Is The Great Stimulus Debate Over?

Financial FAQs

The stimulus debate over what form government aid should take to the recovery is only over for the moment. The headlines tell us both the rich and poorer among us will receive various tax breaks under the Democratic-Republican Party compromise, while businesses will have their research and development (R&D) tax credits extended. This is bound to lead to more hiring, say most of the pundits.

What was the debate about? A hint was the House Democratic majority’s unsuccessful attempt to cut the inheritance tax exemption from $5m to $3.5 million. If the goal is over what gives the most bang for the buck, then it is important to know who will benefit. Economic growth is already back to its pre-recession level (See my Popular Economics Weekly column of this week.).

So the real debate yet to be settled is who will receive most of the benefits of the recovery. The Bush II recovery was fueled by tax cuts for the wealthiest, which brought us a wealth distribution that matched 1928 before the Great Depression. The theory being was that the investor class was in the best position to boost growth.

Alas, that didn’t happen, as just 5 million jobs were created from 2000-08 after the Bush II tax breaks, the lowest since WWII, vs. 22 million jobs created during the Clinton Administration (when tax rates were higher). Why? Incomes were much more eqalitarian then, creating much more demand from the income brackets that do most of the spending.

The solution really isn’t such a puzzle; more like common sense. The wealthiest tend to spend less of their incomes, whereas the middle and lower brackets spend almost all of their incomes. So simple math tells us the more income that flows to the lower income brackets, the more of it gets spent. And it is overall spending that fuels growth in our 70 percent consumer-driven economy.

What do the top income brackets do with their wealth, other than conspicuous consumption? They invest it, in part by lending it back to the rest of us. That happened from 2000-08. The record low interest rates engineered by Chairman Greenspan’s Fed created easy money that allowed the 90 percent income earners to borrow from the wealthiest 10 percent in record amounts. But, as Roosevelt’s Fed Chairman Marriner Eccles said during the Depression, the game ended once those players ran out of borrowed chips.

Though leaving the Bush tax cuts in place for those earning more than $250,000 per year benefits the highest income earners most, the other 90 percent also benefits somewhat with the temporary payroll tax reduction. Adding the 2 percent payroll tax cut lowers revenues to social security, however. The maximum tax drops to 12.2 percent from 14.2 percent, shared equally by employer and employee for salaried workers.

It is basically above the $500,000 annual income level that the Democratic and Republican Parties’ tax proposals differ. Preserving all the Bush II tax cuts boosts tax savings of the $500k to $1million incomes from $6,701 to $17,467 and for $1 million plus incomes from $6,309 to $103,835, a huge jump.

So the tax cut compromise doesn’t give as much bang for the buck as we would like. The strong retail sales report for November points to consumers feeling wealthier in certain areas, however. The latest (October) Federal Reserve consumer credit report showed consumer credit expanded $3.4 billion in October, following a $1.2 billion rise in September.  Outstanding credit has not risen for two consecutive months since mid-2008.  The latest rise was led by a $9.0 billion boost in non-revolving credit, following a $10.1 billion jump in September.  Both months reflect healthy motor vehicle sales.

Revolving credit, a category centered in credit cards, continues to contract, down $5.6 billion in October following September's $8.8 billion drop. The decrease in revolving credit means consumers are not pulling out the plastic for purchases—disappointing news for retailers.   It also likely is due to continued charge offs by banks of bad loans, conjectures Econoday. 

Basically, consumers are still cautious about spending, maintaining a relatively high saving rate.  With so many of the tax benefits still going to the wealthiest, this means only a moderate pickup in overall consumer spending is sustainable. So it looks like the U.S. public will have to wait longer for a more egalitarian tax structure that both benefits most Americans, and pays our bills.

Harlan Green © 2010

Good News--End of Recovery in Sight!

Popular Economics Weekly

What does it mean that pundits/economists are now saying the end of the recovery is in sight? Barron’s economist Gene Epstein maintains, “The Recovery from the Great Recession of 2008-09 is almost definitely over. Starting Jan. 2 the expansion will resume.”

The ‘recovery’ ends when Gross Domestic Product (GDP) reaches the peak before the recession began—in Q4 2007, says Epstein. Growth will have made up for the loss in output sustained during the Great Recession, in other words, and the economy can finally begin to expand into new territory.

