Who Opposes Overtime Pay Increase?

Posted on April 22, 2016 by Popular Economics Weekly

Financial FAQs

That’s a no-brainer—Republicans in Congress, of course. Who else would oppose updating the safeguards against working more than 40 hours without overtime pay, part of the New Deal that President Roosevelt called the most important part of the New Deal legislation since the Social Security Act of 1935?

Lawmakers in the House and Senate this week introduced the Protecting Workplace Advancement and Opportunity Act, legislation that will ensure the Department of Labor pursues a balanced and responsible approach to updating federal overtime rules, according to their press release. The sponsors of the legislation—members of the House Committee on Education and the Workforce and the Senate Committee on Health, Education, Labor, and Pensions—released the following statements upon introduction:

““In the 21st century workplace, we need to encourage policies that increase flexibility, reduce regulatory burdens, and create more opportunities for workers to pursue their dreams. Our nation’s outdated overtime rules are in need of modernization, but it must be done in a responsible way that doesn’t stifle opportunities for working families to get ahead. Unfortunately, the administration’s overtime proposal fails this test and should be sent back to the drawing board,” said House Subcommittee on Workforce Protections Chairman Tim Walberg (R-MI).

Sure, this when corporate profits have doubled from 6 percent of gross domestic product to 12 percent and more over the last 30 years, while wages have fallen by almost exactly the same amount, said former Labor Secretary Robert Reich in a recent NYTimes Oped.

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Graph: EPI

It is Repub’s reaction to the Labor Department’s proposal for new overtime rules that are expected to be introduced this summer—rules that require no congressional approval. 

According to the Economic Policy Institute, says Professor Reich, it would give 13.5 million more workers a new or stronger right to overtime pay — substantially increasing both middle-class incomes and employment. “It’s not as high as the $69,000 threshold it would take to return to 1975 levels, after adjusting for inflation, but it’s a courageous step in the right direction. It’s like a minimum wage hike for the middle class,” said Reich.

And opposing any boost to the minimum wage is of course the real target of Republicans. But minimum wages are rising, anyway. California, New York, and several cities have already enacted a $15 per hour minimum wage to be phased in over several years.

This tells us just how out of the mainstream are Republican lawmakers that have little, if any, interest in bettering living conditions of 80 percent of the workforce that are wage and salary earners.

Harlan Green © 2016

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Motor Vehicles, Housing Will Power 2016 Economy

Posted on April 21, 2016 by Popular Economics Weekly

Popular Economics Weekly

Even though Q1 2016 GDP growth looks weak for a number of reasons (such as lower exports and slumping oil prices that depress energy sector earnings), there are reasons it can go higher in 2016. Oil prices have stabilized, for starters, and exports are rising again as the dollar has weakened against other currencies when the Fed signaled it wouldn’t raise interest rates further until later, if at all this year, due to the worldwide slowdown in growth.

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Graph: Trading Economics

Firstly, auto sales, a major component of retail sales, should surpass last year’s 17.5 million total, according to industry pundits. Moderate wage growth, declining gasoline prices and continued low interest rates on auto loans will drive new car and light truck sales higher in 2016, said Steven Szakaly, chief economist of the National Automobile Dealers Association, at the Los Angeles Auto Show.

“New light-vehicle sales will rise to 17.71 million units in 2016, a 2.3 percent increase from our forecast of 17.3 million sales in 2015,” Szakaly said. “This would mark the seventh straight year of increasing U.S. new-vehicle sales.”

There is a temporary weakness in motor vehicle production because of a slowdown in current vehicle sales, according to the Fed’s March Industrial Production figures. But production has climbed steadily higher in the last five years and been the strongest component in the Fed’s Manufacturing Index, as the red line in the graph indicates.

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Graph: Econoday

And housing sales are picking up, beginning with the just released existing-home sales, up 5.1 percent to a 5.33 million annual rate in March. Existing sales rose in all four major regions last month and are up modestly (1.5 percent) from March 2015. Total housing inventory at the end of March increased 5.9 percent to 1.98 million existing homes available for sale, but is still 1.5 percent lower than a year ago (2.01 million).

