Debt Ceiling, Obamacare Debates Will Boost Government’s Role

Popular Economics Weekly

Tea Party Republicans apparently aren’t aware of the damage they inflict on their own party and constituents in attempting to shut down the federal government, if Obamacare isn’t delayed or repealed. For a shutdown will prove once and for all the importance of government, that institution feared and loathed in equal parts by Tea Partiers.

For starters, government spending and contracts contribute about 20 percent to economic activity, while consumers contribute some 70 percent. This is not just defense contracts, social security and Medicare, but up to $2.2 trillion in deferred infrastructure improvements such as ancient bridges and unpaved roads estimated by the American Society of Civil Engineers, in education programs and private research and development.

In fact, without the impact of federal cuts and higher taxes already passed, Mesirow Financial economist Diane Swonk estimates annual economic growth would be close to 4 percent, above the 2.5 percent pace she is expecting in 2013. Like most economists, Ms. Swonk says she does not think the economy will fall back into recession or experience a pronounced rise in unemployment, unless the shutdown is prolonged.

But we have an example of what could happen with the 1995 shutdown engineered by then House Speaker Newt Gingrich, says Ms. Swonk. In late 1995, the government closed for five days in November and again from mid December to early January 1996. If this happens again, all government employees are vulnerable to furloughs (forced, unpaid leave).

Essential workers in national security, public health and safety, including air traffic control workers, may be forced to work without pay. That would mean a hit to employment and income as we approach the critical holiday season. Social security and other transfer checks were also delayed 18 years ago, as those few left in government offices to work without pay couldn’t process the volume necessary to cut the checks.

Graph: Business Insider

And Chicago Fed President Charles Evans provided this chart to show the sharp drop in government consumption that has largely been responsible for subpar economic growth after the Great Recession.

Yet Obamacare will proceed on October 1, because it’s funding is already mandated and outside the province of Republicans to obstruct.

The New York Times said it best in a recent editorial. “That means the country will be stuck with the sequester-level cuts for the foreseeable future. It means more than 57,000 students will not get their Head Start seats back, and 140,000 low-income families who lost their federal housing assistance will be stuck in unaffordable or substandard homes. Thousands of scientists have been laid off and vital medical research projects have stalled. More than 85 chief Federal District Court judges signed a letter last month saying their cuts have been so deep that public safety is now at risk.

“A continued sequester will force unnecessary and damaging furloughs of all F.B.I. employees, and of 650,000 civilian employees of the Defense Department. And it means the economy will continue to sputter. The Congressional Budget Office estimated that ending the sequester could create up to 1.6 million jobs.”

It was conservative stalwart President Reagan who first lamented the fact that Republicans and Democrats couldn’t compromise in earlier budget battles, when he posited that it might take another war or alien invasion to get them to work together. Then he realized he could win the Cold War by out-arming Russia, and government spending came to the rescue once again.

Harlan Green © 2013

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Are Excessive Corporate Profits Hurting Growth?

Popular Economics Weekly

The third estimate for real GDP growth for the second quarter was left unchanged at an annualized rate of 2.5 percent compared to the second estimate and compared to a first quarter rise of  1.1 percent. But even 2.5 percent growth is not enough to increase job creation or bring down the unemployment rate further.

Graph: Calculated Risk

Full employment has always been associated with 3 percent plus growth. It has averaged 3.2 percent over the last 75 years, so there is a growing concern that the segment of economic growth that has expanded, corporate profits, may be the culprit. For though corporate profits have expanded to record levels, household incomes as well as wage and salary growth, have stagnated. Various studies verify income growth has not even kept up with inflation since the 1970s, or the productivity growth that is the reason for much of corporate profit growth.

Graph: The Atlantic

Above all, there is concern that too much of the taxation burden will fall on individuals. Going forward, the Obama administration predicts that Washington will rely more on individual income taxes and less on corporate taxes, yet corporations are investing less of their profits on expansion, more on CEO salaries and dividends for their shareholders. This hasn’t expanded economic growth since 2000, at least.

