Iran Agreement Means Low Inflation, Higher Growth

Financial FAQs

Although economists haven’t yet begun to crunch the numbers, Iran’s agreement not to produce atomic weapons or weapon-grade plutonium for at least 10 years will result in much lower oil prices, thus keeping inflation in check and interest rates at their current lows for some time to come, if not years.

This is if Congress approves the deal, of course. But lifting the economic sanctions will enable Iran to begin to sell its oil internationally sometime next year, into a world already flooded with oil products, though there is some uncertainty when this will happen.

Barron's, for instance, believes it will happen slowly, which might not affect oil prices in the short term, at least. When and if sanctions are lifted, Iran's oil production has to be ramped up, facilities upgraded, so that its products will only gradually reach international markets.

Graph: TradingEconomics

This is when retail inflation via the Consumer Price Index is already zero—i.e., retail prices aren’t rising at all. So it will give Janet Yellen’s Federal Reserve room to keep interest rates lower longer, thus boosting consumer spending and housing, which is beginning to show more robust growth with builder confidence at its highest level since 2005.

It will also boost consumer incomes, which are already profiting from the low interest rate environment that has reduced borrowing costs for consumers. Real (after inflation) consumer incomes are now rising at 4 percent.

Graph: Econoday

Wages & salaries rose 0.5 percent in the month. Both proprietors' income and rental income show especially strong gains. Spending was higher for durables, especially to autos, and also strong gains for non-durables, partly because of higher gas prices.

This in turn is boosting consumer spirits, with both the Conference Board and U. of Michigan surveys now at pre-recession levels.

Graph: Econoday

Optimism in the closely watched consumer sentiment report from the University of Michigan is as strong as it can get, according to Econoday. The overall index is up sharply this month and well beyond Econoday's high-end forecast. The report's expectations component, reflecting strong optimism for the jobs market, is an absolute standout at 97.8 for a 12-year high and a 13.6 point surge from May. The 13.6 point spread is the largest monthly gain since March 1991 (that's right, 1991).

There is a downside to the agreement, of course. Russia and China will benefit from doing more business with Iran, and Iran could backslide on the agreement. But there is general agreement that Iran's nuclear weapons ban will boost growth throughout developed countries with consumer-driven economies that require low inflation and cheap energy to maintain sustainable economic growth.

Harlan Green © 2015

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

Three % Plus YoY Economic Growth Is Here

Popular Economics Weekly

We are finally back to 3 percent plus GDP growth on an annual basis. And it is largely fueled by consumer spending that has been increasing as more jobs are created.

Retail and Food service sales ex-gasoline increased by 3.5 percent on a YoY basis—though overall retail sales were up just 1.4 percent. This wasn’t a particularly strong report, but it will improve over time with increased consumer confidence and continued employment growth.

Graph: Calculated Risk

Personal Consumption Expenditures are the better measure of growth, and they are increasing at more than 3 percent annually. The consumer came to life in May, boosted by a 0.5 percent rise in personal income, helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. And gains are not inflationary, at least yet, based on the very closely watched core PCE price index which edged only 0.1 tenth higher in May and is at a very low 1.2 percent year-on-year rate which is actually down a tenth from an upward revised April.

Graph: Econoday

The reason for my optimism is that incomes are finally increasing faster than inflation. Both proprietors' income and rental income show especially strong gains, said Econoday. Spending components show special strength for durables, again tied especially to autos, and also strong gains for non-durables, here tied to higher pump prices. Spending on services once again shows an incremental gain.

However the PCE Index was for May, and with weaker June retail sales, PC Expenditures could drop in the June report. But not consumer incomes, which is the main reason for the high readings in consumer confidence.

Even Fed Chair Janet Yellen is upbeat in her latest congressional testimony, and says the Fed on track to raise interest rates sometime this year. When? I believe it will be a single token raise to show the Fed means business though both wholesale and retail inflation are still too low, and the job market is still “slack”, so let’s get it over with in September.

“Other measures of job market health are also trending in the right direction, with noticeable declines over the past year in the number of people suffering long-term unemployment and in the numbers working part time who would prefer full-time employment. However, these measures--as well as the unemployment rate--continue to indicate that there is still some slack in labor markets.”

And that slack with continued low inflation should keep interest rates low as well through next year, which is in keeping with the Fed’s mandate of “maximum employment with 2 percent inflation.”

Harlan Green © 2015

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

Home Prices Increase With Jobs

The Mortgage Corner

The S&P Case-Shiller Home Price Index is the bell weather for real estate and home prices these days. It not only reports housing prices, but what affects those prices, and jobs have to be the most important indicator of housing health. So it’s probably not surprising that cities in the Case-Shiller 20-city index that have the fastest job growth also have the highest price growth.

