Fed Rate Hike Could Hurt Employment

Posted on December 3, 2015 by Popular Economics Weekly

Financial FAQs

Fed Chair Janet Yellen all but confirmed the Fed was ready to raise interest rates in December. She laid out a case for raising interest rates in a speech on Wednesday at the Economic Club in Washington.

“Ongoing gains in the labor market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2 percent as the disinflationary effects of declines in energy and import prices wane,” she said.

This is while the latest labor productivity stats show productivity is improving, and wages are finally rising above the inflation rate, which is a necessary condition for continued growth. But a rate hike at this time could make it more difficult for consumers to spend their new found wealth. They might decide to save more instead, at a time when businesses are also saving more and investing less in increased productivity.

The inflation rate isn’t back to their 2 percent target. Nor is the labor market at full employment. We therefore believe such a rate increase would be premature and dampen consumer demand, at a time when consumers are already saving much more than they are spending.

In fact, Yellen said “In October, almost 2 million individuals classified as outside the labor force because they had not searched for work in the previous four weeks reported that they wanted and were available for work. This is a considerable number of people, and some of them undoubtedly would be drawn back into the workforce as the labor market continued to strengthen. Likewise, some of those who report they don’t want to work now could change their minds in a stronger job market.”

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Graph: EPI

But even her estimate of the unemployed may be low. The Economic Policy Institute estimates some 4 million are neither employed nor looking for work. In fact, if added back into the labor force, they would raise the unemployment rate to 7.4 percent, far above the Fed’s employment target.

The Bureau of Labor Stats said nonfarm business sector labor productivity increased at a 2.2-percent annual rate during the third quarter of 2015, as output increased 1.8 percent and hours worked decreased 0.3 percent. The decline in hours worked was the first decline in this series since a 4.8-percent decline in the third quarter of 2009.

This means that more was produced with less hours worked, hence the productivity increase. But from the third quarter of 2014 to the third quarter of 2015, productivity increased just 0.6 percent, reflecting increases in output and hours worked of 2.5 percent and 1.9 percent, respectively. That means output of goods and services increased 2.5 percent, but hours worked had to increase 1.9 percent to produce it. So if they were equal, there would be no productivity increase.

So why begin to raise interest rates now?? Wouldn’t that cause businesses to borrow less, and hence invest less in capital expenditures, thus hurting future productivity growth? Yellen cautioned against delaying a rate hike for too long, saying it may force the U.S. central bank to tighten “abruptly.” Holding rates at its current level near zero also risks “excessive risk-taking” by investors, she noted.

The Fed may once again be attempting to deflate an asset bubble. But are stock and bond prices, as well as housing, in bubble territory? Businesses are not overleveraged, with corporations hoarding some $5 Trillion in cash and other liquid assets worldwide. The last time the Federal Reserve (with Fed Chair Alan Greenspan) began to deflate a bubble resulted in the Great Recession.

Harlan Green © 2015

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Oct. Pending and New-Home Sales Still Rising

Posted on December 1, 2015 by Popular Economics Weekly

The Mortgage Corner

Both new and existing-home sales are still thriving, given that conforming fixed rates are still at almost historic lows, in spite of a looming Fed interest rate hike. Why? It’s mainly investors worried about worldwide growth that are parking their money in safe Treasury bonds and mortgage backed securities that determine mortgage rates. It is one reason the housing market is still growing.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, inched 0.2 percent to 107.7 in October from an upwardly revised 107.5 in September and is now 3.9 percent above October 2014 (103.7). The index has increased year-over-year for 14 consecutive months.

Lawrence Yun, NAR chief economist, says pending sales have plateaued this fall as buyers struggle to overcome a scant number of available homes for sale and prices that are rising too fast in some markets. “Contract signings in October made the most strides in the Northeast, which hasn’t seen much of the drastic price appreciation1 and supply constraints that are occurring in other parts of the country,” he said. “In the most competitive metro areas – particularly those in the South and West – affordability concerns remain heightened as low inventory continues to drive up prices.”  