A look at the unemployment numbers tells us why. A survey from the U.S. Bureau of Labor Statistics—called the Job Openings and Labor Turnover Survey (JOLTS)—gives us the most accurate picture of the labor market. In October, about 4.047 million people lost (or left) their jobs, and 4.196 million were hired (this is the labor turnover in the economy) adding 149 thousand total jobs. Four million has been the historical monthly job turnover, so huge is our economy. So the jobless numbers relate to how many jobs are gained or lost above or below that number.

Also, total job openings increased from 3.0 million in September to 3.4 million in October, though overall labor turnover was still low. (The dark blue line (hires) is now above the light blue bars (quits + layoffs) with the yellow graph line of job openings steadily rising. 

Economic growth reached its low point in Q2 2009, having fallen about 4.1 percent from its peak, the steepest loss since the Great Depression—hence this one being called the Great Recession. The latest (Q3) quarter probably expanded at 2.5 to 3 percent after all revisions, bringing growth back to its highpoint before the recession. Year-on-year, real GDP in Q3 is up 3.2 percent. Both Final Sales to domestic purchasers and Final Sales of domestic product (F.S.), a measure of overall demand, continued to increase.

Just as consumers take up almost 70 percent of GDP activity, retail sales are the most important component (50 percent) of consumer spending. And sales continue to rise for the fifth consecutive month. Overall retail sales on a year-ago basis in October was a huge 7.7 percent, slightly below 8.0 percent of the prior month.

Today's retail sales numbers should lead to upward revisions to forecasts for the Personal Consumption Expenditures component in fourth quarter GDP, says Econoday.  Overall, sales are quite healthy overall despite price issues. (Since retail sales do not adjust for inflation, it is difficult to determine if ‘real’, after inflation sales are staying ahead of inflation.

A more esoteric measure of sustainable demand is the inventory-to-sales ratio that tells us how fast shoppers are emptying the shelves. Business inventories rose 0.7 percent in October in a light build given a very strong 1.4 percent rise in business sales. The mismatch pulled the inventory-to-sales ratio down one notch to 1.27. The comparatively small build is a plus for the economic outlook, pointing to the need to build inventories faster which requires output and employees, says Econoday.

The strong retail sales report for November points to the possibility of a further draw in November retail inventories. Based on government data, retailers appear to be having trouble keeping goods on store shelves.

What should not be hard to understand is that private businesses begin to hire only when they see sustainable demand for their goods and services increase, as we said last week. And because we have returned to pre-recession growth levels, that demand seems to be sustainable.

Harlan Green © 2010

Who Are The Job Creators?

Popular Economics Weekly

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

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

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

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

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

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

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

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

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

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

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

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

Harlan Green © 2010

Is Pending Sales Index Rise Good News?

The Mortgage Corner

The Pending Home Sales Index, a forward-looking indicator, rose 10.4 percent to 89.3 based on contracts signed in October from 80.9 in September. It was the highest jump since early 2003 when the surge in housing began. The index remains 20.5 percent below a surge to a cyclical peak of 112.4 in October 2009, which was the highest level since May 2006 when it hit 112.6.

This, and the continued rise in mortgage purchase applications signals an upsurge in housing demand. But is it sustainable? Is there enough pentup demand for housing—whether via increased household formation, or continued low interest rates—to sustain the surge? The seasonally adjusted Purchase Index increased 1.8 percent from one week earlier. This is the third weekly increase for the Purchase Index which reached its highest level since early May 2010, and is now back to its mid-1998 level, when housing was at the beginning of its last surge.

NAR chief economist Lawrence Yun said excellent housing affordability conditions are drawing home buyers. “It is welcoming to see a solid double-digit percentage gain, but activity needs to improve further to reach healthy, sustainable levels. The housing market clearly is in a recovery phase and will be uneven at times, but the improving job market and consequential boost to household formation will help the recovery process going into 2011,” he said.

“More importantly, a return to more normal loan underwriting standards and removal of unnecessary underwriting fees for very low risk borrowers is needed and could quickly help in the housing and economic recovery,” Yun said. Recent loan performance data from Fannie Mae and Freddie Mac clearly demonstrates very low default rates on recently originated mortgages, much lower that the vintages of 2002 and 2003 before the housing boom.

That is the real issue. Probably because almost 90 percent of all mortgages are either guaranteed or insured by the federal GSEs, Fannie Mae, Freddie Mac, or FHA/VA, their guidelines have become increasingly restrictive, with heightened credit score and lower allowable debt ratios restricting many eligible borrowers.