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Graph: Calculated Risk

The above graph shows that existing sales have been rising steadily since 2008 the end of the Great Recession. Unsold inventory is at a 4.5-month supply at the current sales pace, up from 4.4 months in February, but still far too low to stimulate more buying in the lower price ranges, where inventory is most lacking. In fact, inventory has fallen back to 2000 levels, even before the housing bubble that doubled the housing inventory.

Another window into the housing market is the volume of mortgage applications that depend on interest rates, and rates are back to historic lows with the 30-year conforming fixed rate down to 3.25 percent for a 1 point origination fee in California.

Applications increased 1.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 15, 2016. The Refinance Index increased 3 percent from the previous week. The unadjusted Purchase Index increased 1 percent compared with the previous week and is 17 percent higher than the same week one year ago.

Another sign of future growth is the Conference Board Leading Economic Index® (LEI) for the U.S., which increased for the first time in 3 months, up 0.2 percent in March to 123.4 (2010 = 100), following a 0.1 percent decline in February, and a 0.2 percent decline in January.

“With the March gain, the U.S. LEI’s six-month growth rate improved slightly but still points to slow, although not slowing, growth in the coming quarters,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Rebounding stock prices were offset by a decline in housing permits, but nonetheless there were widespread gains among the leading indicators. Financial conditions, as well as expected improvements in manufacturing, should support a modest growth environment in 2016.”

Manufacturer’s new orders, higher stock prices (now above 2015 indexes), and the fact that weekly jobless claims fell to the lowest level since 1973 were the strongest signs of future growth in the Conference Board’s LEI.

Still, it consumer spending that powers most economic activity these days, and consumers will only spend when there’s more market stability, hence certainty in such things as energy prices, which have been fluctuating wildly of late, and an adequate supply of new housing that keeps housing prices within reach of prospective home buyers.

Harlan Green © 2016

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Builder Confidence Holds, But Household Formation Still Weak

Posted on April 19, 2016 by Popular Economics Weekly

The Mortgage Corner

Builder confidence in the market for newly-built single-family homes remained unchanged in April at a level of 58 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Builders remain cautiously optimistic about construction growth in 2016,” said NAHB Chief Economist Robert Dietz. “Solid job creation and low mortgage interest rates will sustain continued gains in the single-family housing market in the months ahead.”

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Graph: NAHB.org

And privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,089,000. This is 8.8 percent below the revised February estimate for new construction of 1,194,000, but is 14.2 percent above the March 2015 rate of 954,000, according to the Census Bureau. This is the main reason builders’ confidence remains solid.

But for it to go higher, (and housing starts return to historical levels)—the formation of new households would also have to increase to historical levels, and that will take some time, given all those millennials aged between 18-36 years that either cannot afford to live alone, or choose to rent rather than purchase a home, according to the Census Bureau.

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Graph: Bloomberg

This manifests itself in in the number of 25- to 34-year-olds of working age living at home. The rate began rising in 2003, fell briefly after the recession (perhaps because of first-time buyer-assistance programs), says Bloomberg’s Barry Ritzholtz, and then started rising again. As of last year, those still of working age still at home was at a record high.

It isn’t merely living in their parents’ basements;” says Ritzholtz, “more young adults are doubling up in apartments. Census data has identified this as a fast-growing living arrangement. The central theme is that expensive housing, along with a dearth of economic opportunities, forces young adults into less-than-desirable living arrangements.”

Unfortunately, there is still a shortage of homes on the market, especially entry-level housing that most millennials can afford. Single-family housing starts in March, for instance, were at a rate of 764,000; this is 9.2 percent below the revised February figure of 841,000. The March rate for units in buildings with five units or more was 312,000.

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Graph: Calculated Risk

And privately-owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,086,000. This is 7.7 percent below the revised February rate of 1,177,000, but is 4.6 percent above the March 2015 estimate of 1,038,000.

What is the current level of new household formation? Speaking on the country’s economic outlook and monetary policy at the Economic Leadership Forum in Somerset, New Jersey, Federal Reserve Bank of New York President Bill Dudley said the U.S. economy has its strengths and weaknesses—but he expects household formation to receive a boost in 2016.

“Housing starts are still well below the rate consistent with the nation’s population growth rate, and the fundamentals of housing demand remain positive,” Dudley said. “Rising employment is likely to boost the household formation rate and low mortgage interest rates should keep housing relatively affordable, despite the ongoing recovery in home prices.”