Graph: S&P

For instance, Dallas, San Francisco, Tampa and Denver all had approximately 9-10 percent annual price increases and 3 percent plus annual job growth. Before seasonal adjustment, the 10-City and 20-City Composites posted gains of 1.0 percent and 1.1 percent month-over-month, respectively.

Graph: Calculated Risk

But after seasonal adjustment, the 10- and 20-city composites were up just 0.3 percent and 0.4 percent. This is a far less meaningful statistic, as the ‘seasonal adjustment’ means above what is normal for that time of year. So prices actually rose 1 to 1.1 percent on average, a huge increase and why housing in cities such as San Francisco is becoming so expensive. That’s why all 20 cities reported increases in April before seasonal adjustment; but after seasonal adjustment, 12 were up and eight were down, said Calculated Risk.

Graph: Econoday

Bottom line is that all depends on the job market, which is still growing robustly. The Labor Department’s JOLTS report said job openings are up and employers are holding onto the employees that they have. Job openings rose 0.5 percent in May to a record 5.363 million vs 5.334 million in April. The separations rate dipped 2 tenths to 3.3 percent with the quits rate unchanged at 1.9 percent but with the layoff rate down slightly.

The hiring rate also dipped 1 tenth to 3.5 percent perhaps reflecting the increasing difficulty of finding qualified employees. The unemployment rate is down to 5.3 percent, but that’s because more workers stopped looking for work than were added to payrolls.

So where is the housing market this selling season? Pending-home sales are booming at the highest rate in 9 years, which means good sales for the rest of 2015, since we believe interest rates can’t climb much more this year. Why? The Fed’s Janet Yellen said so in her most recent press conference. The 30-year fixed conforming rate even dropped briefly to 3.625 percent for 1 origination Pt. last week.

Harlan Green © 2015

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

Greece’s Great Depression

Financial FAQs

This may seem facetious some 6 years into recovery, but many policy makers don’t seem to understand the severity of the Great Recession, or its consequences. It is the major reason why Greece, and many other Eurozone countries are in so much economic trouble at present. Greece in fact is suffering from a Great Depression, as great as our own Great Depression that lasted 10 years, in all.

Actually, the Eurozone of member countries have actually suffered two recessions since 2008, thanks to their austerity policies that have cut spending and raised regressive taxes (i.e., on the poorest) in an attempt to pay down the huge debt loan incurred from the Great Recession.

Whereas the US under Fed Chairs Ben Bernanke and Janet Yellen knew early in the recovery that deflation and loss of demand was the problem, and so initiated the various Quantitative Easing programs that pumped more money into economic growth, instead of withdrawing it.

Leading economists such as Nobelist Paul Krugman and French economist Thomas Piketty have said the Great Recession equals the Great Depression in economic damage done in many of those countries.

“It’s depressing thinking about Greece these days, so let’s talk about something else, said Krugman in a recent Op-ed. “Let’s talk, for starters, about Finland, which couldn’t be more different from that corrupt, irresponsible country to the south. It’s also in the eighth year of a slump that has cut real gross domestic product per capita by 10 percent and shows no sign of ending. In fact, if it weren’t for the nightmare in southern Europe, the troubles facing the Finnish economy might well be seen as an epic disaster.”

Graph: NYTimes

“And Finland isn’t alone,” said Krugman “It’s part of an arc of economic decline that extends across northern Europe through Denmark — which isn’t on the euro, but is managing its money as if it were — to the Netherlands. All of these countries are, by the way, doing much worse than France, whose economy gets terrible press from journalists who hate its strong social safety net, but it has actually held up better than almost every other European nation except Germany.”

The US Great Depression is the easiest comparison to the Eurozone’s predicament today. Our economy shrank some 26 percent overall in lost production, or GDP growth, in 1932-33, and the unemployment rate rose to more than 25 percent.

Thomas Piketty, economist and author of Capital in the Twenty-First Century, outlined how much Greece has suffered in a recent German Die Zeit interview.

“To deny the historical parallels to the postwar period would be wrong. Let’s think about the financial crisis of 2008/2009. This wasn’t just any crisis. It was the biggest financial crisis since 1929. So the comparison is quite valid. This is equally true for the Greek economy: between 2009 and 2015, its GDP has fallen by 25 percent. This is comparable to the recessions in Germany and France between 1929 and 1935.”

The result of the Great Recession has been an almost overwhelming rise of sovereign debts for almost all of the western countries. U.S. debt rose to some 10 percent of GDP, as did Germany in 2008. And that is precisely why the current austerity policies haven’t brought a European economic recovery.

This is when entities such as the IMF have said that the default of sovereign debt (i.e, debt owed by governments) was “unnecessary, undesirable, and unlikely,” according to New York Times’ Eduardo Porter.