But housing pricing haven’t yet stabilized, with the S&P Case-Shiller same-home price index still at the bottom. he S&P/Case-Shiller 10-city home price index (seasonally adjusted) fell for the third month in a row and fell very steeply, down 0.7 percent in September and down 0.3 percent the prior month. At only plus 1.5 percent, the adjusted on-year rate extended its run of weakness. Weakness is no longer concentrated in the West or Florida with declines sweeping across regions.

Also, with badly depreciated housing prices, the current appraisal system hurts housing values on legitimate, arms-length purchases by not taking into account compensating factors, such as whether a neighborhoods value has been damaged by a recent foreclosure, or short sale.

But the PHSI fell only in the Western region, while in the Northeast it jumped 19.6 percent, in the Midwest the index surged 27.3 percent, and in the South rose 7.1 percent. So we are in an uneven recovery, with those regions that have resumed growth leading the way, while those states with huge foreclosure backlogs—like California, Nevada, Arizona, and Florida—holding back growth in their regions.

Harlan Green © 2010

Redistributing Great Wealth (is) The Path to Recovery

Popular Economics Weekly

We are in the deepest economic malaise since the Great Depression. And there is a good reason for it. We also have the greatest maldistribution of wealth since 1928. Researchers are finding that the two—the greatest inequality and greatest downturns—are intimately connected. So restoration of what is in effect our Middle Class, where at one time the majority of wealth resided, would restore both the jobs and financial health to an economy sorely out of balance.

This will not be easy. Witness the vociferous opposition to any restoration of equality—which conservatives label the redistribution of wealth to those less worthy, in their eyes. The current example is Republicans refusal to give up the Bush tax cuts for the wealthiest, which would restore tax rates of the Clinton era when 22 million jobs were created.

The sad fact is that unless we do begin to level the economic playing field, we are fated to experience more boom and bust cycles that will only debilitate the U.S. economy further, and so our standing in the world. And history will continue to repeat itself. Roosevelt’s Federal Reserve Chairman, Marriner Eccles, understood in 1933 the main cause of the Great Depression.

“… a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand (my italics) for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

Thomas Piketty and Emmanuel Saez among others have documented the disappearance of Middle Class wealth (See Feb. 2003 Quarterly Journal of Economics). The Center for Budget and Policy Priorities (CBPP), a non-partisan think tank, using Piketty and Saez data, verify that income and asset inequality has risen to levels last seen in the 1920s (see graphs).

Income disparities before that crisis and the recent one were the greatest in approximately the last 100 years, according to Harvard Professor David Moss, who is among a small group of economists, sociologists and legal scholars trying to discover if income inequality contributes to financial crises. In 1928, the top 10 percent of earners received 49.29 percent of total income. In 2007, the top 10 percent earned a strikingly similar percentage: 49.74 percent. In 1928, the top 1 percent received 23.94 percent of income. In 2007, those earners received 23.5 percent.

There is no good reason for such wealth disparity, in spite of the severity of this Great Recession. It was a problem that began in the 1970s and only now is catching public attention. An estimated 43.6 million Americans in 2009 were living off incomes below the federal poverty line, or around $11,000 for an individual under 65 or $22,000 for a family of four. The total number, an increase of 3.7 million over 2008, is the largest in 51 years, since the government first started tracking poverty data.

And that is the main reason for the slowness of this recovery. “It’s no coincidence that the last time income was this concentrated was in 1928,” wrote former Labor Secretary Robert Reich in a recent Op-ed. Professor Reich hedges his bets, however. “I do not mean to suggest that such astonishing consolidations of income at the top directly cause sharp economics declines. The connection is more subtle.”

This debate goes back to the Great Depression, as we have said. By effective demand, Eccles was referring to what economists today define as aggregate demand. Eccles was maintaining that the growth in income inequality created a credit bubble that burst and so led to an sharp diminishment in aggregate demand, which is measured today by our Gross Domestic Product.

The relationship is intuitively simple, yet was hard to verify before Piketty and Saez, et.al., did their research. As more income flowed to the top income brackets, middle and lower income classes had to borrow more to keep up their consumption patterns. And the easy credit available with the housing bubble accelerated that borrowing, to the tune of $2.3 trillion extracted from housing in the last decade. But then the excess of supply produced during the bubble caused housing values to crash, losing more than $4 trillion and counting of the $11 trillion in housing assets.

Professor Reich says we have to find ways to raise the wages of working people—the 90 percent who have suffered stagnant wages since the 1970s. Lowering payroll taxes for the lowest income earners who spend most of their incomes, while restoring the Clinton era taxes on those earning more than $250,000 is the most discussed remedy for such income disparity.