Harlan Green © 2016

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Record Mortgage Originations in 2015, In Spite of FHFA

Posted on April 12, 2016 by Popular Economics Weekly

The Mortgage Corner

In addition to very large Consumer credit borrowing that rose $17.2 billion in February (but excludes mortgage lending), the number of new first mortgages increased to a post-recession high in 2015, according to new data from credit rating company Equifax. In fact, it is approaching pre-recession levels thanks to the Fed’s low interest rate policy, which should also help the housing shortage by stimulating more new-home construction.

This is in spite of the Obama Administration’s efforts to downsize Fannie Mae and Freddie Mac, the conforming mortgage GSEs that continue to guarantee the bulk of affordable mortgage loans.

According to the company’s latest National Consumer Credit Trends Report, the total number of new first mortgages originated in 2015 rose to 7.71 million, an increase of 31.6 percent from 2014. Meanwhile, the total balance of new first mortgages was $1.82 trillion, a year-over-year spike of 42.9 percent.

Equifax also found that first mortgage lending to subprime borrowers grew in 2015, with 366,900 loans made – an increase of 25.2 percent over 2014 – and a total subprime balance of $59.7 billion, a 41.3 percent increase.

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Graph: Econoday

Why is it taking this long for the housing market to recover? The so-called qualification criteria of conforming loans have become ever stricter since the housing bubble. It is even more difficult to qualify for a subprime mortgage, or the origination totals would be even higher. There has to be some measure of the ability to repay as part of the mortgage application process these days. For subprime mortgages it can be the 12-month total of deposits from non-business bank accounts—no more No Income, No Asset mortgages, in other words. And it has to be a 5 or 7-year fixed rate ARM that converts to an adjustable rate for the rest of the 30 years, rather than the plain vanilla 30-year fixed rate.

“We saw a nice jump in mortgage lending in 2015 that was driven by both rising home-purchase activity and solid refinancing volumes,” said Amy Crews Cutts, Equifax senior vice president and chief economist. “While low interest rates are helping, continued gains in employment and consumer confidence are key. What we are not seeing is any meaningful loosening of underwriting, at least with respect to credit scores. The median credit score on new first mortgages in the fourth quarter of 2015 was 750 and 90 percent of first mortgage borrowers had a score in excess of 646; these values are essentially unchanged for the past three years.”

There is a reason for the higher credit scores. Both Fannie and Freddie add large ‘penalties’ for credit scores lower than 720. This discourages many borrowers, as the US Treasury and the Federal Housing Finance Authority, their nominal conservators, don’t seem to want the GSEs to expand their credit guarantees.

Why? It’s a long story, but the Treasury (the real puppeteer pulling their strings) has said several times they want to dissolve the GSEs, and have Congress replace them with something more streamlined, but without an implicit government guarantee. The catch is it will raise interest rates, since the latest Treasury proposals require originating lenders to put some skin into the game (such as retaining liability even when sold to investors), which defeats the purpose of making home ownership more available.

This overturns the reasons Fannie Mae, created as part of Roosevelt’s New Deal, and Freddie Mac, created post-WWII, were formed. They were never the major cause of the housing bubble, nor contributed to its failure. That was due to the likes of such non-banks as Lehman Brothers and Bear Stearns lending money they themselves had borrowed without sufficient collateral. Why on earth does the Obama Administration oppose the GSEs, as long as there are eligible home buyers wanting affordable housing?

Harlan Green © 2016

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Record Low Rates Spur Consumer Debt, But Not Spending

Posted on April 7, 2016 by Popular Economics Weekly

The Mortgage Corner

Consumer credit rose a very large $17.2 billion in February with January revised higher to $14.9 billion, says the Federal Reserve. Nonrevolving credit, which are gains for vehicle financing and student loans, rose $14.2 billion and revolving credit, where credit-cards are tracked, rising the smallest amount as usual with a gain of $2.9 billion. Total consumer borrowing, which does not include mortgage debt, is now $3.57 trillion.

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Graph: Econoday

This seems to contradict recent weak retail and consumer spending data that shows consumers saving more and spending less. So what are consumers up to? The lack of gains for revolving credit is good in the sense that it points to consumer wherewithal but negative relative to short-term consumer spending, says Econoday.