Between fiscal 2010 and fiscal 2018, individual income taxes will rise from 41.5 percent of federal revenues to 49.8 percent, an increase of 8.3 percentage points, the president’s proposed fiscal 2014 budget shows. Corporate income taxes – assuming current statutory rates – are expected to grow by only 2.4 percentage points from 8.9 percent in 2010 to 11.3 percent of federal revenues in 2018.

As a percentage of national income, corporate profits stood at 14.2 percent in the third quarter of 2012, reports the New York Times, the largest share at any time since 1950, while the portion of income that went to employees was 61.7 percent, near its lowest point since 1966. In recent years, the shift has accelerated during the slow recovery that followed the financial crisis and ensuing recession of 2008 and 2009, said Dean Maki, chief United States economist at Barclays.

Corporate earnings have risen at an annualized rate of 20.1 percent since the end of 2008, he said, but disposable income inched ahead by 1.4 percent annually over the same period, after adjusting for inflation. “There hasn’t been a period in the last 50 years where these trends have been so pronounced,” Mr. Maki said.

No, but there was a period before that—the Great Depression—when wealth was so concentrated. Instead of looking at the income inequality of the 1 percent, we need to look at corporate dominance of the American economy that has basically stopped domestic economic growth, while U.S. corporations invest and grow overseas. 

Raising the federal minimum wage above $7.25 per hour would be a starter.

Harlan Green © 2013

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Case-Shiller Home Prices Take Off

The Mortgage Corner

The July S&P Case-Shiller home price index shows home prices are in full recovery mode. Over the last 12 months, prices rose 12.3 percent and 12.4 percent as measured by the 10- and 20-City Composites in the major cities and metro areas, which are a 3-month average of same-home increases. And because the Fed still in full credit easing mode with its September decision to maintain QE3 securities’ purchases at $85 billion per month, interest rates are beginning to decline

Graph: Calculated Risk

Data through July 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices showed increases of 1.9 percent and 1.8 percent from June for the 10- and 20-City Composites. For at least four months in a row, all 20 cities showed monthly gains. Phoenix posted 22 consecutive months of positive returns. Although home prices in all the cities increased, 15 cities and both Composites those increases slowed in July versus June.

“Home prices gains are holding their 12 percent annual rate of gain established by the two Composite indices in April,” says Chairman David M. Blitzer, of the S&P Dow Jones Indices. “The Southwest continues to lead the housing recovery. Las Vegas home prices are up 27.5 percent year-over-year; in California, San Francisco, Los Angeles and San Diego are up 24.8, 20.8 and 20.4 percent, respectively. However, all remain far below their peak levels.”

The result of lower mortgage rates is mortgage applications are also increasing, after falling sharply in May when the Fed first hinted it would begin to tighten credit in the fall. Mortgage applications increased 5.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 20, 2013.

The Refinance Index increased 5 percent from the previous week. The seasonally adjusted Purchase Index increased 7 percent from one week earlier. The Purchase Index was at its highest level since July 2013.

Graph: Calculated Risk

The HARP share of refinance applications increased to 41 percent from 40 percent the week before, and is the highest since MBA started tracking this measure in early 2012. So there is the feeling that many home owners with negative home equity are only now taking advantage of refinancing their underwater mortgages at current interest rates. The HARP program allows mortgage holders to refinance when debt can be as much as 150 percent of their home’s value.
So the Federal Housing Finance Authority has stepped up its campaign to encourage more homebuyers to apply for HARP refinancing. Acting FHFA Director Edward J. DeMarco said that 2.8 million homeowners have refinanced through HARP but with mortgage rates still historically low and HARP eligibility requirements expanded, other qualified homeowners could reduce their monthly mortgage payments or build their equity faster with a shorter term mortgage through the program.

DeMarco told Bloomberg News in an interview this weekend that FHFA used focus groups to find out why borrowers with high rates hadn't yet tried to refinance through HARP. They found many didn't realize they were eligible. They thought they had to be delinquent on their mortgages before the government would help them. DeMarco said he hoped the educational outreach would bring in an additional 2 million HARP borrowers.

This is while total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose to a seasonally adjusted annual rate of 5.48 million in August from 5.39 million in July, and are 13.2 percent higher than the 4.84 million-unit level in August 2012, reported the National Association of Realtors.

