Retail Sales, Inflation, Interest Rates Rising

Financial FAQs

Gasoline prices pulled down February's retail sales, falling 0.6 percent after rising 2.1 percent in January. But when excluding volatile autos and gasoline prices, sales rose 0.2 percent vs January's very strong 1.1 percent. And control group sales, which are another core measure, inched only 0.1 percent in the month but follow an outstanding 0.8 percent gain in January, one that initially posted at 0.4 percent, says Econoday.

Graph: Econoday

And strong retail sales are helping to push retail inflation higher, with the Consumer Price Index for retail goods and services now at 2.7 percent. This has to be why the Federal Reserve on Wednesday just increased its benchmark short-term interest rate for the second time in three months and signaled two more rate hikes this year. The Fed policy committee voted 9-to-1 to raise interest rates to a range of 0.75 to 1 percent.

Graph: Econoday

The overall year-on-year CPI rate continues to climb, at 2.7 percent that is well above the general 2 percent Federal Reserve target rate that was last matched nearly 5 years ago, in March 2012. But the core rate, which excludes energy, is steady at 2.2 percent.

So inflation is hardly a problem, and the Fed may be acting too quickly when economies will only grow more with higher prices, hence higher inflation. Because this means companies can raise their prices, hence profits. They can then expand their production of goods and services. This should be a no-brainer, so it is puzzling why the Fed is acting now, when it’s not even clear when and how the Trump administration will be able to enact their growth agenda.

In fact, it is mainly because gas and energy prices are stable that inflation hasn’t been rising faster. Energy prices fell a very sharp 1.0 percent in the month of February with gasoline down 3.0 percent.
Yet year-on-year rates are still very strong, at plus 15.2 percent for overall energy and plus 30.7 percent for gasoline. These are the gains that are pushing up the headline year-on-year inflation rate.

Harlan Green © 2017

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Homeownership Is Rising

The Mortgage Corner

An improving economy, multiple years of strong job growth and the notable increase in home values in most markets fueled a greater share of purchases from Generation X households over the past year, says the National Association of Realtors in a recent survey.

And that is helping to boost the all-important household formation of younger generations, which is what ultimately precipitates home sales, especially among those young adults who are forming families.

This is according to the National Association of Realtors® 2017 Home Buyer and Seller Generational Trends study, which evaluates the generational differences of recent home buyers and sellers. The survey additionally found that a growing number of millennials and younger boomer buyers have children living at home; student debt is common among Gen X and boomer households; more millennials are buying outside the city; and younger generations are more likely to use a real estate agent.

Graph: SF Fed

A notable shift in the relative household growth rates after 2007 reflects declines in “headship” rates, that is, the share of the population identified as heads of households, according to a report by the San Francisco Federal Reserve. It is mostly the result of the Great Recession that decimated the earning power of so many young adults, in particular. This means that for over five decades headship rates in the United States had increased on average before falling off in the wake of the financial crisis after 2007.

The patterns in headship rates over the housing cycle differ considerably across age groups. Specifically, in recent years most of the changes were among young adults. For two groups—ages 18 to 24 and ages 25 to 29—headship rates have declined appreciably in recent years. Headship rates among older age groups have been more stable.

Also apparent in the SF Fed’s chart is that headship rates among young adults rose considerably from the mid-1990s up to the financial crisis. That was the period of the strong housing market, rapidly rising house prices, and booming homeownership rates, including among young adults. Indeed, the movements in shares of young heads of household closely track the rise and decline in homeownership ratios.

"Gen X sellers' median tenure in their previous home was 10 years, which puts many of them selling a property they bought right around the time home values were on the precipice of declining," said NAR chief economist Lawrence Yun. "Fortunately, the much stronger job market and 41 percent cumulative rise in home prices since 2011 have helped a growing number build enough equity to finally sell and trade up to a larger home. More Gen X sellers are expected this year and are definitely needed to ease the inventory shortages in much of the country."