The Commerce Department reported consumer spending has been tepid the past 2 months. Income rose a soft 0.2 percent in February with wages & salaries slipping 0.1 percent for the first decline since September and, as it turned out, underscoring the lack of earnings punch in the employment report. But the worst news comes from the spending part of the report, up only 0.1 percent and with January revised sharply lower, now also at 0.1 percent vs an initial jump of 0.5 percent.

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Graph: Econoday

And consumers continue to put money in the bank as the savings rate, in perhaps a sign of consumer defensiveness, is up 1 tenth to 5.4 percent for a 3-year high. This is while year-over-year income growth is near a two-year low and spending well under the growth during 2014. This softness isn’t helping vehicle sales which in an ominous sign for the March retail sales report (released next week) fell 5.1 percent in data released on Friday. The annualized unit rate of 16.6 million is the lowest since February last year.

So what is the problem, with jobless claims at record lows, pointing to a lack of layoffs and ongoing strength for the nation’s labor market? Initial claims fell 9,000 in the April 2 week to a slightly lower-than-expected 267,000. Consumers continue to pile up debt, but are spending less on day-to-day needs paid with credit cards.

Could it be due to plunging stocks and geopolitical uncertainty, synonymous with the recent terrorist attacks and weak growth in other major economies, like the EU and China?

We have no real answer, but continue to hope real estate will somehow fill the growth gap, with record low interest rates, and the Fed showing no signs of raising interest rates further. Purchase applications for home mortgages declined by 2.0 percent in the April 1 week, but refinancing, boosted by lower rates, increased by 7 percent. The average rate for 30-year conforming loans ($417,000 or less) dropped by 8 basis points from the prior week to 3.86 percent. (But conforming fixed mortgage rates are now as low as 3.25 percent in California for 1 origination point.)

Year-on-year, the purchase index was up 11 percent, still strong but a far cry from early March levels when it was more than 30 percent higher than year ago levels. But last week’s construction spending report for February showed spending for new single-family homes rose 1.2 percent month-to-month and multi-family homes 0.9 percent. And, the 11 percent year-to-year rise in the purchase index is in line with February’s year-to-year 10.7 percent increase in residential construction spending, and these are still quite impressive.

So when and how will we know what consumers are really up to, more savings or more spending? Probably not until the spring housing season kicks in sometime in May. We should also have a better picture of 2016 GDP growth by then.

Harlan Green © 2016

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Service Sector, Job Openings Show More Growth

Posted on April 6, 2016 by Popular Economics Weekly

Financial FAQs

More economic data this week make job and growth prospects for 2016 look even better. And this is on top of the very strong March employment report. The March ISM Non-manufacturing index (i.e., for the service sector) rose to 54.5 percent, up from 53.4 percent in February. The employment index increased in March to 50.3 percent, up from 49.7 percent in February. These are wow numbers!

The Non-Manufacturing Business Activity Index increased to 59.8 percent, 2 percentage points higher than the February reading of 57.8 percent, reflecting growth for the 80th consecutive month, with a faster rate in March. And the New Orders Index registered 56.7 percent, 1.2 percentage points higher than the reading of 55.5 percent in February.

Note: Any number above 50 indicates more than 50 percent of the surveyed purchasing managers say their companies are expanding in those areas.

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Graph: Calculated Risk

So are we approaching full employment, the holy grail of most economists and the Fed’s overriding mandate, as we’ve been saying? This is even though the unemployment rate rose a notch to 5 percent from 4.9 percent. But it was because more Americans joined the labor force, the Labor Department said Friday. The size of the labor force has increased by more than 2 million people in the past five months, a clear sign that jobs are easier to find.

And the Labor Department’s just released JOLTS report shows there are more job openings that are being filled. The number of hires increased to 5.4 million (+297,000) in February, the highest level since November 2006. The number of hires increased for total private (+278,000) and was little changed for government. Hires increased in retail trade (+102,000), accommodation and food services (+78,000), educational services (+44,000), and state and local government, excluding education (+25,000). Hires declined in mining and logging (-9,000). In the regions, hires increased in the South. Until now, government (including state and local) hiring has been almost non-existent during the recovery.

Large numbers of hires and separations occur every month throughout the business cycle, but we don’t see the whole labor picture until the monthly JOLTS (Job Openings and Labor Turnover Summary) report comes out.