In fact, the underlying effects of such income inequality hasn’t been researched at all. But a new book by Professors Jacob Hacker and Paul Pierson, “Winner Take-all Politics”, is beginning to give us a picture of its results.

Publisher Simon & Schuster’s advertising blurb succinctly describes their thesis: “Winner-Take-All Politics—part revelatory history, part political analysis, part intellectual journey— shows how a political system that traditionally has been responsive to the interests of the middle class has been hijacked by the superrich. In doing so, it not only changes how we think about American politics, but also points the way to rebuilding a democracy that serves the interests of the many rather than just those of the wealthy few.”

There is some good news on the wealth redistribution front. Forty billionaires led by Warren Buffet and Bill Gates have pledged to donate one-half of their wealth to philanthropic causes. From Ted Turner to George Lucas, these 40 billionaires joined Warren Buffett and Bill Gates in making the pledge as part of their The Giving Pledge, a campaign launched earlier this year "to urge wealthy individuals to give the majority of their money to charities of their choice either during their lifetime or after their death," said one headline. If only more of the superrich would follow their example.

Why would they do so? Because it not only helps to build their wealth, but the wealth of those who have lost so much to the wealthiest since the 1970s. This is an economic fact—that greater wealth equality creates more wealth for all—that is increasingly difficult to deny. We are only now becoming aware of the damage that such unequal wealth has wrought to our economy via the excesses of Wall Street and deregulation. It is something that economists weren’t really aware of until Piketty and Saenz did their groundbreaking research.

Harlan Green © 2010

High Labor Productivity = More Jobs

Financial FAQs

Why are we seeing more job creation? All the indicators—from Challenger and Gray’s corporate layoff and ADP private payrolls surveys, to the U.S. Bureau of Labor Statistic’s (BLS) unemployment report—point to a big pickup in hiring, in spite of government downsizing.

This is because it is becoming too expensive for the existing workforce to produce more as demand grows, hence small businesses in particular are beginning to hire to keep their production costs down. I.e., workers are demanding higher wages and more overtime, says the Labor Department’s Nonfarm Productivity Report.

Companies have been squeezing out as much output as possible from the current workforce instead of adding to payrolls, which is why productivity for the third quarter got a boost. Nonfarm business productivity for the third quarter was revised up to a 2.3 percent gain from the initial estimate of 1.9 percent.

The key is unit labor costs (ULC), which have been rising steadily since late 2009. Labor makes up two-thirds of production costs, so any upsurge in those costs is a red flag to businesses. The higher hours worked is also a sign that demand for their goods and services is picking up.

Productivity is up largely due to a 3.7 percent rebound in nonfarm business output after a 1.6 percent rise in the second quarter, as demand for their products and services grew. Also, hours worked continued to grow at a 1.4 percent increase from 3.5 percent in the second quarter. Compensation rose an annualized 2.2 percent after a 2.9 percent boost the quarter before.

ADP employment services, a payroll processor for private businesses, estimates November private payrolls rose by 93,000 vs. a rise of 82,000 in October (revised from plus 43,000). It tends to closely mirror the Labor Department’s November’s nonfarm private payrolls unemployment report, since it represents roughly 500,000 U.S. business clients. During the twelve month period through June 2010, this subset averaged over 340,000 U.S. business clients and over 21 million U.S. employees working in all private industrial sectors, says ADP.

Challenger's count of layoff announcements totaled 48,711 in November, up from October's 37,986. Announcements were up in the government/non-profit sector as well as consumer products and pharmaceuticals. Retail and computers showed a dip in layoffs.

And initial weekly claims for unemployment insurance, the best forward looking indicator of job losses, has been falling sharply of late. Initial claims fell 34,000 in the November 20 week to a far lower-than-expected level of 407,000 (prior week revised slightly higher to 441,000). The four-week average is down 7,500 to 436,000 for a nearly 20,000 improvement in the month-ago comparison.

More good hiring news came from the Institute for Supply Management’s November manufacturing survey, the best indicator of domestic manufacturing activity. New orders came in at 56.6, indicating solid month-to-month growth that's only slightly slower than October's very strong growth of 58.9. The pace of production slowed noticeably but, at 55.0, is still strong though less strong than the prior month's 62.7. And ISM's survey shows businesses are continuing to add employees. The 57.5 index level for employment is very strong for this reading, says Econoday.

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

Harlan Green © 2010

Why Such a Mortgage Mess?

