Don’t Forget the Consumer!

Posted on July 22, 2014 by Popular Economics Weekly

Popular Economics Weekly

“It’s the Consumers, Stupid,” is an oft-repeated mantra being echoed currently by Internet advocates who want to keep Internet access free. But there’s a more important reason to worry about consumer health. Consumers are still way too pessimistic in the fifth year of this recovery, and that is hurting economic growth.

consumer

Graph: Reuters

There are a lot of reasons for their malaise. Incomes that can’t rise faster than inflation are a major cause. So are consumers’ tremendous debt loads, a result of the housing bubble. But there is a deeper reason. Tax policies and political choices have emphasized employer and investor profits over employee salaries.

Rutgers economic historian James Livingston was one of the earliest to sound the alarm that consumers need help, if our economy is to continue to grow. He maintained that consumer and government spending now drive economic growth, not corporate profits, which tend to end up in inflated CEO salaries or speculative investments, or just hoarded as cash in very liquid assets. And there has been little to help consumers create more jobs or boost their incomes.

“…corporate profits are… just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash,” said Livingston. “Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”

The Congressional Budget Office says as much in its latest budget report. Thanks to the lingering effects of the recession, the aging of the country, the shrinking of the labor force, and various tax and spending policies, the nation now only has the potential to grow about 2.5 percent per year over the next decade, on average, far below the long term 3 percent average that includes the Great Depression.

“In CBO’s projections, the growth of potential GDP over the next 10 years is much slower than the average since 1950,” says the report. “That difference stems primarily from demographic trends that have significantly reduced the growth of the labor force. In addition, changes in people’s economic incentives caused by federal tax and spending policies set in current law are expected to keep hours worked and potential output during the next 10 years lower than they would be otherwise.”

debt

Graph: House of Debt

It’s been a terrible recovery, say House of Debt economists Atif Mian and Amir Sufi, the worst recovery since 1950. And with the revision of Q12014 GDP growth downward to -3.0 percent from -2.9 percent, it’s getting worse, not better. The reason is easy to see. It’s consumer incomes, and therefore spending that has fallen off and won’t return, unless more is done to encourage wage growth, for starters. The Reuters graph highlights how little consumers’ Personal Consumption Expenditures (PCE) are contributing to economic growth at present.

Yet if government was ever allowed to create jobs again, we could have above average job creation, and so higher GDP growth for decades to come. The New Deal proved that. But with Congress’s own CBO emphasizing debt, without highlighting policies that bring greater growth, there is little political will to increase job growth.

We know because net business investment declined 70 percent as a share of G.D.P. over that century, says Professor Livingston. In 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.

When New Deal spending kicked in, it boosted growth by literally creating millions of WPA, CCC jobs that resulted in new highways, bridges, dams, even artworks that boosted spirits and glorified the work ethic. Conversely, when government spending was cut back prematurely in 1937 in an attempt to balance the budget, the Great Depression resumed. So we see history repeating itself, once again.

Harlan Green © 2014

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Why Such Low Interest Rates?

Posted on July 17, 2014 by Popular Economics Weekly

The Mortgage Corner

Fixed 30-year conforming interest rates have once again dropped slightly below 4 percent for a 1 pt. origination fee in California, after being as high as 4.50 percent earlier this year. Why the drop when most economic indicators show the economy recovering from the harsh winter? The unemployment rate has dropped to 6.1 percent. And both the service and manufacturing sector Institute for Supply Management indicators show strong growth.

duy

Graph: Tim Duy

The easy answer is the lack of inflation, which is still below 2 percent overall. Interest rates follow inflation trends in general, since inflation cheapens the value of bonds. But less obvious is the fact that 2014 housing sales have slowed, putting less pressure on mortgage rates even though home prices continue to rise.

rates

Graph: Calculated Risk

It’s easy to see from the graph that 2013 mortgage rates (blue line) rose after June, as housing sales rose, and began to decline in 2014 (red line) due in part to the winter deep freeze and geopolitical unrest. Paradoxically, even with the decline in the Fed’s QE3 bond purchases, rates have continued to decline this year.

usgdp

That could also be because of the horrible -2.9 percent decline in Q1 GDP growth, probably a sign that 2014 growth overall will not be all that great. Hence investors tend to leave the stock market and flee to bonds as a safe haven.