Net employment change results from the relationship between hires and separations. When the number of hires exceeds the number of separations, employment rises, even if the hires level is steady or declining. Conversely, when the number of hires is less than the number of separations, employment declines, even if the hires level is steady or rising. And, over the 12 months ending in February, hires totaled 62.1 million and separations totaled 59.4 million, yielding a net employment gain of 2.7 million, says the Bureau of Labor Statistics.

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Graph: Marketwatch

Lastly, and maybe the major determinate of future growth, is the record expansion of the labor force. Marketwatch economist Rex Nutting reports the U.S. labor force grew at the fastest pace on record in the past six months, according to Labor Department data released recently.

“After years of stagnant labor-force growth or even declines, millions of potential workers are joining or rejoining the workforce. In just the past six months, the labor force (which consists of everyone who holds a job plus everyone who is actively searching for work) has increased by 2.4 million. Almost all of them are finding work. Employment has increased by the same amount since September.”

It is the most since at least 1948, when the BLS first began measuring the size of the labor force. The old record of 2.1 million was set in July 1973, says Nutting. That is leading to a lot of hires, folks, now mainly in the service sector that pays lower wages, but very good for future growth prospects.

Harlan Green © 2016

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U.S. Nearing Full Employment?

Posted on April 1, 2016 by Popular Economics Weekly

Popular Economics Weekly

Are we approaching full employment will be the debate raging within the Federal Reserve and beyond this year. That’s because, “Total nonfarm payroll employment rose by 215,000 in March, and the unemployment rate was little changed at 5.0 percent,” the U.S. Bureau of Labor Statistics reported today. “Employment increased in retail trade, construction, and health care. Job losses occurred in manufacturing and mining, only.”

It does look like the U.S. is approaching full employment, the holy grail of most economists and the Fed’s overriding mandate? This is even though the unemployment rate rose a notch to 5 percent from 4.9 percent. But it was because more Americans joined the labor force, said the Labor Department. The size of the labor force has increased by 2 million people in the past five months, a clear sign that jobs are easier to find.

Those new workers and jobseekers, particularly since last fall, pushed the so-called labor force participation rate up to 63 percent. That’s the highest level in two years, reversing at least for now a sharp decline that kicked in after the onset of the Great Recession, said the Bureau of Labor Statistics.

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Graph: Marketwatch

And this is with the mini job-recession in the energy and manufacturing sectors that lost 12,000 and 29,000 jobs, respectively. The household survey measure of employment shows a very good 246,000 gain in March, it is just that the labor force increased by an even bigger 396,000. That means the labor force has now increased by more than two million in the past five months alone. The participation rate has jumped from a low of 62. percent last September to a two-year high of 63.0 percent this March.

“This is a remarkable turnaround in terms of both its speed and magnitude,” said Marketwatch’s Jeff Bartash.

And the manufacturing drop may be temporary as its component of the industrial production report posted a surprising 2 tenths gain in February last week, which came on top of January’s ‘stunning’ gain of 0.5 percent.

In fact, the March just released ISM Manufacturing Report showed a big surge in ISM new orders, which is certain to shake up what has been a very downbeat outlook for the manufacturing sector, said Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management® (ISM®).

“The March PMI® registered 51.8 percent, an increase of 2.3 percentage points from the February reading of 49.5 percent. The New Orders Index registered 58.3 percent, an increase of 6.8 percentage points from the February reading of 51.5 percent. The Production Index registered 55.3 percent, 2.5 percentage points higher than the February reading of 52.8 percent.”

“Manufacturing registered growth in March for the first time since August 2015, as 12 of our 18 industries reported sector growth, and 13 of our 18 industries reported an increase in new orders in March,” said Holcomb.

So what will full employment actually look like? Even In March, 1.7 million persons were marginally attached to the labor force, says the Labor Department, down by 335,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

But, the number of persons employed part time for economic reasons (also referred to as involuntary part-time workers) was about unchanged in March at 6.1 million and has shown little movement since November. These individuals, who would have preferred full-time employment, were working part-time because their hours had been cut back or because they were unable to find a full-time job.