The Mortgage Corner

What is causing the mortgage ‘mess’ to continue, in this case the controversy over ownership of mortgages that is embroiling Wall St. and Washington? Much of it is exaggerated by the media and attorneys for the plaintiffs suing various banks to take back those mortgages packaged and sold as mortgage backed securities. So it is not easy to understand the underlying facts, especially when real estate values have yet to stabilize.

The beginning of the mortgage origination process is fairly straightforward. When a bank, mortgage bank, or other entity originates a mortgage, it is either held by that lender in its “portfolio”, or sold to someone else. Many commercial banks still hold onto their shorter term loans—such as for businesses or construction projects. These are usually due within 5, and so don’t tie up a bank’s capital reserves for a longer period.

But most mortgages are permanent, meaning not due for 15-30 years. These are usually sold onto the secondary market—Wall Street firms who bundle them into mortgage pools that are sold to investors as mortgage backed securities (MBS). Some such securities for the VA/FHA, Fannie Mae, and Freddie Mac (the GSEs), are considered AAA rated, because either guaranteed or insured by the Federal Government. So someone holding a ‘Ginnie Mae’ Certificate knows it has an ownership share in a pool of AAA rated FHA/VA loans on which it receives a percentage yield.

The main ownership problem is that banks in particular may hold on to servicing the loan, even though it has been sold to investors. This means that said bank still collects the payments and passes them on for a fee of usually 3/8 to ½ percent of the loan amount. So if the ownership papers weren’t properly documented to the MBS investors, either servicers or investors may not have clear title to sell or auction the underlying property held as security if the property is foreclosed on.

Another ‘mess’ is if there was fraud involved—i.e., the loan originators didn’t follow their own underwriting guidelines when funding the mortgages. It is hard to believe that is the case, as lenders know they must buy back a loan if fraud—i.e., misrepresentation—is involved. But given the huge number of foreclosures—more than 2 million this year—so-called foreclosure mills in those 22 states who have judicial foreclosures may have taken shortcuts in not verifying all the documentation, or even faking lost documents.

Meanwhile, the delinquencies have declined substantially in 2010, and consumers incomes are improving--indicators that say real estate values may be stabilizing. And that is the bottom line in improving the foreclosure rate. Lenders tend to panic when housing values are falling, and so are quicker to foreclose in order to recoup as much as possible of loan principal.

Calculated Risk cites a report by LPS Applied Analytics that foreclosures leveled off at 3.92 percent, from a 1 percent historical rate and delinquencies at 9.29 percent in October, up from its historical 4 percent rate. So there is a long way to return to normal. Delinquencies began to take off at the beginning of 2007 (i.e., 3+ years ago), so it should take another 3 years to return to historical levels.

Home prices are coming under weakness again due to distressed sales adding to housing supply and tighter credit standards cutting demand, but that may be mainly to seasonal factors. Fewer homes are put on the market and sold during the winter months. The Federal Housing Finance Authority purchase only house price index for homes with conforming loans slipped 0.7 percent in September after no change the month before.

On a year-on-year basis, the FHFA HPI is down 3.4 percent, compared to down 2.8 percent in August. This index is based on resale prices for homes financed or bundled by federal housing agencies (i.e., the GSEs).

The price weakness is reflected in lower new and existing-home sales in October, down 2.2 and 14 percent, respectively. The National Association of Realtors also said the sales drop was mostly due to seasonal factors and tightened lending standards.

“A review of recently originated loans suggests that they have overly stringent underwriting standards, with only the highest creditworthy borrowers able to tap into historically low mortgage interest rates. There could be an upside surprise to sales activity if credit availability is opened to more qualified home buyers who are willing to stay well within budget,” said NAR chief economist Lawrence Yun.

The consumer is making a moderately strong comeback in October in both income and spending. Meanwhile, core inflation is subdued and still too low for Fed comfort. Personal income in October posted a healthy 0.5 percent gain, following no change in September. Income growth topped analysts' forecast for 0.4 percent increase. Importantly, the wages & salaries component jumped 0.6 percent, following a 0.1 percent improvement the month before.

Household spending also showed strength. Personal consumption expenditures rose 0.4 percent, following a 0.3 percent increase in September. For the latest month, strength was led by a 1.9 percent monthly spike in durables. Nondurables advanced 0.8 percent while services edged up 0.1 percent.

The bottom line? If consumers continue to consume as much as during this holiday season, employers will hire more employees, which leads to more housing sales and higher prices. So we see slow and steady improvement and a return to normalcy in real estate sales and values over the next 3 years.

Harlan Green © 2010