The uptick in purchases from Gen X buyers this year (28 percent) was the highest since 2014 and up from 26 percent in 2016. Millennials were the largest group of recent buyers for the fourth consecutive year (34 percent), but their overall share was down slightly from a year ago (35 percent). Baby boomers were 30 percent of buyers, and the Silent Generation made up 8 percent.

This year's survey also brought to light how the soaring cost of rent in many areas is likely influencing the decision of middle-aged parents to buy a home with their young adult children in mind. Younger boomers were the most likely to purchase a multi-generational home (20 percent; 16 percent in 2016), and the top reason for doing so was that children over 18 years old either moved back home or never left (30 percent; 27 percent in 2016).

"The job market is very healthy for young adults with a college education, but repaying student debt and dealing with ever-increasing rents on an entry-level salary are forcing many to either shack-up with several roommates or move back home," said Yun. "This growing trend of delayed household formation is one of the main contributors to the nation's low homeownership rate."

Similar to previous years, roughly two-thirds of millennial buyers are married. One aspect of their household that has changed is the number of children in them. In this year's survey, 49 percent of millennial buyers had at least one child, which is up from 45 percent last year and 43 percent two years ago.

With more kids in tow, the need for more space at an affordable price is increasingly pushing millennial buyers outside the city. Only 15 percent of millennial buyers bought in an urban area, which is down from 17 percent last year and 21 percent two years ago.

"Millennial buyers, at 85 percent, were the most likely generation to view their home purchase as a good financial investment," added Yun. "These strong feelings bode well for even greater demand in the future as more millennials settle down and begin raising families. A significant boost in new and existing inventory will go a long way to ensuring the opportunity is there for more of them to reach the market."

But that isn’t yet the case. Inventories are still in the 5-month range with current sales rates. So something must happen to increase housing inventories of existing homes, such as the sale of tens of thousands of foreclosed homes hedge funds purchased at fire sale prices when the housing bubble burst that are rental units.

The Blackstone’s Invitation Homes subsidiary, under the auspices of Blackstone's real estate leadership, began purchasing homes in 2012 and eventually amassed more than 60,000 homes, investing $1.2 billion in renovations. At one point it was reportedly spending $150 million per week on homes.

And now the Dallas-based single-family rental real estate investment trust, one of the largest in its class, raised $1.54 billion in an initial public offering this January. It priced 77 million shares at $20 each, well within its previously stated range of $18 and $21, said the press release.

So until hedge funds decide it’s no longer lucrative to hold rental properties, we may continue to experience a housing shortage, which means prices will continue to rise above the inflation rate for the foreseeable future.

Harlan Green © 2017

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Strong February Jobs Report = Rising Interest Rates

Popular Economics Weekly

Economists are almost unanimous that the Fed will raise their short term rates at next week’s FOMC meeting. This is because total nonfarm payroll employment increased by 235,000 in February, and the unemployment rate dropped slightly to 4.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment gains occurred in construction, private educational services, manufacturing, health care, and mining.

Graph: Marketwatch

This is while Federal Reserve Chair Janet Yellen indicated last Friday that if the economy stays on track for the next few weeks, a rate hike would likely come when Fed leaders meet March 14-15.

"At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," Yellen said in the Chicago speech.

It’s now the 8^th year of the post-Great Recession growth cycle, with a total of almost half a million jobs in the first two months of 2017, the best back-to-back performance since last summer. The unemployment rate dipped to 4.7 percent from 4.8 percent.

Yet Treasury yields retreated today, even after official data showed that U.S. employers created more jobs than expected in February, but wage growth remained unexpectedly weak. In February, average hourly earnings for all employees on private nonfarm payrolls increased by 6 cents to $26.09, following a 5-cent increase in January.