So, eh, we are approaching full employment, but are still not there. Our Fed Chairwoman Janet is right. Let’s allow more of those part timers, and marginally attached folks to find work that can fully support them and their families, before the Fed tightens the credit screws any further.

Harlan Green © 2016

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Why Such Dismay At Fed Chair Yellen’s Dovish Remarks?

Posted on March 31, 2016 by Popular Economics Weekly

Financial FAQs

Janet Yellen gave another speech yesterday, and stocks and bonds rallied. So you would think the pundits would applaud her speech. But, no, with approximately half of the Fed Governors saying they want higher interest rates now, many thought she was the Fed party pooper.

She in fact said that with so much economic uncertainty both here and abroad, now wasn’t the time to talk about raising interest rates further. And there is plenty of uncertainty, since our last quarter’s GDP growth was just raised to 1.4 percent from 1 percent, and we might be lucky to achieve 2 percent GDP in Q1 2016.

“Global developments have increased the risks” to the outlook, with economic and financial conditions still less favorable than in December when the Fed engineered its first rate hike in a decade, Yellen said in a speech to the Economic Club of New York.

“Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy,” she said. She didn’t mention a month for when the Fed could lift interest rates.

So why on earth are so many calling for higher rates at this time? How would that benefit growth, and employment? It’s the bankers among the Fed Governors who worry most about another recession. They voiced the fear that with rates so low, the Fed wouldn’t be able to stimulate more growth should we enter another recession.

So in an unexpected twist to the speech, Yellen pushed back on the conventional wisdom that the U.S. central bank would be virtually powerless to respond to a recession given that interest rates are so close to zero. “The Fed would still have considerable scope to provide additional accommodation,” Yellen said.

But where are the inflation fears coming from, with more than 200,000 jobs being created every month, and the unemployment rate at 4.9 percent? An economy has to overheat first, such as during the housing or dot-com bubbles, has to be producing at full capacity with inflation soaring before there’s any danger of a recession.

And inflation is dependent mostly on increasing wages, these days, since wages and salaries still make up two-thirds of product costs. Yet wages are only beginning to rise after being stagnant for some 30 years.

One caveat that may be feeding recession fears is that corporate profits are shrinking, which could mean slowing growth. Pretax profits fell nearly 8 percent in the fourth quarter, and annual profits fell for the first time since the Great Recession, the Commerce Department reported last week.

But Marketwatch reports that David Rosenberg, chief economist and strategist of Gluskin Sheff, in a research note says consumer income leads business income, and not the other way around. Historically, the relationship runs from personal income growth to corporate profit growth by a four-quarter lag.

And the Commerce Department report on corporate profits also showed employment compensation as a percentage of total income on the rise. It’s admittedly rebounding from historic lows, but this growth should ultimately lead households to bolster spending, and that spending will end up in corporate coffers, Rosenberg says.

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Graph: Marketwatch

Then we have this news. Manufacturing may be on the rebound. The Institute For Supply Management’s just released Chicago Business Barometer, one of the major manufacturing indicators, increased a HUGE 6.0 points to 53.6 in March, led by sharp bounce backs in Production and Employment. In fact, I’ve already reported that manufacturing is returning to pre-Great Recession levels.

“Four of the five Barometer components increased between February and March,” said Chicago-ISM, “with only Supplier Deliveries declining on the month. Movements in the Barometer and its components have been volatile over the past few months, while trend growth has remained weak. March’s positive outturn, though, left the three month trend at the highest for just over a year and the Q1 average at the highest since Q4 2014.”

So where is the recession?

Harlan Green © 2016

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U.S. Manufacturing’s Near Record Output

Posted on March 28, 2016 by Popular Economics Weekly

Popular Economics Weekly

Gross output of U.S. manufacturing industries — counting products produced for final use as well as those used as intermediate inputs — totaled $6.2 trillion in 2015, about 36 percent of U.S. gross domestic product, and nearly double the output of any of the other big sectors: professional and business services, government and real estate, reports Marketwatch’s Rex Nutting.

This is hardly a failed sector of the economy, as the Republican primary candidates maintain. “China may have become the leading manufacturing economy in the world in 2010,” says Nutting, “but the United States maintains a strong second-place standing. The value added by U.S. factories is more than $2 trillion a year, equal to the next three countries (Japan, Germany and South Korea) combined. U.S. manufacturing is still the envy of the world.”

