and that is enabling more households to pay down their debts.

Graph: Calculated Risk

This is while the Quits number decreased in January but is up about 3 percent year-over-year. These are voluntary separations, and mean workers are seeing more job opportunities that make them willing to leave their current job. (Light blue columns at bottom of graph is trend for "quits").

Graph: Calculated Risk

And household debt, as measured by the Federal Reserve’s Household Debt Service Ratio of mortgage and consumer loans to Disposable Income, has been declining steadily, and is now below 1980 levels. This is freeing up consumers’ incomes to spend more, needless to say, and a sign of better economic growth for 2014.

Sure enough, employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January, said the Labor Department last Friday. The unemployment rate, however, rose to 6.7 percent from a five-year low of 6.6 percent as Americans flooded into the labor market to search for work.

This is even though 601,000 people could not get to work because of the winter weather, the highest level for February since 2010. Some economists said job growth in February would have been as high as 200,000 if not for the weather.

And the smaller survey of households from which the unemployment rate is derived showed 6.9 million people with jobs reported they were working part-time because of the weather. That was the highest reading for February since the series started in 1978.

So even the winter weather isn’t slowing down appreciable growth. And consumers now have more money to spend. So watch out, trendsetters and economic forecasters, when the Spring thaw sets in!

Harlan Green © 2014

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

Beware of the Taperians!

Popular Economics Weekly

Now that the Fed has begun to reduce its QE3 securities’ purchases $10B per month in January, what will that do for growth? My answer is it’s too soon to say. Firstly, beware of the ‘Taperians’, those who would end QE3 too soon. As outgoing Fed Chairman Bernanke explained in his most recent speech, without QE3 we might have regressed back into a recession.

“"Skeptics have pointed out that the pace of recovery has been disappointingly slow, with inflation-adjusted GDP growth averaging only slightly higher than a 2 percent annual rate over the past few years and inflation below the Committee's 2 percent longer-term target," Bernanke said at the American Economic Association annual meeting in Philadelphia. "However, as I will discuss, the recovery has faced powerful headwinds, suggesting that economic growth might well have been considerably weaker, or even negative, without substantial monetary policy support. For the most part, research supports the conclusion that the combination of forward guidance and large-scale asset purchases has helped promote the recovery."

Then there are the political ‘headwinds’. Will the next 2 years’ budget agreement mean no more budget fights for a while, or will opponents to Obamacare continue to throw up roadblocks to its implementation in the 35 states that wouldn’t set up their own health care exchanges? This would make it more expensive and wasteful of government resources, needless to say.

Yet it seems at least one Fed Governors has been sounding the need to end QE3 before its time—Richmond Fed Governor Jeff Lacker. Lacker has been most vocal in wanting to rein in QE3 almost from its start last fall, and one who most consistently voted against continuing it at subsequent FOMC meetings. The reason? He’s an inflation hawk, or ‘inflationista’ (P Krugman’s term), as well as deficit hawk that fears all those bonds bought by the Fed will create runaway inflation (and deficits), once they are sold back into the economy.

In other words, he belongs to the ‘confidence fairy’ camp (another Krugman term) that believes business confidence is the key to growth, instead of consumer demand for their products, and businesses will lose confidence when interest rates and debt servicing costs rise, increasing budget deficits. But what about consumer confidence, when consumers are currently spending at a 4 percent annual rate, which is the largest component of overall demand?

“Businesses also appear to be quite reticent to hire and invest,” said Lacker in his most recent report. “A widely followed index of small business optimism fell sharply during the recession and has only partially recovered since then. Interestingly, when small business owners were asked about the single most important problem they face, the most frequent answer in the latest survey was "government regulations and red tape." This observation accords with reports we've been hearing from many business contacts for several years now. They've seen a substantial increase in the pace of regulatory change and a substantial increase in uncertainty about the shape of new regulations. Both are said to discourage new hiring and investment commitments.”

Graph: DShort

However that is not all survey results show in the December 10 NFIB report reported. “The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months was unchanged at a negative 8 percent. Fifteen percent still cite weak sales as their top business problem, but it is the lowest reading since June 2008. The net percent of owners expecting higher real sales volumes rose 1 point to 3 percent of all owners after falling 6 points in October (seasonally adjusted), a weak showing.”