This follows continued growth in last week’s new-home sales report for October by the National Association of Home Builders. Even though the October report was somewhat disappointing, sales are still up solidly year-to-date.  The Census Bureau reported that new home sales this year, through October, were 430,000, not seasonally adjusted (NSA). That is up 15.7 percent from 371,000 sales during the same period of 2014 (NSA). That is a strong year-over-year gain for 2015 through October, said Calculated Risk.

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Graph: Calculated Risk

But this graph doesn’t show the low inventories—at 5.5 months’ of supply—that means demand is high and builders will continue to build more new homes to fill that demand. The largest segment with the color blue in the graph is homes under construction, while red shows completed homes, and green permits for homes not yet built. It’s therefore easy to see construction is booming, which is adding to economic growth.

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Graph: Calculated Risk

And, indeed, the U.S. Census Bureau of the Department of Commerce just announced that construction spending during September 2015 was estimated at a seasonally adjusted annual rate of $1,094.2 billion, 0.6 percent above the revised August estimate of $1,087.5 billion. The September figure is 14.1 percent above the September 2014 estimate of $959.2 billion.

And spending on residential construction in particular is up 1.0 percent in October for a seventh straight gain and all of them convincing. Year-on-year, residential construction is up 16.6 percent. Private non-residential spending rose 0.6 percent in October with the year-on-year rate at plus 15.3 percent. Public spending is holding down totals with the educational component unchanged in the month though Federal spending did jump, up 19.2 percent for a year-on-year rate of plus 10.7 percent which leads the public components. This report points to solid fourth-quarter contribution from construction.

Need we say more on the need for additional housing to keep housing prices from rising faster?  This should help prospective homebuyers looking for affordable housing. A conforming 30-year fixed rate mortgage is still available at 3.625 percent for slightly more than one origination point, and Hi-balance fixed conforming is at 3.75 percent for the same cost.

So, mortgage rates are holding, even though markets are expecting the Fed to raise its overnight rate this month, which is a sign that there are no signs of inflation, or an overheated economy anytime soon.

Harlan Green © 2015

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When Is Faster Growth Coming?

Posted on November 25, 2015 by Popular Economics Weekly

Popular Economics Weekly

Where is the promised growth, with almost full employment? GDP growth was revised up from 1.5 to 2.1 percent Q2 to Q3, and is up 2.2 percent annually? When, if ever, will it return to the historical norm of plus 3 percent growth, last achieved in 2010, when government stimulus spending from ARRA and TARP helped to save US from another Great Depression?

So why is the Fed now talking about raising their interest rates in December? It won’t do anything for growth—in fact will make goods and services more expensive for lower and middle income earners—those whose incomes have barely risen.

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Graph: Trading Economics

The latest third-quarter GDP is revised to an annualized plus 2.1 percent, up 6 tenths from the initial estimate but showing less strength by the consumer with final sales now at plus 2.7 from plus 3.0 percent. Higher inventories are a big factor in the upward revision. Rising inventories add to GDP growth, because they measure increased production. In this case, it was still below last quarter’s huge buildup, so this subtracted just 6 tenths from Q3 GDP vs an initial 1.4 percent subtraction.

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Graph: Econoday

The core Personal Consumption Expenditure Index (PCE) is the Fed’s most important inflation reading and it is not showing rising pressure, even though real disposable income—income after taxes and inflation factored in—is above 4 percent. Why? Because consumers are saving more, with the savings rate up to 5.6 percent. All those cost savings from lower gas prices are being saved at the moment.

So the overall PCE price index remains nearly dead flat, which could give a boost to durable spending during the holidays. But that might depend on what happens to interest rates.  The PCE price index is up only 0.1 percent, vs expectations for a 0.2 percent gain, with the year-on-year rate at a very telling and extremely low plus 0.2 percent.

Net exports pulled GDP down by 2 tenths because the dollar has become more expensive, and raising interest rates will make the dollar even more expensive for foreign buyers. Exports rose only 0.9 percent in the quarter, down 1 percentage point from the initial reading. Readings on residential investment, adding 2 tenths to GDP, and nonresidential fixed investment, adding 3 tenths, are little changed.

Lower exports hurt the manufacturing sector, which is already suffering from lower worldwide demand as evidenced by falling commodity prices. In other words, inflation is much too low for the Fed to raise their rates now. It could hurt both domestic and foreign demand for our goods and services.

Harlan Green © 2015

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Are We Running Out of Homes?