Whatever the reason, it doesn’t look like interest rates will rise anytime soon. The US housing market would have to pick up, as NAR chief economist Lawrence Yun keeps repeating. But there is little likelihood that will happen, unless market conditions improve.

“Sales should exceed an annual pace of five million homes in some of the upcoming months behind favorable mortgage rates, more inventory and improved job creation,” said Yun. “However, second-half sales growth won’t be enough to compensate for the sluggish first quarter and will likely fall below last year’s total.”  

Also, since there is little or no inflation on the horizon, new Fed Chairperson Janet Yellen has vowed to keep interest rates as low as possible in her latest speeches and testimony before Congress. “For the moment, I don’t see any trade-off whatsoever in achieving our two objectives (growth with stable inflation). They both call for the same policy, namely, a highly accommodative monetary policy.”

Harlan Green © 2014

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Don’t Forget the Millennials!

Posted on July 17, 2014 by Popular Economics Weekly

Popular Economics Weekly

Fed Chair Janet Yellen’s current congressional testimony is saying the Fed could keep rates low for a long time to come. Why? Because unemployment is still too high, and economic growth too slow at present.

The CBO says thanks to the lingering effects of the recession, the aging of the country, the shrinking of the labor force, and various tax and spending policies, the nation now only has the potential to grow about 2.1 percent per year over the next decade, on average.

We believe that is far too pessimistic an outcome. For starters, GDP growth has averaged more than 3 percent over the long term, including the Great Depression. And no one is taking into account the next generation, the Gen Y’ers or Millennials, entering the workforce, which because of their size should kick start growth around 2020, and obviate the worries about soaring budget deficits as the baby boomers retire.

gdp

Graph: Trading Economics

In the last two decades our growth rate has been steadily decreasing. The 50’s and 60’s average growth rate was above 4 percent, It dropped to around 3 percent in the 70’s and 80’s. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level.

Yet if government was ever allowed to create jobs again, we could have above average job creation, and so higher GDP growth for decades to come. The New Deal proved that. When New Deal spending kicked in, it boosted growth by literally creating millions of WPA, CCC jobs that resulted in new highways, bridges, dams, and the care of natural resources. Conversely, when government spending was cut back prematurely in 1937 in an attempt to balance the budget, the Great Depression resumed.

depression

Graph: Seeking Alpha

Especially spending on public infrastructure stimulates the U.S. economy in the short-run, given that there is some $2.2 trillion in deferred infrastructure maintenance, according to the US Society of Civil Engineers. Investing in infrastructure goes beyond mere improvements to the quality of roads, highways, sewers, and power plants. These investments also generate “significant economic returns for other portions of the U.S. economy and substantially increase ultimate tax revenue for the government,” according to a 2012 College of William & Mary academic study.

And what about demographics, the assertion that since baby boomers are retiring, the work force will shrink rather than grow, further cutting GDP growth? Ah, but we are speaking of the so-called Millennium generation born between 1981 to 1998, which numbers more than 70 million in the US alone. In fact, one commentator maintains, starting around 2020 (or a few years after 2020), the U.S. should see another robust growth period similar to the period enjoyed by the baby boomer generation.  This is because there will be just as many new workers in the work force from the Gen Y or Millennial generation as there were in the baby boomer generation. 

Barron’s Magazine has been looking at the Millennials’ potential. FOR ONE THING, THE MILLENNIALS — sometimes called Generation Y, and defined by many demographers as ranging from ages 18 to 37 — make up the largest population cohort the U.S. has ever seen. Eighty-six million strong, it is 7 percent larger than the baby-boom generation, which came of age in the 1970s and ’80s. And the Millennial population could keep growing to 88.5 million people by 2020, owing to immigration, says demographer Peter Francese, an analyst at the MetLife Mature Market Institute.

This echo-boom generation totals 27 percent of the U.S. population, less than the 35 percent the boomers represented at their peak in 1980. When the baby-boom generation drove the economy in the 1990s, growth in gross domestic product averaged 3.4 percent a year. As the Millennials hit their stride, they could help lift GDP growth to 3 percent or more, at least a percentage point higher than current levels.