In fact, the lack of consumer demand for their products is still the chief problem, not federal regulations or high taxes, as shown by their lack of need for more credit. “…only 2 percent of NFIB members cite credit and interest rates as their top business problem, and a record 66 percent expressed no interest in a loan, obviously due to their dismal view of the future of the economy. It’s not a problem of credit supply; it’s a lack of credit demand due primarily to poor economic prospects.”

What does Lacker say about consumer demand, the largest driver of economic growth, as we said? That consumer sentiment is still depressed because of economic ‘uncertainty’. “Although consumption grew rapidly at the end of last year, we have seen similar surges since the last recession, only to see spending return to a more moderate trend. Consumer spending trends are likely to depend on whether the dramatic events of the last few years are only a temporary disturbance to household sentiment or if they instead represent a more persistent shift in attitudes about borrowing and saving. At this point, I am inclined toward the latter view (i.e., that household sentiment remains depressed).”

Once again he talks about sentiments, rather than real income and wealth, which are the main determinants of consumer spending. It is their actual wealth that determines consumers’ spending habits, much more than what they feel about future prospects, research has shown.

So it’s true consumers are still being cautious, but several factors are improving consumer confidence. For example, said Bernanke, “notwithstanding the effects of somewhat higher mortgage rates, house prices have rebounded, with one consequence being that the number of homeowners with "underwater" mortgages has dropped significantly, as have foreclosures and mortgage delinquencies. Household balance sheets have strengthened considerably, with wealth and income rising and the household debt-service burden at its lowest level in decades.

If in fact Fed Governor Lackey believes consumer and business uncertainty is still too high, he should not be supporting an early end to the QE3 taper. Consumers and businesses are still facing an uncertain future. Is this the time to be taking away the credit ‘punch bowl’, with the private sector holding back?

So beware of those Taperians which cite the shortcomings of governments, rather than their own policies that hamper future prosperity.

Harlan Green © 2013

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

Equality Is Good For Everyone!

Popular Economics Weekly

It looks like some states are beginning to take the equality issue seriously again. Massachusetts just raised their minimum wage to $10 per hour, California is raising it to $8.25 over 2 years, with New Jersey and other states to follow.

And just last week, the Center for American Progress launched the Washington Center For Equitable Growth, which aims to deepen the economic critique of inequality. It is being set up by Berkeley economist Emmanuel Saez, among others, who is known with his partner Thomas Piketty, as the first economists to historically research the history of income distribution over the past 100 years.

Their results show that we have the worst income distribution in the developed world; as bad as in 1929 that resulted in the Great Depression. Such inequality was again the case in the run-up to the Great Recession.

It was declining household incomes that led the Bush administration and Federal Reserve to create the housing bubble. It used very easy credit conditions and lax loan qualification standards to boost economic growth. But those declining incomes caused consumers to use up all their available credit and savings to maintain their standard of living, thus causing the Great Recession.

As the mission statement of the Center says:

“New research suggests that growing inequality in the United States may have broad social and economic effects — by reducing stable demand for goods and services, dampening entrepreneurialism, undermining the inclusiveness and responsiveness of political and economic institutions, limiting access to education, and stunting individual development.  Yet our understanding of how these mechanisms interact with the broader economy is limited.”

In December 2011 I wrote a column entitled, Equality Is Good For Everyone, when there was hope that maybe the Great Recession was finally over, and households might regain their financial footing from the busted housing bubble.

Alas, that wasn’t to be because Congress become locked in the battle over a higher debt ceiling and government spending cuts, just as the Europeans were going through their own austerity budget cuts. And so similar budget cuts were agreed to by President Obama and Congress that has reduced economic growth by as much as 1 percent per year, according to leading economists.

President Obama had just given a speech on income inequality that December at Osawatomie, Kansas, the site of Teddy Roosevelt’s “New Nationalism” speech, which signaled the beginning of the progressive era that culminated in FDR’s New Deal.

Teddy Roosevelt had given his now famous speech in 1910 that called upon the three branches of the federal government to put the public welfare before the interests of money and property.