Over the year, average hourly earnings have risen by 71 cents, or 2.8 percent, which is still not enough to cause substantial inflation, and that is what worries bond traders that have an almost knee-jerk reaction to any sign of increased inflation. In February, average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $21.86 in February. The yield on the 10-year Treasury note was off nearly three basis points at 2.580 percent in recent trade, while the 30-year yield was down two points at 3.173 percent.

And lower inflation expectations will keep mortgage rates from rising as well, which means the construction industry—and housing—will continue to boom. Which is why sales of newly built, single-family homes rose 3.7 percent in January to a seasonally adjusted annual rate of 555,000 units, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

In February, construction employment increased by 58,000, with gains in specialty trade contractors (+36,000) and in heavy and civil engineering construction (+15,000). Construction has added 177,000 jobs over the past 6 months.

Employment in private educational services rose by 29,000 in February, following little change in the prior month (-5,000). Over the year, employment in the industry has grown by 105,000. Manufacturing added 28,000 jobs in February. Employment rose in food manufacturing (+9,000) and machinery (+7,000) but fell in transportation equipment (-6,000). Over the past 3 months, manufacturing has added 57,000 jobs.

Health care employment rose by 27,000 in February, with a job gain in ambulatory health care services (+18,000). Over the year, health care has added an average of 30,000 jobs per month.

Employment in mining increased by 8,000 in February, with most of the gain occurring in support activities for mining (+6,000). Mining employment has risen by 20,000 since reaching a recent low in October 2016. Employment in professional and business services continued to trend up in February (+37,000). The industry has added 597,000 jobs over the year.

Economists and bond traders don't seem to agree with Yellen's Fed and the inflation hawks, which is why longer term interest rates, and bond yields shouldn't rise substantially this year.  There just isn't enough inflation to justify more than one Fed rate hike in 2017.  Time will tell, of course, as will any substantial rise in the budget deficit due to increased federal spending.

Harlan Green © 2017

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U.S. Will Badly Need Immigrants

Popular Economics Weekly

For most of the past half-century, adults in the U.S. Baby Boom generation – those born after World War II and before 1965 – have been the main driver of the nation’s expanding workforce, reports the PEW Research Center. But as this large generation heads into retirement, the increase in the potential labor force will slow markedly, and immigrants will play the primary role in the future growth of the working-age population (though they will remain a minority of it).

Graph: PEW Research

The stakes are enormous if Republicans succeed in removing most of the estimated 11 million undocumented worker (only half of which are from Mexico and the Latin countries), and cut legal immigration in half, as they have promised to do. Economic growth will plummet, since it is mainly based on growth of the working age population, as well as labor productivity, which has also fallen since 2000.
 

The causes of the drop in labor productivity are largely because of the fall in capex spending, the investment in new plants and equipment, which has fallen by half since 2010, in large part because of the Great Recession, but also because corporations have chosen to move so many jobs overseas where labor is cheaper, rather than investing domestically to improve the productivity of American workers.

 

Graph: Econoday

The plunge in capex has been most noticeable last year, perhaps because of uncertainty over economic growth in what is the 7^th year of this long growth cycle, or uncertainty about results of the President election. Such expectations can be self-reinforcing in these anecdotal surveys, of course, given the poor 1.9 percent GDP growth in 2016.

The ISM manufacturing survey, which tracks anecdotal assessments from a national sample of purchasers, made big headlines in the week with a 4.7 point jump in its new orders index to 65.1. This level of order growth was last exceeded in August 2009 and follows two prior 60 readings.

The number of adults in the prime working ages of 25 to 64 – 173.2 million in 2015 – will rise to 183.2 million in 2035, according to Pew Research Center projections. That total growth of 10 million over two decades will be lower than the total in any single decade since the Baby Boomers began pouring into the workforce in the 1960s. The growth rate of working-age adults will also be markedly reduced, says the study.

So the Trump administration has to be careful of what they wish for, if they want to boost economic growth domestically.

Harlan Green © 2017

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

A Gangbusters Jobs Report Tomorrow?