So there’s no real reason to be so pessimistic about economic growth and a soaring federal deficit for decades to come. If GDP growth is dependent on workforce growth, and 1990’s growth repeats itself—which was the longest uninterrupted economic expansion in our history that also gave us 4 years of budget surpluses—then we may see the next generation already taking charge. And they could turn out to be much more industrious than we know!

Harlan Green © 2014

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Economic Recovery Is For Real

Posted on July 15, 2014 by Popular Economics Weekly

Popular Economics Weekly

We are already in July, and can now see that the US economic recovery is for real, in spite of the past winter. Even economic growth is picking up, so that second quarter Gross Domestic Product might surpass 4 percent, cancelling out the minus -2.9 percent decline in Q1. Many economists believe that Q1 was an aberration, or may even have been in error to be revised upward in coming months.

gdp-1

Graph: Marketwatch

Consumer confidence is also returning to normal, though its index was as high as 110 in the 1990’s the index has yet to return to 90, which prevailed before the housing crash. The final Reuters / University of Michigan consumer sentiment index for June increased to 82.5 from the May reading of 81.9, and was up from the preliminary June reading of 81.2.

sentiment

Graph: Calculated Risk

Consumer incomes and spending have also to increase, since they are the largest component of economic growth. Right now, so-called Real Disposable Income (after taxes and inflation) is just at 2 percent, and it must rise at least to 3 percent to increase the GDP to 3 percent plus, and so fuller employment.

income

Graph: Econoday

How soon may that happen? Much will depend on GDP growth in the coming months, and that will depend on a continuing housing revival. Existing-home sales are back to 5 million units annually and prices in the West are rising most sharply, according to the latest New York Federal Reserve consumer survey, with cities such as San Francisco, Los Angeles and San Diego up double digits.

So there is no problem with upper income buyers. It is the entry-level, first time homebuyers that are having the most difficult time, says NAR chief economist Lawrence Yun.

“The flourishing stock market the last few years has propelled sales in the higher price brackets, while sales for homes under $250,000 are 10 percent behind last year’s pace. Meanwhile, apartment rents are expected to rise 8 percent cumulatively over the next two years because of tight availability,” said Yun. “Solid income growth and a slight easing in underwriting standards are needed to encourage first-time buyer participation, especially as renting becomes less affordable.”

Even better news was that perceptions on earnings and the job market seemed to improve. Median earnings growth expectations increased to 2.5 percent from 2 percent, driven mostly by respondents with no college education. The mean probability of finding a job in three months among the currently employed (if current job was lost) rose to 51.8 percent, a new 13-month high, the New York Fed said.

Harlan Green © 2014

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Where is Housing Affordable?

Posted on July 14, 2014 by Popular Economics Weekly

The Mortgage Corner

Why aren’t there more home buyers? It seems that housing can’t really recover until household incomes recover, and household incomes are barely keeping up with inflation at the moment. We also know that can’t happen until we are closer to full employment. Right now housing prices are rising faster than incomes, which means an ever shrinking number of homebuyers are eligible purchasers, unless current strict lending standards are eased.

At least, that’s what one report suggests. In Trulia’s Price Monitor for June, Trulia’s chief economist Jed Kolko compares the rise in asking prices with the rise (or lack thereof) of wages in the 100 largest metro areas.

“In fact, average wages per worker rose less than 1 percent in 2013 in all but one of the 10 metros with the largest price increases,” Kolko said. “Nationally, asking prices (year-over-year in June 2014) rose faster than wages per worker (year-over- year in 2013) in 95 of the 100 largest metros.”

prices

Graph: Housing Wire

The report might be slightly biased, as those areas with the highest price increases; such as Detroit, Riverside-San Bernardino, and Florida; were severely overbuilt with mostly low cost housing. But even Silicon Valley suburbs such as San Francisco had 20 percent annual price increases, while average incomes even there can’t keep up.  They rose as much as 5 percent Y-o-Y in the high cost areas.