Posted on November 23, 2015 by Popular Economics Weekly

The Mortgage Corner

This isn’t a repeat of the housing bubble, as some pundits would have us believe. In fact, it’s the opposite. Too few homes are being built, and existing inventories of homes for sale have fallen to 2 million homes—whereas more than 4 million existing homes were for sale at its height.

Inventories are literally back to 2001 levels, before Fed Chairman Greenspan engineered record low interest rates for that time that created the incentive for the oversupply of housing and consequent Great Recession. This time we have just 4.8 month’s supply at today’s sales rate.

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Graph: Calculated Risk

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 3.4 percent to a seasonally adjusted annual rate of 5.36 million in October from 5.55 million in September, said the NAR. Despite last month’s decline, sales are still 3.9 percent above a year ago (at 5.16 million).

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Graph: Calculated Risk

The real problem is not enough new homes are being built, with housing starts slightly over 1 million annually, but permits for future homes at 1.2 million plus, a good sign for future growth. Lawrence Yun, NAR chief economist, says a sales cooldown in October was likely given the pullback in contract signings the last couple of months.

“New and existing-home supply has struggled to improve so far this fall, leading to few choices for buyers and no easement of the ongoing affordability concerns still prevalent in some markets,” he said. “Furthermore, the mixed signals of slowing economic growth and volatility in the financial markets slightly tempered demand and contributed to the decreasing pace of sales.”

Builder optimism is still high at 62 percent, as we said last week, which also should mean more new construction. Though builder confidence in the market for newly constructed single-family homes slipped three points to 62 in November from an upwardly revised October reading on the NAHB/Wells Fargo Housing Market Index (HMI), it is still robust with traffic wanting new homes.

“All-cash and investor sales are still somewhat elevated historically despite the diminishing number of distressed properties,” adds Yun. “With supply already meager at the lower-end of the price range, competition from these buyers only adds to the list of obstacles in the path for first-time buyers trying to reach the market.” Weakness in this reading has been reflecting lack of first-time buyers in the market, until now.

So why are builders still optimistic with still low new construction numbers? A tremendous pentup demand, in a word. Over the past seven years, NAHB Chief Economist David Crowe estimates the slow recovery and uncertainty in the job and housing markets resulted in 7.4 million lost home sales.

“While some of these sales will never take place, this does indicate how many sales were lost as fewer households decided to move. We expect at least some of these to return in the form of new home sales as job and economic growth continue to firm.”

He says a key demographic to help jump-start this process should come from the millennials, as we have been noting over the past years (ie, those from 18 to 36 years). The share of first-time home buyers has traditionally averaged around 40 percent, but in the aftermath of the housing downturn it now stands at just under 30 percent. This is while household formation is finally returning to a more normal level of 1 million plus. First-time buyers are expected to provide a boost to the housing market, as the unemployment differential between young people and others is shrinking.

Harlan Green © 2015

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A Huge Employment Report

Posted on November 18, 2015 by Popular Economics Weekly

Popular Economics Weekly

The economy generated 271,000 new jobs last month, with all but 3,000 coming in the private sector, the government said Friday, topping expectations for 190,000 to 240,000 jobs predicted by various economists. Almost every major industry boosted payrolls.

Even bigger news is that on November 5, 2015, the U.S. House of Representatives passed the bipartisan Surface Transportation Reauthorization and Reform Act, a new multi-year transportation authorization bill, by a vote of 363-64. In other words, we are one step closer to a six-year transportation bill that will boost jobs and economic growth for years to come.

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Graph: Marketwatch

The jobs report showed that a long-awaited acceleration in wages might finally be happening, another plus for economic growth. Hourly pay rose at the fastest year-over-year pace since the U.S. exited recession in mid-2009. Economists have been expecting a faster increase in pay amid a deep drop in unemployment and the creation of millions of new jobs over the past several years.

In October, average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $25.20, following little change in September (+1 cent). Hourly earnings have risen by 2.5 percent over the year.

The rebound in hiring in October was driven almost entirely by service sector jobs, such as software design, banking, health care, shopping and restaurants. White-collar businesses added 78,000 profession jobs. Health care added 45,000 positions. Retailers took on 44,000 new workers, and restaurants hired 42,000 people. Builders also beefed up employment by 31,000, reflecting an upturn in construction over the past year, and the new transportation bill will boost more construction jobs, as well as heavy machinery and other industries that feed infrastructure spending.