Harlan Green © 2013

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Why Didn’t Fed Reduce QE3?

Popular Economics Weekly

Chairman Ben Bernanke attempted to answer that question at his post-FOMC press conference last Wednesday.  He said economic growth has slowed and so the Fed has reduced its growth projection to 2.0 to 2.30 percent for the year.  But the real reason is much of the country is still in recession, with elevated unemployment rates and the lowest labor participation rates since World War II.

Another reason may be that Janet Yellen is now Bernanke’s heir apparent as Fed Chairman, since Larry Summers is out of the running.  And Dr. Yellen has been his strongest supporter of the QE programs as Vice Chairman.  Professor Bernanke looked relieved at his press conference with a 9-1 vote supporting the decision to maintain QE3 purchase levels, referring several times to the success of QE3 and earlier easing programs that have boosted the real estate and the automotive industries, in particular.

Graph: Calculated Risk

Basically, 21 of the 52 states are still above the national 7.3 percent unemployment rate, according to the U.S. Census Bureau.  In fact, twenty-eight states and the District of Columbia had unemployment rate increases, 8 states had decreases, and 14 states had no change, the U.S. Bureau of Labor Statistics reported today.

Nevada had the highest unemployment rate among the states in July, 9.5 percent. The next highest rate was in Illinois, 9.2 percent. North Dakota continued to have the lowest jobless rate, 3.0 percent.

The Fed now predicts inflation will remain under 2 percent until 2016, well below its 2.5 percent threshold, as measured by the PCE index.  In its latest economist forecast, the Fed predicts an inflation rate of no higher than 1.2 percent in 2013, rising to a range of 1.7 percent to 2 percent by 2016, said Bernanke.   

Bernanke also gave another reason to maintain QE3; in response to a question whether such programs had harmed emerging market economies with such cheap U.S. dollars fuelling some of their own asset bubbles.  But he said that boosting U.S. growth would boost growth worldwide, since a healthy U.S. economy was still the main engine of growth for the world economy, while the White House and Congress were doing nothing to boost growth or create jobs. So he and the Fed had no choice to continue as the only engine of U.S. growth.

Harlan Green © 2013

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

Existing Home Sales Take Off

The Mortgage Corner

Existing-home sales have finally taken off, a sign that real estate might now be leading the economic recovery. Real estate has historically led past recoveries, by employing so many construction workers and professional services, but not this one to date due to the busted housing bubble.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.7 percent to a seasonally adjusted annual rate of 5.48 million in August from 5.39 million in July, and are 13.2 percent higher than the 4.84 million-unit level in August 2012, reports the National Association of Realtors.

Graph: Calculated Risk

And total housing inventory at the end of August increased 0.4 percent to 2.25 million existing homes available for sale, which represents a 4.9-month supply at the current sales pace, down from a 5.0-month supply in July. So the very low inventory is causing housing prices to soar, which will ultimately cure much of the negative home equity still existing. Unsold inventory is 6.3 percent below a year ago, when there was a 6.0-month supply.

Lawrence Yun, NAR chief economist, said the market may be experiencing a temporary peak.  “Rising mortgage interest rates pushed more buyers to close deals, but monthly sales are likely to be uneven in the months ahead from several market frictions,” he said.  “Tight inventory is limiting choices in many areas, higher mortgage interest rates mean affordability isn’t as favorable as it was, and restrictive mortgage lending standards are keeping some otherwise qualified buyers from completing a purchase.”

But that may not be so with the Federal Reserve’s decision to put off tapering QE3 purchases. Conforming 30-year fixed mortgage interest rates plunged one-quarter percent on Wednesday to 4.25 percent for zero points origination fee in California, when the Fed announced its decision to continue the $85 billion in purchases.

The national median existing-home price for all housing types was $212,100 in August, up 14.7 percent from August 2012.  This is the strongest year-over-year price gain since October 2005 when the median rose 16.6 percent, and marks 18 consecutive months of year-over-year price increases, said the NAR.