We can only hope EU and Eurozone members now realize that it will take many years to recover from such a depression and much debt restructuring, as it did during the Great Depression, and earlier.

Harlan Green © 2015

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

Pending Home Sales, Mortgage Applications Soar

The Mortgage Corner

Pending home sales continued to rise in May and are now at their highest level in over nine years, according to the National Association of Realtors. Gains in the Northeast and West were offset by small decreases in the Midwest and South. This is why we expect both existing and new-home sales to be the best since 2006 at the height of the housing bubble.

And mortgage activity is soaring, thanks to ultra-low interest rates, with total mortgage origination balances reaching $466 billion in the first quarter -- nearly a 75 percent increase from the same time a year ago, according to the Equifax National Consumer Credit Trends Report.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, climbed 0.9 percent to 112.6 in May and is now 10.4 percent above May 2014. The index has now increased year-over-year for nine consecutive months and is at its highest level since April 2006.

Graph: Econoday

Pending sales were strongest in the West, up 2.2 percent in May for a 13.0 percent year-on-year gain. Pending sales in the South, up 10.6 percent year-on-year, have also been strong though the region though lower by 0.8 percent in the latest month. The Midwest was down 0.6 percent for a year-on-year plus 7.8 percent, but were up sharply in the Northeast where housing came back strongly from the severe winter, up 6.3 percent in this report for a year-on-year again of 10.6 percent.

NAR chief economist Lawrence Yun says contract activity rose again in May for the fifth straight month, increasing the likelihood that home sales are off to their best year since the downturn. "The steady pace of solid job creation seen now for over a year has given the housing market a boost this spring," said Yun. "It's very encouraging to now see a broad based recovery with all four major regions showing solid gains from a year ago and new home sales also coming alive."

Equifax said the bulk of mortgage growth has been to first mortgages, which zoomed nearly 80 percent compared to the first quarter of 2014 to $430 billion. The number of first mortgages originated in the first three months of the year was 1.78 million -- a 55 percent increase over the same time a year ago and 14 percent higher than in the fourth quarter of 2014. Originations of home equity lines of credit (HELOCs) rose 30 percent to $30.9 billion and new home equity installment loans climbed 13.6 percent to $5.0 billion.

• Average first-lien mortgage loan amounts rose to $232,547 in March, an 11.5% increase over March 2014;
• The number of first mortgages originated in the first three months of the year was 1.78 million, a 54.9% increase over the same time a year ago and 13.6% higher than in the fourth quarter of 2014;
• The share of first mortgage accounts originated in the first quarter that went to consumers with an Equifax Risk Score below 620 (generally considered subprime) was 4.5%;
• 3.1% of newly originated balances in the first quarter went to borrowers with subprime credit scores. For the same time a year ago, the share was 3.5%; and
• The average loan amount for a first mortgage originated to a borrower with a subprime credit score in March 2015 was $152,260, up 9.9% from March 2014.

"The drop in mortgage rates that began in the fourth quarter of last year kicked off a refinance boomlet that accelerated in the first quarter, as rates fell further, averaging just 3.7 percent for the first three months of this year," said Amy Crews Cutts, Chief Economist at Equifax. "While rates have recently reversed that trend and are back up to about 4 percent, they remain extremely low historically. These rates, coupled with a housing market that is showing signs of vigor, should carry the mortgage business over the summer."

So we are seeing the housing sector back to normal growth. Existing-home sales also rose 5.1 percent in May to a 5.35 million annual rate. Home sales were plus 9.2 percent which, outside of the March 11.9 percent, is the strongest rate in nearly two years. And prices are rising, up 7.9 percent year-on-year at a median $228,700.

But, "Housing affordability remains a pressing issue with home-price growth increasing around four times the pace of wages," adds Yun. "Without meaningful gains in new and existing supply, there's no question the goalpost will move further away for many renters wanting to become homeowners."

Harlan Green © 2015

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

What Would Save the Euro?

Popular Economics Weekly

Now that Greece has voted NO on the latest European Commission-European Central Bank-IMF proposal (the so-called troika), will Greece stay in the Eurozone? If so, Greece may save the euro.

Why is this choice even necessary when most economists know the solution to their problems—something that would be a combination of easing the most draconian conditions that have really been imposed on all EU and Eurozone members, and a European version of our Marshall Plan that would reinvest in productive capacity to bring back growth to those countries suffering most from the worst recession since the Great Depression.

And isn’t just Greece. As Paul Krugman’s most recent Op-eds have asserted, countries from Finland to Spain to the Netherlands are also suffering from too much austerity—austerity in the sense of focusing too much on cutting spending and raising taxes to pay down the debt accumulated mostly from the Great Recession, when more spending is needed to speed up economic recovery—which is the only proven way to pay down debts.

Graph: Trading Economics

“The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose.”