Financial FAQs

It looks like tomorrow’s unemployment report could be the best of the New Year.  That’s because ADP's February private payroll estimate is 298,000, a yuge number. This would make tomorrow’s jobs report the biggest gain since October 2015 and one of the very largest of this recovery from what was the Great Recession, let us not forget. ADP isn't always followed closely but its call last month for outsized growth in January payrolls did prove correct with January’s 227,000 payroll growth, says Econoday.

The reason? It may be rising factory orders, a major component of the even stronger manufacturing sector. The ISM, which tracks anecdotal assessments from a national sample of purchasers, surprised economists this week with a 4.7 point jump in its new orders index to 65.1.

This level of order growth was last exceeded in August 2009 and follows two prior 60 readings as tracked by the green line of the graph, said Econoday. This is rare strength. Among regional reports, the most closely watched one, the Philly Fed, has been making similar headlines with its new orders index surging 12 points to a 38 level that was last witnessed way back in 1987.

Graph: Econoday

But such anecdotal evidence may not be enough to boost overall GDP growth, as the stronger dollar is holding down exports. Data on goods trade show a major widening in the deficit, to $69.2 billion during January. Foreign buyers showed little interest in U.S. goods in the month as exports of capital goods fell sharply and pulled total exports down 0.3 percent to $126 billion as tracked on the graph, said Econoday.

Whereas imported goods jumped 2.3 percent to $195 billion and once again were fed by America's appetite for foreign consumer goods and foreign vehicles, which subtracts from GDP growth. So ongoing strength in the dollar, as tracked in reverse by the red line, will hold back exports by making

U.S. products more expensive to foreign buyers and lift imports by making foreign products less expensive to U.S. buyers.

Is this all about the ‘Trump’ enthusiasm effect, which to date has nothing to show for it but executive orders and Tweet storms? He has historically low approval ratings for a new president (at least among Democrats and Independents), and has been unable to start his term with a burst of substantial legislation, as Barack Obama did, and as I said last week.

So the jobs surge may be temporary, unless the Trump administration begins to focus on jobs legislation, rather than attacks on their perceived enemies. That is still the question, with so many intelligence scandals and conflicts of interest surrounding him. President Trump has to first prove he can lead his own party.

Harlan Green © 2017


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

2017 Manufacturing Off To Good Start

Popular Economics Weekly

What is happening with manufacturing? The ISM manufacturing index jumped 1.7 points in February to a 57.7 level that beats the consensus by 1.3 points. This is the strongest rate of monthly growth in composite activity since August 2014. So does it mean Trump can keep his promise of bringing back those blue collar jobs lost to the likes of China?

It’s in spite of higher dollar exchange rates that have boosted consumer spending because of cheaper import prices, which dropped GDP growth in Q4 and the year, to 1.9 percent. (Import sales subtract from GDP growth.) So what gives? Is it the Trump euphoria over his promise to cut taxes and regulations?

Graph: Econoday

The report in fact is filled with superlatives led by a 4.7 point jump in new orders to 65.1. This rate of monthly growth was last matched in December 2013 and last exceeded in August 2009. Backlog orders jumped 7.5 points to 57.5 in a reading last exceeded in March 2014. Production is also very strong, up 1.5 points to a 62.9 level that is the best since March 2011.This is while consumer confidence index continues to make new post-election highs and new cycle highs at a 114.8 February level, which beats consensus estimates and makes for a strong 3.2 point gain from January.

But beware, says Econoday, “This report perhaps is the greatest expression yet of post-election strength in anecdotal surveys, strength that has yet however to find its way to actual government data on the factory sector which have been consistently soft.”

The data includes just released auto sales, softer at 17.5 million units. Wrightson ICAP had estimated a seasonally adjusted annualized sales pace of 17.7 million.  That would still be a little below the December/January average of 17.9 million, but would represent an increase of roughly 1 percent in both month-to-month and YOY terms.  And it would be about 1.4 percent above the actual 2016 total of 17.46 million, which was a record high.