And Fannie Mae and Freddie Mac conforming loans have been getting more expensive. They can add as much as 3 pts. to loan costs if a buyer’s credit score drops below 680. And many lenders have dropped their Fannie Mae maximum debt-to-income ratio to 43 percent, though Freddie Mac’s can as high as 50 percent with compensating factors, such as a good savings history.

The good news is that the unemployment rate has dropped to 6.1 percent, but when part timers and those no longer looking for work are included, it is still stuck at 12.1 percent, according to the US Census Bureau’s June unemployment report.

The best answer to slow down price increases is to build more housing, of course. We know existing-home inventories continue to increase, with inventory now higher than in 2013, which is also helping affordability.

jolts

Graph: Investors Daily

Though we may have to wait for more jobs, the jobs picture is looking better. The latest indicator is the Labor Department’s May JOLTS report, which says that employers are firing fewer workers and hiring more.

Job openings rose to a recovery high in May, the Labor Department said Tuesday in its Job Openings and Labor Turnover Survey (JOLTS) report. The 4.64 million U.S. job openings topped economists’ expectations for 4.4 million and hinted at improvement in the economy and job market.

So economic growth and employment are picking up, which means the gap between incomes and housing prices will probably decrease, allowing more homebuyers into the housing market this year.

Harlan Green © 2014

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We Need Some Inflation!

Posted on July 8, 2014 by Popular Economics Weekly

Financial FAQs

How much inflation is too much inflation? Germany thinks any inflation is too much, based on their 1920s inflation experience when burning money for fuel was cheaper than burning wood. It has led to the EU’s draconian austerity policies, such as calling for spending cuts during deflationary times that has kept the EU in and out of recessions since 2008.

euro

Trading Economics

Yet the US deficit hawks—mostly Republicans these days—continue to believe that deficits are evil and the Fed should begin to tighten now, rather than wait for 2015 when economic growth is more sustainable. This is even though the unemployment rate is 12.1 percent when the 3.1 million long term unemployed and part timers are included, and we have too little inflation.

inflation-1

Graph: Tim Duy

So how much is too much inflation? The easy answer is that rising prices become inflationary when supply can no longer meet the demand for goods and services over a prolonged period, thus raising prices. This last happened in the 1970s, when oil embargos were rampant, the rest of the world wasn’t yet industrialized and producing too much of everything, and trade barriers were higher than they are today.

In fact, we are in a world of generally falling prices with the Asian Tigers exporting most of what they produce, hence the huge surpluses. So maybe we should be looking at regional or worldwide prices and production capacities, instead of individual countries’? That seems to be Germany’s mistake, extrapolating its own past history to the EU as a whole.

Budget deficits don’t feed inflation during ‘zero-bound’ episodes (when interest rates are at, or close to 0 percent), such as after Great Recessions when all the Fed can do is try to prevent deflation, as occurred in Japan for two decades.

This is basic Economics 101 that many economists don’t understand, because they have little knowledge of liquidity traps—which is when money is no longer circulating, but being hoarded rather than invested. How could they, since it’s only happened twice in modern times—during the 1930s and now.

Budget deficits in fact prevent said deflationary episodes, which are episodes when wages are stagnant or falling and there is little or no economic growth, if the monies are spent wisely on longer term projects, because government spending puts more money into circulation. This should be easy to understand, but the inflation hawks are squawking again because the Fed now has some $4 trillion in reserves on its books, yet there is no inflation even on the horizon.

Calculated Risk has started an interesting discussion about when inflation might become a problem, using the US example. And it turns out that even US capacity utilization doesn’t give us a good measure. For instance, from 1992 to 2001 during the longest economic expansion in our history, when more than 20 million jobs were created and capacity utilization was as high as 84 percent of capacity, CPI prices averaged less than 3 percent. Maybe the Fed’s inflation target should be 3 rather than 2 percent, which has accompanied mostly weak growth.

capacity

Graph: Calculated Risk

So maybe we should be looking at the world’s production capacity when looking for the ideal inflation rate? Because China, Korea, and the other Asian Tigers continue to produce more than they consume, more ways should be found to boost demand, i.e., which in the majority are from mostly middle class incomes.