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Graph: Marketwatch

Then why so much bad mouthing of U.S. manufacturing? It’s maybe because fewer workers are needed to produce more, which has hurt the Midwest rust-belt states, and is probably why those blue collar workers have supported either Bernie or Donald in the Presidential primaries. Technology and new ways of organizing work have revolutionized the American factory since the Golden Age of the 1980s, says Nutting. Today, U.S. factories produce twice as much stuff as they did in 1984, but with one-third fewer workers.

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The manufacturing component of the industrial production report posted a surprising 2 tenths gain in February last week, which came on top of January’s stunning gain of 0.5 percent. Exports aren’t specifically tracked in any of these reports but the implication is clear, says Econoday that this year’s steep and early decline in the dollar, down 3.8 percent on the dollar index, is making our exports less expensive to our foreign customers.

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So the ultra-strong dollar exchange rate with foreign currencies that allows Asian countries to outprice US on the cheaper consumer goods hasn’t hurt our manufacturing base that much. In fact, it’s been a great help to consumers, making imported goods that consumers love even cheaper.

Consumers aren’t necessarily spending their windfall from the cheaper imports and low inflation, however. Wages and salaries fell for the first time since last September in the Commerce Department’s just released Personal Income and Outlays report, and their savings rates has risen to 5.4 percent. Why? We suppose anytime incomes fall, households tend to want to save more for that rainy day those pundits keep talking about.

Harlan Green © 2016

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Where Are The New Homes?

Posted on March 24, 2016 by Popular Economics Weekly

The Mortgage Corner

Sales of newly built, single-family homes rose 2 percent in February from an upwardly revised January reading to a seasonally adjusted annual rate of 512,000 units, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

This shows progress in badly needed housing inventory, but new-home sales are still far below the 50-year average, which means there is still a tremendous amount of pent up demand for housing in the 7th year of this economic recovery that is reflected in escalating rents and housing prices. And developers are only now beginning to get it.

“This reflects a slow but steady increase in demand from homebuyers as well as increasing confidence of homebuilders,” said Trulia Chief Economist Ralph McLaughlin. “It is also a positive sign for the U.S. economy headed into 2016, as new home sales leads to new construction and consumer demand for housing-related goods and services. Despite the positive news, new home sales remain still remain about 24 percent below the 50-year average.”

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Graph: HOUSINGWIRE

Where is the shortage? It is mostly in the lower-priced brackets that most homebuyers can afford.

From housing economist Tom Lawler, per Calculated Risk:  “While single-family housing production has continued to recover, the overall level of production – in terms of units – has been well short of consensus forecasts from a few years ago. In looking at the production “shortfall,” the one thing that is striking is that production of moderately sized homes has barely recovered from the cyclical lows, while production of big homes (3000+ square feet) has been running at a higher pace that in all but one year of the 1990’s, as the above graph illustrates.

This makes very little sense if builders are to meet the housing need, as 80 percent of the employed are wage and salary earners and the U.S. median household income is barely above $60,000 per year these days. That is, household incomes are finally returning to early 2000, pre-recession levels. Such a median income can buy a home worth approximately $400,000 with 10 percent down at today’s very low conforming fixed rates (still less than 4 percent).

Yet hardly any homes with 1600 square foot or less areas are being built that can be sold in moderate price ranges. Builders maintain it is because of labor and land shortages, but banks have been very slow to grant development or acquisition financing, which is the credit developers need to even acquire the land for development.

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Graph: Calculated Risk

However builders remain ever optimistic in this new year. “While builders contend with industry headwinds such as labor shortages, relatively low mortgage interest rates and solid job growth should keep the housing market moving ahead as we enter the spring buying season,” said NAHB Chief Economist Robert Dietz.

The inventory of new homes for sale was 240,000 in February, which is a 5.6-month supply at the current sales pace (still slow). The median sales price of new houses sold in February was $301,400. Regionally, new home sales rose 38.5 percent in the West. (But) Sales dropped 4.1 percent in the South, 17.9 percent in the Midwest and 24.2 percent in the Northeast.

Does this mean builders and banks will realize they have to build for the middle class as well as the wealthiest that can afford those 3,000 sf homes, if they want to grow the housing market?

Harlan Green © 2016

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