As background to the just passed House transportation bill, earlier this summer the Senate passed their proposal for the same bill. The next step is the House and Senate must reconcile the differences between their two versions and pass a compromise bill. The most recent extension of the current transportation program expires November 20 so they will have to work quickly.

The Senate passed its long-term highway bill in July, though their work on federal infrastructure funding isn’t over. Senators voted 65-34 to approve the six-year bill, which funds federal highway and infrastructure projects for three years.

The legislation would be used to pay for about $47 billion of funding for the Department of Transportation’s Highway Trust Fund. That funding accounts for only the first three years of the legislation. Under the Senate bill, senators would have to determine by 2018 how to pay for the full six years.

The labor market as a whole is now the healthiest it’s been in years. The U.S. has added an average of 206,000 jobs a month in 2015, in part because the seasonal adjustments were readjusted to add more jobs to past months. This usually happens during the summer months because Labor Department statisticians tend to overcompensate for seasonal hires in the summer. As much as one million more workers were hired this past summer than in past years, which might become the new normal for the next couple of years, if the unemployment rate drops below 5 percent.

The change in total nonfarm payroll employment for August was revised from +136,000 to +153,000, and the change for September was revised from +142,000 to +137,000. With these revisions, employment gains in August and September combined were 12,000 more than previously reported.

As a result, the number of people who can’t find work or who can only get part-time jobs continues to shrink. The so-called U6 unemployment rate that takes these people into account dropped to 9.8 percent in October, the first time it’s fallen below 10 percent since May 2008.

The labor market is still not fully healed, however, says Marketwatch. Some 15.6 million Americans who want a full-time job can’t find one, an unusually high number after more than six years of economic recovery. The percentage of able-bodied people 16 or older in the labor force also sits at a 42-year low. It was unchanged at 62.4 percent in October.

Harlan Green © 2015

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Dr. Yellen—Don’t Raise Interest Rates Just Yet.

Posted on November 18, 2015 by Popular Economics Weekly

Popular Economics Weekly

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased just 0.2 percent before seasonal adjustment.

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Graph: Trading Economics

This hardly shows incipient inflation, and is no reason for the Fed to raise their interest rates in December. Year-on-year, the CPI is also up 0.2 percent which is up from zero in September while the core rate is unchanged at plus 1.9 percent, right at the Fed’s general 2 percent goal. Only medical care and housing costs rose, which is understandable with more becoming insured under Obamacare and a shortage of new housing stock.

Why such low inflation? Oil and commodity prices in general have been declining, and energy analysts say this could last for years. Yes, I said for years. So why the hurry to raise interest rates when and if energy prices remain this low, which will continue to lower the costs of goods and services?

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“A projected marked slowdown in demand growth next year and the anticipated arrival of additional Iranian barrels–should international sanctions be eased–are likely to keep the market oversupplied through 2016“, said the IEA, or International Energy Agency, on Oct 13, 2015.

Oil prices have now declined to almost $40 per barrel of West Texas crude, and the Saudis have said they don’t intend to cut back their oil production, in an attempt to keep Iranian oil from grabbing more market share.

Some slight inflationary pressure is coming from rising rents, which rose 3.7 percent over the past 12 months, the Labor Department said, the same as in September. Yearly rent increases have accelerated steadily since 2010, and are outpacing annual wage growth, which was an inflation-adjusted 2.4 percent in October, according to the October unemployment report.

Household formation has picked up as the economy improves, but supply is lagging demand. The inventory of both new and existing homes has been 5 months’ supply, much lower than the 6 months’ worth of supply considered normal. That’s helping drive up prices of homes for sale, and in turn keeping many renters on the sidelines even as mortgage rates remain historically low.

What should help is more new construction. Though builder confidence in the market for newly constructed single-family homes slipped three points to 62 in November from an upwardly revised October reading on the NAHB/Wells Fargo Housing Market Index (HMI), it is still robust with traffic wanting new homes.