It is a dilemma brought on mostly by the EU’s massive bureaucracy that rules almost every facet of EU life. One commentator said the regulations that must be satisfied to join the EU would rise to 5 feet if stacked vertically.

Included in those requirements are economic policies—such as budget deficits cannot exceed three percent. Another condition even more draconian is an inflation target of 2 percent. It is mainly a German condition from their past. It brings back the horror of economic collapse that led to Hitler and the Holocaust. Yet without a higher and more flexible inflation target, sustainable growth cannot happen. The recovery from GW Bush’s first recession only happened with massive deficit spending and a 5 percent inflation rate at one time.

The horror of hyperinflation is really no longer possible in a modern world so interlinked by trade and finance (and modern technology that produces anything required cheaply and quickly). We suffer from oversupply of goods and services, in other words, that makes deflation the most real danger.

In fact, Japanese-style deflation has been more the norm since the 1980s, since then Fed Chairman Volcker’s focus on austerity (in the form of sky-high interest rates) to bring down America’s sky-high inflation of the early 1980s.

Then why isn’t there more discussion among the ‘troika’ of debt relief, which seems to be Greece’s main problem? The austerity policies foisted on Greece by the troika has put Greece into a major depression, with 25 percent unemployment and a 25 percent reduction in its economic growth. And nothing but higher and sustained growth can ever pay down the huge mountain of debt—some $323 billion at last count—owed to its creditors. But to allow that to happen Greece’s debt load must be eased in some way.

Columbia University economist Jeffrey Sachs, a specialist in economic development, has lamented Germany’s insistence on adhering to agreed upon ‘rules’, rather than allowing more flexibility in Greece’s debt repayment terms.

“Sovereign debts have been restructured hundreds, perhaps thousands, of times – including for Germany. In fact, hardline demands by the country’s US government creditors after World War I contributed to deep financial instability in Germany and other parts of Europe, and indirectly to the rise of Adolf Hitler in 1933. After World War II, however, Germany was the recipient of vastly wiser concessions by the US government, culminating in consensual debt relief in 1953, an action that greatly benefitted Germany and the world. Yet Germany has failed to learn the lessons of its own history.”

And we know what happens when history repeats itself. Even Germany has to know. So saving Greece is important for a number of reasons--not just European unity. Foremost is the need to reform an unworkable system, to make it more flexible, with plans that would be already in place to aid countries that have suffered the most from the Great Recession--which lest we forget, was almost a repeat of the Great Depression.

Harlan Green © 2015

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

A Good Jobs Report

Financial FAQs

Should we push back the first Fed rate hike to the presidential election year of 2016, because of June's softer-than-expected employment report? Nonfarm payroll growth came in at 223,000 vs expectations for 230,000 and above. It included downward revisions totaling 60,000 to the two prior months (May revised to 254,000 from 280,000 and April to 187,000 from 221,000), said the Bureau of Labor Statistics report.

I doubt the Fed will wait that long, as the most recent economic data shows boom times—from rising home prices, as well as construction spending, and manufacturing activity on the rise again. This could be a temporary softness, in other words, as the US economy approaches full employment.  And it is a good jobs report, given all the uncertainties affecting economic growth these days.

Softness in payroll growth was combined with softness in wage pressures with average hourly earnings unchanged in the month and the year-on-year rate moving down to 2.0 percent from 2.3 percent. But that can be deceptive. Median household wages are now rising 3 percent, which means the income ‘bar’ for 50 percent of the families doing well is rising faster than inflation.

Graph: Marketwatch

But there is still a lot of labor slack in our job market that Fed Chair Yellen has been talking so much about. This is most evidenced by part-timers who would rather work fulltime, according to the BLS. Their numbers are declining, from 6.65 million to 6.51 million in one month, but would still have to drop by one-third to return to the range that prevailed from the 1970s until the start of the Great Recession in this Calculated Risk graph.

Graph: Calculated Risk

And the labor force participation rate just declined to 62.6 percent, from its historical 67 percent in the Calculated Risk graph that dates from 1960. Economists are not sure of the reasons. It may be the working age population is not growing as fast—just 0.5 percent, instead of historical 1 percent, according to the latest census figures, but that shouldn’t affect the participation rate of those actually looking for work.

It could be that while more of the older workers are dropping out, the newest generation aged 16 to 35 years, now the largest segment, is just entering the work force. This is why the actual unemployment rate fell to 5.3 percent. More dropped out of the labor force (432,000 seasonally adjusted) than were newly employed, according to the household survey that also tracks the self-employed.

So look for a Fed rate increase before the end of 2015—but only one—maybe in September. That means 2016 might be a wild year, with both economic growth and politics dependent on so many factors—such as the dollar strength, inflation, the price of oil, the Eurozone, and even geopolitical uncertainty.

Harlan Green © 2015

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