“The new Nationalism puts the National need before sectional or personal advantage,” said Roosevelt. “It is impatient of the utter confusion that results from local legislatures attempting to treat National issues as local issues. It is still more impatient of the impotence which springs from over-division of governmental powers, the impotence which makes it possible for local selfishness or for legal cunning, hired by wealthy special interests, to bring National activities to a deadlock. This new Nationalism regards the executive power as the steward of public welfare. It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that of the representative.”

Sound familiar? Obama said the Republican ideology of laissez faire, small government, free markets that existed when Teddy Roosevelt made his Osawatomie speech had resulted in too much graft and unlimited corporate power.

“It’s a simple theory — one that speaks to our rugged individualism and healthy skepticism of too much government. It fits well on a bumper sticker. Here’s the problem: It doesn’t work. It’s never worked.”

Berkeley Professor and former Clinton Labor Secretary Robert Reich has been most vocal on the growing divide between Haves and Have-nots that has resulted from the decline in equality with his film and book, Inequality For All. He also highlights the resultant distortions—among them a declining quality of life for most Americans, and financial markets becoming more susceptible to boom and bust cycles.

Harlan Green © 2013

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

Mortgage Delinquencies Continue Decline

The Mortgage Corner

Mortgage delinquencies and foreclosures continue to decline. According to Lender Processing Services (LPS), 6.08 percent of mortgages were delinquent in May, down from 6.21 percent in April, while 3.05 percent of mortgages were in the foreclosure process, down from 4.12 percent in May 2012.

This was the largest drop in delinquencies in 11 years, and gives a total of 9.13 percent delinquent or in foreclosure. It breaks down as:
• 1,708,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,335,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,525,000 loans in foreclosure process.

Graph: Calculated Risk

Delinquencies are down more than 15 percent since the end of December 2012, coming in at 6.08 percent for the month. As LPS Applied Analytics Senior Vice President Herb Blecher explained, much of this improvement is supported by the fact that new problem loan are approaching the pre-crisis average.

“Though they are still approximately 1.4 times what they were, on average, during the 1995 to 2005 period, delinquencies have come down significantly from their January 2010 peak,” Blecher said. “In large part, this is due to the continuing decline in new problem loans -- as fewer problem loans are coming into the system, the existing inventories are working their way through the pipeline. New problem loan rates are now at just 0.73 percent, which is right about on par with the annual averages during 2005 preceding.

It has to be why consumer spending is in effect soaring. Consumers were out in force in May as consumer credit rose a huge $19.6 billion. Revolving credit jumped $6.6 billion for the largest gain since May last year and the second largest of the recovery. The gain points to a jump in credit card use which, if extended, would be a big plus for retailers. It hasn’t increased at all for most of the year, until now.

Graph: Econoday

Non-revolving credit also jumped in the month, up $13.0 billion for yet another outsized gain that reflects both strong car sales but also gains in the student loan component that are tied in part to ongoing government acquisitions of student loans from private lenders, acquisitions that do not necessary reflect current student borrowing.

So the wealth effect from more jobs and rising housing prices seems to be taking hold. That is why delinquencies have been declining, in the main. This is while the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) showing some 3.828 million new job openings in June, and 4.4 million new jobs created.

Graph: Econoday

Both hires and separations are oscillating upward with hires running a little higher than separations. In May, there were 4.441 million hires versus 4.395 million the month before. There were 4.323 million total separations in the month of May-slightly up from 4.287 million in April. The separations rate was 3.2 percent. Total separations include quits, layoffs and discharges, and other separations.

Harlan Green © 2013

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

Economic Growth Stronger Than Predictions?

Popular Economics Weekly

There are signs that economists have underestimated GDP growth this year. The New York Times surveyed economists in a recent Sunday front page article, that said growth could increase to 3 percent from the 2 percent norm of the past 3 years. “That is the surprising new view of a number of economists in academia and on Wall Street, who are now predicting something the United States has not experienced in years: healthier, more lasting growth,” said the Nicholas D. Schwartz article.

And consumers are spending more. May retail sales surprised on the upside and increased 0.6 percent on the month and were up 4.3 percent from a year ago. Retail sales excluding just autos and excluding both autos and gasoline were up 0.3 percent from April, much as expected. On the year, they were up 2.8 percent and 4.1 percent respectively.