Though future sales are down a sizable 5 points, the HMI is still at 70. Present sales, which is the most heavily weighted component, fell 3 points to 67, also still a very strong level. The positive in the report is a 1 point rise in traffic, a component which, at 48 in the latest report, has been lagging badly but is getting closer to the breakeven 50 mark. Weakness in this reading has been reflecting lack of first-time buyers in the market, until now.

“The November report is pullback from an unusually high October, and is more in line with the consistent, modest growth that we have seen throughout the year,” said NAHB Chief Economist David Crowe. “A firming economy, continued job creation and affordable mortgage rates should keep housing on an upward trajectory as we approach 2016.”

This should also boost the odds of a more prolonged recovery from the Great Recession, as we said last week. A new Goldman Sachs prediction just out says there is a 60 percent chance this recovery could last another four years. This is according to a team of researchers at Goldman Sachs Group, led by Chief Economist Jan Hatzius. Among developed economies, the average length of an economic expansion has been expanding since 1950. The longest U.S. expansion lasted 10 years, from 1991 to 2001. Before 1950, the average expansion lasted about three years, with only a few enduring for 10 years or more.

Harlan Green © 2015

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An End to Austerity—Part II

Posted on November 12, 2015 by Popular Economics Weekly

Financial FAQs

The Senate voted on Tuesday to start talks with the House about a compromise highway funding measure. Lawmakers are facing a Nov. 20 deadline for renewing federal infrastructure funding. Both chambers have passed bills that would guarantee at least three years of highway and transit spending, and the Senate voted 82-7 to begin bicameral negotiations on a potential compromise. 

The U.S. House of Representatives just passed their version, the Surface Transportation Reauthorization and Reform Act, STIRR, a new multi-year transportation authorization bill, by a vote of 363-64. It will refund the Highway Trust Fund, among other public projects.

This is a sea change for Congress that might have something to do with it being a Presidential election year, as we have said. The Senate bill contained three years’ worth of guaranteed highway funding in July, and lawmakers in both chambers have said they are eager to get to conference.

The good news is that it will prolong this economic recovery from the worst downturn since the Great Depression. The highway bill approved by the House last week calls for spending $261 billion on highways and $55 billion on transit over six years. The legislation authorizes highway funding for six years, but only if Congress can come up with a way to pay for the final three years. 

So, are we one step closer to a Congress that sees the need to boost spending in order to boost jobs and economic output for years to come, as we asked in our last column? It could mean the U.S. Congress has finally seen the folly of austerity policies that shrink growth, as has happened in Europe. Or, it could be because of a so-called ‘emergency’; the Highway Trust Fund has run out of money.

So congressional haste to refund the Trust Fund could also be due to predictions for another severe winter that could wreak havoc on deteriorating roads—including another Polar Vortex, perhaps. The British Guardian recently said: “…they’re likely to see more treacherous cold in coming years, because the long-term forecast for the north-east and midwest calls for a spike in damaging winter storms. That means more stress on the aging, dilapidated infrastructure of older cities and suburbs; more maintenance costs for home-owners and service costs for municipalities; more disruptions of school and business schedules; more automobile accidents; more aching all around.”

Hence the reason for coming to an agreement before the November 20 deadline. “Both the Senate and the House bills have many similarities that will allow for a very short conference period,” Sen. James Inhofe (R-Okla.), who is chairman of the Senate Environment and Public Works Committee, said in a statement while the House was finishing work on its version of the highway bill. 

“With this milestone, Congress should be able to send a bill to the president’s desk by Thanksgiving,” he continued. “This will allow for our nation to avoid the Highway Trust Fund hitting a dangerously low level, which DOT Secretary Anthony Foxx warned would significantly affect the 2016 construction season.”

Why has the Highway Trust Fund run out of money? First, in 1994, the GOP took over Congress on a wave of angry reactionary politics. Led by Newt Gingrich, they proposed repealing the last gasoline tax increase, from 1993. Though they failed at that, they stopped a new gas increase — and ever since, Republicans have refused to allow the gas tax to go up, even to keep pace with inflation.

The result is that the current 18.4-cent-per-gallon gas tax brings in less revenue in absolute terms than it did 20 years ago — thanks to more efficient cars and a dip in vehicle miles traveled — and the shortfall is even bigger in relative terms because of inflation. So transportation funding is squeezed, and passage of a comprehensive transportation bill has been stymied by Congress’s inability to find a new funding mechanism.