Oh wait a minute. That’s what we should be doing in the US as well. Maybe raising the Fed’s inflation target would boost demand, or are we as traumatized by the 1970’s era of stagflation as the German’s were in the 1920’s?

Harlan Green © 2014

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What is Yellen’s Real Unemployment Rate?

Posted on July 3, 2014 by Popular Economics Weekly

Financial FAQs

Fed Chairwoman Janet Yellen spoke with IMF President Christine Lagard at an epoch-making conference yesterday. It was epoch-making (with luminaries such a ex-Fed Chair Paul Volcker in attendance), because Ms. Yellen told us which unemployment rate she and the Fed Governors looked at to determine when they should begin to raise interest rates.

Though payrolls have averaged 231,000 additional jobs this year, the so-called U6 unemployment rate that includes people who can only find part-time work, including those who recently gave up looking, barely improved to 12.1 percent in June from 12.2 percent.

Yellen has said several times that it was specifically the long term unemployed that she wanted back to work before the Fed would seriously begin to tighten credit. The number of long-term unemployed (those jobless for 27 weeks or more) declined by 293,000 in June to 3.1 million, said the report. These individuals accounted for 32.8 percent of the unemployed. Over the past 12 months, the number of long-term unemployed has decreased by 1.2 million.

jobs

Graph: Marketwatch

This is when today’s June unemployment report was terrific, with the rate falling to 6.1 percent from 6.3 percent, and 288,000 payrolls jobs were created. There was hiring across the board. Even governments hired 26,000 additional employees.

Professional jobs increased by 67,000, just 15 percent of which were temp positions, said the report. Retailers hired 40,200 workers and restaurants added 33,000. Health-care providers, another source of steady hiring, created 21,000 new positions. Manufacturers took on 16,000 additional workers. Even the finance industry, which has lagged in hiring since the financial panic in 2008, created 17,000 jobs in June. That’s the largest increase in 27 months.

There is one other factor that Yellen, et. al., are looking at.  Wage and salary levels aren’t increasing faster than inflation, and the average workweek was unchanged at 34.5 hours. Hours worked tend to rise when an economy strengthens, but there’s been little change for months.

Average hourly pay rose 6 cents, or 0.2 percent to $24.45 in June. Over the past 12 months, wages have risen 2 percent. But wages are rising at just two-thirds the normal rate and the recovery is unlikely to be more robust unless workers start to receive bigger paychecks.

So Yellen and the Fed Governors are saying don’t tighten credit prematurely, as FDR did in 1937, which dragged the 30’s economy back into the Great Depression. There are still too many signs of weakness, including excessive long term unemployment and insufficient demand to warrant raising interest rates, or otherwise worry about inflation.

nutting

Graph: Marketwatch

Banks and Wall Street always worry about excessive inflation, because they are the creditors, and inflation reduces the value of their debt. But that benefits consumers, as it also reduces the value of their debt, and excessive consumer debt has been the main drag in this recovery.

So we will not see a real recovery that puts even the long term unemployed back to work, until the mountain of private debt is reduced. And that can’t happen until we create employment policies that continue to create more jobs on Main Street, rather than worry about and abet the policies of Wall Street.

Harlan Green © 2014

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Why Slow Recovery–It’s Housing, Stupid

Posted on July 2, 2014 by Popular Economics Weekly

Popular Economics Weekly

Dean Baker, a noted economist with the Center for Economic Policy and Research (NEPR), has probably given the best and most understandable reason for the Great Recession and ultra-slow recovery—it’s the lousy housing market.  The economy is growing at slightly over 2 percent, when we would expect 3 percent growth 5 years after the end of the Great Recession.

Image 

 “The basic story of the Great Recession is about as simple as they come,” says Baker.  “The economy was being driven by a housing bubble and the bubble burst. The combination of the loss of housing construction, due to the enormous overbuilding of the bubble years, and the loss of the consumption that had been driven by bubble generated housing wealth, created a gap in annual demand of more than $1 trillion. That’s all simple and easy.”