Graph: Econoday

This is reflected in consumer confidence numbers. Consumer sentiment has been oscillating upward slowly since the mid-2011 plunge. Consumer spirits have been on a climb the last couple of months, but dipped back mid-June to 82.7 versus May's 84.5.

The consumer's fundamental outlook for the economy is little changed with the expectations component rising nearly 1 point to 76.7 which is near a recovery high. In fact, the current conditions outlook is almost back to 2006 levels.

The nonpartisan Congressional Budget Office also sees relatively fast growth of 3.4 percent next year, and 3.6 percent between 2015 and 2018. A few other private economists are even more bullish, according to the New York Times article. Jim Glassman, senior economist at JP Morgan Chase’s commercial bank, estimates the economy could expand by 4 percent in both 2014 and 2015. If that were to come to pass, it would be the strongest back-to-back annual growth since the late 1990s.

There are many ingredients that could boost economic growth. The U.S. could become a net exporter of oil and gas in the coming decades. Health care costs are declining thanks to Obamacare, or the Affordable Care Act, according to many analysts. And housing may now be leading the recovery, while household net worth has increased some $3 trillion in Q1 2013, according to the Federal Reserve’s Flow of Funds report.

In fact, household debt continues to decline, also making consumers more optimistic about their future. The Calculated Risk graph shows the Debt to Service Ratio for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages (blue) and consumer debt (yellow).

Graph: Calculated Risk

Almost all of the ratios are down to levels that prevailed in the1990s (graph begins in 1980). This is both because of historically low interest rates, rates that we haven’t seen since World War II, and the large number of foreclosures and short sales that have reduced mortgage debt by as much as one-third in some regions.

That tells us the importance of low interest rates during this recovery, when household incomes are still stagnant, mainly due to almost no growth in wages and salaries—the income earned by most households (therefore consumers).

In fact, real, after inflation household incomes have declined 7.8 percent since the end of the Great Recession, which is the ‘real’ reason this recovery has been so painfully slow.

Graph: dshort.com

As Doug Short says in his excellent blog column, “The stunning reality illustrated here is that the real median household income series spent most of the first nine years of the 21st century struggling slightly below its purchasing power at the turn of the century.”

Harlan Green © 2013

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

Consumer Sentiment, Leading Indicators Signal Higher Growth

Popular Economics Weekly

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

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

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

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

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

Graph: Calculated Risk

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

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

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

Graph: Haver Analytics

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

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

Harlan Green © 2013

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

Consumer Debt Falls to Pre-Recession Level

Financial FAQs

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

Graph: New York Federal Reserve

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

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

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

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

Graph: Econoday

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

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

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

Harlan Green © 2013

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

What to do with Record Corporate Profits?

Popular Economics Weekly

U.S. corporations continue with record-breaking profits in Q1 2011. So what is wrong with the downturn in stocks, employment, and depressed consumer sentiments? Nothing, really, except corporations refuse to spend their profits. Of course, economies never recover in straight lines, consumers and government still have too much debt to ‘goose’ growth substantially after the greatest recession since the Great Depression, but corporations don’t seem to want to contribute to that growth just yet. That is why Bernanke and the Federal Reserve have to continue to hold down interest rates.

Consumers are still cash-strapped, as we said. That has resulted in the slowdown of GDP growth from 3.1 percent in Q4 2010 to 1.9 percent in the first quarter.

A good measure of consumer demand is Final Sales of Domestic purchasers, and consumer make up approximately 70 percent of domestic Final Sales. Final Sales had been rising 2-3 percent during the housing bubble, largely because consumers were using their home’s equity as a checkbook, but is now down to 0.4 percent annualized. It has never returned 2 percent since Q4 2007, the beginning of recession.

But corporate profits continue their surge in the first quarter; up an annualized 35.2 percent following a 12.6 percent drop the quarter before, and were up 7.8 percent on a year-on-year basis. This has resulted in something like a $1 trillion cash hoard held by the S&P 500 largest corporation, according to the latest data. In other words, corporations are not expanding their businesses.