The Senate bill is “surprisingly good”, said one commentator. The Senate passed its long-term highway bill in July, though their work on federal infrastructure funding isn’t over. Senators voted 65-34 to approve the six-year bill, which funds federal highway and infrastructure projects for three years.

The legislation would be used to pay for about $47 billion of funding for the Department of Transportation’s Highway Trust Fund. Under the Senate bill, senators would have to determine by 2018 how to pay for the full six years.

This should also boost the odds of a more prolonged recovery from the Great Recession. A new Goldman Sachs prediction just out says there is a 60 percent chance this recovery could last another four years, reports Marketwatch. This is according to a team of researchers at Goldman Sachs Group, led by Chief Economist Jan Hatzius. The team analyzed a data set of developed-market business cycles and their findings were pretty interesting. Among developed economies, the average length of an economic expansion has been expanding since 1950. The longest U.S. expansion lasted 10 years, from 1991 to 2001. Before 1950, the average expansion lasted about three years, with only a few enduring for 10 years or more.

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Graph: Marketwatch

A suddenly bipartisan US Congress made a start in refuting such austerity policies by first agreeing to a two year budget plan that ignores the debt ceiling. Given the possibility of another severe winter, and presidential year politics, any final version of a transportation bill will help to prolong this recovery. Austerity policies can no longer be an option with so much at stake.

Harlan Green © 2015

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What Are Economic Lessons From ‘The Martian’?

Posted on November 9, 2015 by Popular Economics Weekly

Financial FAQs

What can we learn from The Martian, a terrific novel and movie starring Matt Damon as an Astronaut in the not too distant future thought dead and left behind on Mars during a violent dust storm? It was the highest grossing movie last weekend. How did he survive on such an inhospitable planet where nothing grows and water isn’t accessible?

It could tell us how we might survive—and even prosper—in the not too distant future on earth. It is a lesson very close to home in several ways. We have predictions that global warming could have catastrophic economic and environmental consequences from such as the Pentagon. Cities within 100 miles of the coastline affected and maybe even obliterated in the not too distant future.

And as many parts of the earth experience climactic changes that could bring about similar conditions as on Mars (too little usable water and violent storms), we can learn just how to rescue earthlings from a similar result.

It was because the U.S. and world, including China, were united in wanting to save Matt Damon that The Martian has a happy ending. And that is exactly how we have to act to save ourselves from becoming another Mars.

Is this too severe a picture of what could happen on earth? The New York Times reported on the latest Pentagon study of the effects of global warming, asserting that climate change poses an immediate threat to national security, with increased risks from terrorism, infectious disease, global poverty and food shortages. It also predicted rising demand for military disaster responses as extreme weather creates more global humanitarian crises.

The report lays out a road map to show how the military will adapt to rising sea levels, more violent storms and widespread droughts, said the Times. “The loss of glaciers will strain water supplies in several areas of our hemisphere,” said U.S. Defense Secretary Chuck Hagel in announcing the report last year. “Destruction and devastation from hurricanes can sow the seeds for instability. Droughts and crop failures can leave millions of people without any lifeline, and trigger waves of mass migration.”

In fact, this is already happening in the Middle East. Record droughts are a major reason for the civil wars and migration of millions into Europe and beyond. It can only be ‘saved’ with cooperation from all sides of the conflict, including Russia.

And China is buying up foreign resources because it will ultimately run out of enough water and arable land to feed its own growing population.

The Martian was rescued as a result of an effort coordinated by the National Aeronautics and Space Administration — NASA — that was responsible for our Apollo moon landings, the International Space Station, and now the Mars Rover and Curiosity remote vehicle explorations.

Closer to home, $700B was authorized by Congress in TARP support of Wall Street and commercial banks, then another $830B for the American Recovery and Reinvestment Act that enabled governments to continue to function, which prevented another Great Depression.

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Graph: Econoday

We lost more than 800,000 government jobs during the Great Recession, of which only a small fraction have returned. This is due to government spending cuts because of reduced tax revenues, but also congressional resistance to expanding federal government spending when this is the time to invest public monies that will increase jobs and growth when the private sector will not.