Even more importantly, distressed homes – foreclosures and short sales – accounted for 12 percent of August sales, down from 15 percent in July, and is the lowest share since monthly tracking began in October 2008. They were 23 percent in August 2012.  Ongoing declines in the share of distressed sales are responsible for some of the growth in median price.

Granted much of the boost in home sales and rising interest rates comes from the fear that QE3 would end. But with interest rates again falling, both home purchases and mortgage refinancing will be boosted. So it looks like the Fed is maintaining it commitment to reviving the housing market, as well as economic growth in general.

Harlan Green © 2013

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What is a Real Minimum Wage?

Financial FAQs

The debate on how to boost this economic recovery has now shifted to the federal minimum wage standard, now at $7.25 percent per hour. This is in part because the latest Census Bureau report shows 46.5 million Americans living below the poverty line—15 percent of all Americans.  Raising the minimum wage should be a no-brainer, as such a wage is nowhere near even the income level that sustains a household working normal hours.  For instance, the current minimum wage comes to $15,080 per year with a 40-hour week vs. $23,492 as the official poverty level for 4 in 2012, reports the U.S. Census Bureau.

But there is an even more important reason.  Higher wages translate to higher spending.  And it is consumer spending in the main that drives the demand for goods and services, with government lending a helping hand.  Higher wages also lowers debt levels, since consumers and government then borrow less. So-called capital investments, the third leg of GDP growth, accounts for much less activity.

The main argument against a raise in the minimum wage from conservatives is that it hurts job creation because fewer workers would be hired due to higher labor costs.

Really?  It’s true that labor costs generally average some two-thirds of product costs, but unit-labor costs are at all-time lows, while corporate profits are at an all-time high, as a percentage of Gross Domestic Product. 

Even MacDonald’s has given their employees advice on how to live within their means on their ‘minimum’ wage of $8.25/hr. But the recommended budget posted on their website includes no money for food, clothing, healthcare, or gas-transportation expenses, but leaves room for a second job.  And, rent can only be $600 per month, which will rent just one room in a California home.

Graph: MilesCorak

It’s also true that the U.S. minimum wage is in 9^th place of the developed countries with minimum wage standards led by Australia with its $16.37 minimum wage for fulltime working adults over 20 years of age.  The Australians are near full employment with their unemployment rate currently in the 5 percent range, by the way, lowest in the developed world.

Graph: Econoday

            The so-called Employment Cost Index put out by the Bureau of Labor Statistics really shows how little American wage and salary workers are earning, vs. during more prosperous times. It is up just 1.8 percent year-over-year.

So why isn’t the importance of a higher minimum wage understood? Much of the misinformation has to do with the advent of Reaganomics, or supply-side economics theory in 1980, which says that a greater share of wealth should be diverted to investors and producers of goods and services over government and the wage and salary workers. This all in the name of new product innovation and greater growth.

But that has been proven wrong in many ways.  For instance, businesses didn’t invest more domestically in the early years of the Reagan administration with their lower tax rates and extra profits.

And though some 15 million jobs were created during President Reagan’s term with lowered tax rates, 21 million jobs were created during President Clinton’s term, when tax rates were raised again.  And just over 1 million net jobs were created during GW Bush’s 8 years, with even more draconian tax cuts while fighting 2 wars.

            The result of policies that have favored ‘supply-side’ policies since then is the top 10 percent of earners took more than half of the country’s total income in 2012, the highest level recorded since the government began collecting the relevant data a century ago, according to an updated study by Saez and Piketty.  And 95 percent of all income growth since 2009 has been garnered by the top 1 percent of income earners.

            So actual results show the need for a higher minimum wage. The 1 percent have not increased production or created jobs in the face of declining real incomes, so it is time to shift some resources back to those who actually produce the wealth.

California is doing that with its just passed raise of the minimum wage to $10 per hour phased in with $1 in 2014 and another $1 by 2016. This still comes to just $20,800 per year with a 40-hour week. So even that amount doesn’t reach the poverty level for for a family of 4 today.

Harlan Green © 2013

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Deflation is the Danger

Financial FAQs

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

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

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

Graph: Econoday

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

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

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

Graph: Econoday

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

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

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

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

Graph: Calculated Risk

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

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

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

Harlan Green © 2013

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