When will businesses begin to spend their cash hoard? Only when so-called effective demand picks up, and that won’t happen until those debts are paid down. All household debt including mortgages still totals more than 100 percent of household assets. That is why demand is down across the board, whether for durable goods (that last more than 3 years), or services. This means incomes have to substantially increase as well.

The good news is that increases in durable goods orders for the latest month were broad-based by industry.  Transportation led the way with a monthly 5.8 percent jump, following a 9.4 percent drop in April.  The swing in both months was largely nondefense aircraft (Boeing) which surged 36.5 percent in May after a 29.0 percent fall the month before.  Defense aircraft rebounded 5.5 percent after a 0.4 percent dip.  However, the auto industry appears to still be suffering from supply shortages.  Motor vehicles edged up only 0.6 percent, following a 5.3 percent fall in April.

Household net worth, the best measure of financial health, is also improving. It is at 370 percent, above the long term average of 350 percent, according to the Federal Reserve’s latest Flow of Funds report, while the personal savings rate is hovering around 5 percent, meaning that consumers are saving enough to continue to pay down their debts, as we said last week.

The Federal Reserve Bank of San Francisco also believes that corporations won’t open their pocketbooks until household debt levels decline further. “If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth,” said a recent SFFRB report. “The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery.”

One would think higher corporate profits should mean corporations will eventually have to hire more workers, if they want to stimulate a greater demand for their products and services. Higher profits also mean a lower price-to-earnings ratio for stock values (earnings being the denominator in the P/E ratio), which has been hovering around 15:1 for the S&P 500 largest corporations of late. And a P/E ratio below 15:1 has historically boosted stock prices. So let us hope this new report gives a boost to stock prices for the rest of the year.

Harlan Green © 2011

Consumers are Coming Back

Popular Economics Weekly

The consumer is back, with spending on track to approach pre-recession levels by the end of this year.  Why?  Employment is now in a virtuous cycle.  Enough new jobs were created over the past 3 months (200,000+ per month) to trigger greater aggregate demand for goods and services, and consumers are paying down their debts.  One caveat is that if Republicans succeed in further cutting government spending without raising taxes (or allowing the Bush tax breaks to expire), it will mean less revenue to pay down public debt.

The Federal Reserve Bank of New York released the Quarterly Household Debt and Credit Report for the first quarter of 2011 today, which showed signs of healing in the consumer credit markets. Evidence of improvement includes:

• an increase in credit limits, by about $30 billion or 1 percent, for the first time since the third quarter of 2008;
• a steady number of open mortgage accounts, following a period of decline beginning in early 2008;
• continued decline of new foreclosures and new bankruptcies, down 17.7 percent and 13.3 percent respectively in the last quarter;
• a 15 percent decline of total delinquent balances, compared to a year ago; and
• a broad flattening of overall consumer debt balances outstanding.

Non-housing related debt, including credit cards, student loans, and auto loans, declined slightly (less than 1 percent), driven by a noticeable 4.6 percent decline in credit card balances. Credit inquiries, an indicator of consumer demand for new credit, came off their recent peak in the fourth quarter of 2010.

“We are beginning to see signs of credit markets healing gradually and evidence of greater willingness of consumers to borrow and banks to lend,” said Andrew Haughwout, vice president and New York Fed research economist.

Mortgage delinquency rates in particular are the best gauge of a RE recovery, and delinquency rates have declined to 8 percent of total mortgages outstanding, while foreclosures have been holding at 4 percent of mortgages, for some reason.  So we may also see employed buyers returning to home buying.  More cash is becoming available to them, is the bottom line.

Overall retail sales are in recovery, with consumers buying across the spectrum.    The widespread strength in retail sales is encouraging, reflecting greater willingness on the part of consumers to spend.  Some interesting patterns are showing up. 

Gains in furniture & home furnishings; building materials; and electronics & appliance stores suggest that while home sales are anemic, homeowners are starting to spend money on improving the quality of the homes.  Also, increases in very discretionary spending such as food services & drinking places are favorable.  But rising costs for gasoline and food may be cutting into discretionary income and could dampen spending unless offset by continued employment gains.

The bottom line is that consumers now have less debt and so more money to spend.  And businesses have to hire if they want to continue to grow, so look for continued job growth to feed the virtuous cycle.

Harlan Green © 2011