Need we more lessons on how to save our own planet? The Martian, a tale of survival under impossible circumstances, provides an immediate example that has already caught the attention of many. This has to be why it has become a best-selling novel and movie.

Harlan Green © 2015

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An End to Austerity?

Posted on November 9, 2015 by Popular Economics Weekly

Financial FAQs

On November 5, 2015, the U.S. House of Representatives passed the bipartisan Surface Transportation Reauthorization and Reform Act, a new multi-year transportation authorization bill, by a vote of 363-64. It will refund the Highway Trust Fund, among other public projects. The Trust Fund has been the source of highway repairs and improvements, but was about to run out of money.

And, earlier this summer the Senate passed their proposal for the same bill. The next step is the House and Senate must reconcile the differences between their two versions and pass a compromise transportation bill. The most recent extension of the current transportation program expires November 20 so they will have to work quickly.

Are we one step closer to a Congress that sees the need to boost spending in order to boost jobs and economic output for years to come? If so, it means the U.S. Congress has finally seen the folly of austerity policies—such as the sequester budget cuts that defunded even defense spending, or Repubs shutting down all government rather than agreeing to new budget caps.

The result of such austerity policies has been lost output and overall wealth that several economists say could last for years—and may even be permanent—hurting both jobs and economic output; thus fulfilling the prophecy of a ‘new normal’ of slower growth for economies of older, developed countries

Paul Krugman and other leading economists have lamented the vise-grip that austerity policies have on developed countries since the Great Recession, and that are continuing in Europe. “Governments that slashed spending in the face of depression hurt their economies,” said Krugman, “and hence their future tax receipts so much that even their debt will end up higher than it would have been without the cuts.”

“And a new paper by Mr. Summers and Antonio Fatás, in addition to supporting other economists’ conclusion that the crisis seems to have done enormous long-run damage,” says Krugman, “shows that the downgrading of nations’ long-run prospects is strongly correlated with the amount of austerity they imposed.”

And the Initiative on Global Markets at the University of Chicago — hardly a hotbed of liberal or Keynesian thought — regularly surveys a number of the leading American economists about a variety of policy issues, such as government stimulus spending, says Econ Prof Justin Wolfers. The survey results find widespread consensus that government spending during economic crises has benefits to employment and growth that far exceed its costs.

Even the EU may be seeing the folly of their current austerity policies, brought on by another emergency—millions of immigrants fleeing into Europe from war torn Middle East and Africa that have to be housed and fed. ECB Chairman Mario Draghi has been sounding the necessity to increase its QE program that to date is purchasing $60 billion per month in securities, in an attempt to boost growth by pushing down interest rates into negative territory. So the ECB would then literally be paying borrowers to borrow money in order to expand the monetary base.

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Graph: Trading Economics

But why does there always have to be an emergency before Austerians (i.e., those who believe public debt is evil) and Progressives (who believe public debt is good and necessary for the public welfare) come together for the common good? The Senate passed its long-term highway bill in July, though their work on federal infrastructure funding isn’t over. Senators voted 65-34 to approve the six-year bill, which funds federal highway and infrastructure projects for three years.

The legislation would be used to pay for about $47 billion of funding for the Department of Transportation’s Highway Trust Fund. That funding accounts for only the first three years of the legislation. Under the Senate bill, senators would have to determine by 2018 how to pay for the full six years.

Austerity is an economic orthodoxy the gripped Herbert Hoover at the beginning of the Great Depression, before FDR decided that a New Deal of government stimulus spending was needed to fight what was not yet a Great Depression—itself an expression of changing times.

But then austerity prevailed in 1937 as well. Republicans were swept back into power because Americans thought the Depression over. Roosevelt listened to them, and raised taxes and cut spending to pay down the deficit before the economy had fully recovered, plunging the U.S. back into what became The Great Depression.

Unfortunately, it took the united will of a World War against fascist terrorism to bring the US together with European countries to fight economic orthodoxy. We knew then government spending and budget deficits were needed during such times. US debt ballooned to some 120 percent of US GDP at the end of WWII.

It took an exploding population and the consumer-driven society that succeeded WWII to bring the deficit back down to pre-war levels by the 1970s. And only with policies that boost growth have we been able to keep debt levels manageable.