Graph: Econoday

Then there is the January durable goods report for items that last 3 or more years. It shows the usual volatility behind which are sagging numbers for key readings, said Econoday. Aircraft, both domestic and defense, skewed durable goods orders sharply higher in January, up 1.8 percent to hit the consensus. Not hitting the consensus, however, are orders that exclude aircraft as well as all other transportation equipment. This reading fell 0.2 percent to come in well below Econoday's low estimate for a 0.2 percent gain.

The worst news in the report is a 0.4 percent decline in orders for core capital goods (nondefense ex-aircraft). This ends 3 months of strength for this reading and pulls the rug out from expectations for a first-quarter business investment boom as indicated by business confidence readings.

And longer term investments happen when core capital expenditures are on the increase. So will the manufacturing boom continue?

Harlan Green © 2017

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

Slower Q4 Growth, (But) Higher Consumer Confidence

Financial FAQs

The growth in the U.S. economy in the final quarter of Barack Obama’s presidency remained at 1.9 percent, held down by a bigger trade deficit even as consumer spending rebounded strongly. In fact, Q4 GDP growth slowed in part because consumers are spending more, thus boosting imports (which is subtracted from GDP), while exports have been weaker due to the stronger US dollar.

This is while the Conference Board's consumer confidence index continues to make new post-election highs and new cycle highs at a 114.8 February level, which beats consensus estimates and makes for a strong 3.2 point gain from January.

Graph: Econoday

But how long will this ‘Trump’ enthusiasm effect last, with his historically low approval ratings for a new president (at least among Democrats and Independents), as well as his failure to start his term with a burst of substantial legislation, as Barack Obama did, writes New York Times Op-ed columnist David Leonhardt?

“The political scientist Matt Glassman in a recent tweetstorm had the best summary I’ve seen,” said Leonhardt. “First, it is radically unusual that party Senators are opposing the President AT ALL. It’s basically unprecedented,” Glassman wrote. “In a normal presidency, party Senators would be on TV constantly, pushing the President’s message and defending his policies.”

The government’s second look at gross domestic product in the fourth quarter showed a bigger increase in purchases by consumers than initially reported: 3 percent vs. 2.5 percent. What Americans spend has the biggest influence by far on GDP (as much as two-thirds of GDP), and the official scorecard for the U.S. economy.

Yet the increase in what consumers spent was offset by somewhat smaller gains in business investment and local and state spending, revised government figures reveal. As a result, GDP was unchanged from the original estimate.

Consumer confidence is rising in tandem with retail sales. Retail sales are making a breakout of their own. It's an upward revision to what was already a strong December, now at a 1.0 percent surge. This goes in the books as the best December since 2004, reports Econoday. Retail sales have now posted five straight monthly gains in a streak that was last matched 3 years ago, back in early 2014.

Graph: Econoday

The Conference Board’s Consumer Confidence report included an 8 tenths dip in those saying jobs are currently hard to get to a very low 20.3 percent, a reading that points to strength for the February employment report coming this Friday. Expectations for future jobs are also strengthening with more, 20.4 percent, more opening up and fewer, at 13.6 percent, seeing less jobs ahead.

Strength in jobs sentiment also makes for strength in income expectations where the spread between optimists and pessimists (18.3 vs 8.2 percent) is a very healthy 10.1 percentage points.

Other details include an uptick in buying plans for autos and no change in inflation expectations, which are at 4.9 percent, soft for this particular confidence reading. Higher confidence has to be the major reason consumers have opened their pocket books, but how long will this last? Much of it is due to initial enthusiasm that President Trump can carry out his agenda announced in last night’s congressional speech.

That is the question, with so many intelligence scandals and conflicts of interest surrounding him. He has to first prove he can lead his own party, which isn’t the case so far.

Harlan Green © 2017

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