The US’s Great Recession was technically over in June 2009, lasting 18 months, but sustained growth didn’t resume until 2012. Whereas Europe suffered through two recessions since 2008 because it also followed policies that cut spending and raised taxes, led by the more conservative (and prosperous) northern EU countries and Germany.

A suddenly bipartisan US Congress made a start in refuting such austerity policies by first agreeing to a two year budget plan that ignores the debt ceiling. The Surface Transportation Reauthorization and Reform Act is another step in the right direction. Maybe it is good politics in a Presidential year to advocate stimulus spending over austerity. Who cares why, as long as both parties can agree it’s the only path to improving our deteriorating infrastructure?

Harlan Green © 2015

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

Posted in Consumers, Economy, Keynesian economics, Macro Economics, Politics, Weekly Financial News | Tagged , , , , , , , | Leave a comment

Huge October Employment Report Will Boost Growth

Posted on November 6, 2015 by Popular Economics Weekly

Popular Economics Weekly

The economy generated 271,000 new jobs last month, with all but 3,000 coming in the private sector, the government said Friday, topping expectations for 190,000 to 240,000 jobs predicted by various economists.

Even bigger news is that on November 5, 2015, the U.S. House of Representatives passed the bipartisan Surface Transportation Reauthorization and Reform Act, a new multi-year transportation authorization bill, by a vote of 363-64. In other words, we are one step closer to a six-year transportation bill that will boost jobs and economic growth for years to come.

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Graph: Marketwatch

The jobs report showed that a long-awaited acceleration in wages might finally be happening, another plus for economic growth. Hourly pay rose at the fastest year-over-year pace since the U.S. exited recession in mid-2009. Economists have been expecting a faster increase in pay amid a deep drop in unemployment and the creation of millions of new jobs over the past several years.

In October, average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $25.20, following little change in September (+1 cent). Hourly earnings have risen by 2.5 percent over the year.

The rebound in hiring in October was driven almost entirely by the service sector jobs, such as software design, banking, health care, shopping and eating out. White-collar businesses added 78,000 profession jobs. Health care added 45,000 positions. Retailers took on 44,000 new workers, and restaurants hired 42,000 people. Builders also beefed up employment by 31,000, reflecting an upturn in construction over the past year, and the new transportation bill will boost more construction jobs, as well as heavy machinery and other industries that feed infrastructure spending.

As background to the just passed House transportation bill, earlier this summer the Senate passed their proposal for the same bill. The next step is that the House and Senate must reconcile the differences between their two versions and pass a compromise bill. The most recent extension of the current transportation program expires November 20 so they will have to work quickly.

The Senate passed its long-term highway bill in July, though their work on federal infrastructure funding isn’t over. Senators voted 65-34 to approve the six-year bill, which funds federal highway and infrastructure projects for three years.

The legislation would be used to pay for about $47 billion of funding for the Department of Transportation’s Highway Trust Fund. That funding accounts for only the first three years of the legislation. Under the Senate bill, senators would have to determine by 2018 how to pay for the full six years.

The labor market as a whole is now the healthiest it’s been in years. The U.S. has added an average of 206,000 jobs a month in 2015, in part because the seasonal adjustments were readjusted to add more jobs to past months. This usually happens during the summer months because Labor Department statisticians usually overcompensate for the number of hires in the summer. As much as a million more workers were hired this past summer than in past years, which might become the new normal for the next couple of years.

The change in total nonfarm payroll employment for August was revised from +136,000 to +153,000, and the change for September was revised from +142,000 to +137,000. With these revisions, employment gains in August and September combined were 12,000 more than previously reported.

As a result, the number of people who can’t find work or who can only get part-time jobs continues to shrink. The so-called U6 unemployment rate that takes these people into account dropped to 9.8 percent in October, the first time it’s fallen below 10 percent since May 2008.

The labor market is still not fully healed, however, says Marketwatch. Some 15.6 million Americans who want a full-time job can’t find one, an unusually high number after more than six years of economic recovery. The percentage of able-bodied people 16 or older in the labor force also sits at a 42-year low. It was unchanged at 62.4% in October.

Harlan Green © 2015

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

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