So the weak housing market, even with the Fed doing all it can do to keep interest rates at rock bottom, hasn’t boosted US growth sufficiently to approach full employment.  Why?  The housing market would be recovering sooner if government was allowed to do more, because of austerity policies prevalent both here and in Europe.   And the results are easy to see in this Paul Krugman graph. 

Image           

Graph: Paul Krugman

Those countries with the lowest growth rates have the most stringent austerity measures—i.e., most drastic budget cuts and highest interest rates when government should be keeping interest rates as low as possible.  And they are the United Kingdom, Spain, Portugal and Greece, of course.  But the US isn’t far behind, in line with France that is having its own budget problems.

What should be done?  We know the government has to help, either with mortgage relief (buy up the bad mortgages and hold them until the market improves), or buying the underwater housing as was done during the Great Depression, and selling them back when conditions improved.

            The Home Owners’ Loan Corporation was set up in 1933 under the New Deal.  It made more than one million loans to homeowners, sometimes bought the underwater homes, and otherwise supported homeowners who were behind on their payments.  Sound familiar?

Image

Graph: FHFA

 The HARP and HAMP loan programs were current attempts to do the same and they have refinanced 3 million of the 16 million homes guaranteed by Fannie Mae and Freddie, according to The Housing Wire and FHFA, the Federal Housing Finance Authority that supervises Fannie and Freddie.

But 8 million more homes are eligible, according to the FHFA, and the White House has done little to promote HARP 3.0, a newer version that would loosen qualification standards to increase eligibility for those behind on their payments, which would allow more homes to be refinanced.  So it doesn’t look like another New Deal for housing is in the offing.

“…what did economists think would fill a trillion dollar gap in annual spending?” laments Baker.  “Of course the government could do it with more spending and/or tax cuts, but since we have a religious cult in Washington that says it is better to keep millions out of work than to run deficits, this was a political impossibility.”     

Harlan Green © 2014

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Pending Home Sales Up—A Better 2014?

Posted on July 1, 2014 by Popular Economics Weekly

The Mortgage Corner

Is the housing market finally beginning to thaw from the polar winter? Pending home sales rose sharply in May, with lower mortgage rates and increased inventory accelerating the market, according to the National Association of Realtors’ Pending Home Sales Index (PHSI). All four regions of the country saw increases in pending sales, with the Northeast and West experiencing the largest gains.

Housing inventories are now up 14 percent, June-to-June, according to Housing Tracker (Department of Numbers). The median asking price for existing homes is now $280, 935, up 10.2 percent y-o-y. But in high growth areas, such as San Francisco and San Jose, inventories are shrinking -1.5 percent and -0.7 percent, respectively thanks to a booming Silicon Valley. Existing inventories in Los Angeles have not grown at all y-o-y.

inventory

Graph: Calculated Risk

NAR chief economist Lawrence Yun expects improving home sales in the second half of the year. “Sales should exceed an annual pace of five million homes in some of the upcoming months behind favorable mortgage rates, more inventory and improved job creation,” he said. “However, second-half sales growth won’t be enough to compensate for the sluggish first quarter and will likely fall below last year’s total.”

firsttimers

Graph: Marketplace.org

That’s in part because only 29 percent of prospective homebuyers were first-timers, and first-timers usually take up at least 33 percent of purchases. Many first-timers are more likely to rent than purchase at present, with little or no savings and difficult qualification criteria, say several surveys.

FHA in particular has tightened its standards and costs. The upfront mortgage insurance fee (MIP) is now 1.75 points, and annual premium 1.5 points with the minimum 3.5 percent down payment. It is slightly less for higher down payments. FHA at one time accounted for up to 60 percent of first-time homebuyers, but now it’s just 30 percent.

Will this change soon? It will depend mainly on better-paying jobs. And that depends on fuller employment, which seems to be the best way to boost incomes these days.

“The flourishing stock market the last few years has propelled sales in the higher price brackets, while sales for homes under $250,000 are 10 percent behind last year’s pace. Meanwhile, apartment rents are expected to rise 8 percent cumulatively over the next two years because of tight availability,” said Yun. “Solid income growth and a slight easing in underwriting standards are needed to encourage first-time buyer participation, especially as renting becomes less affordable.”

The PHSI in the Northeast jumped 8.8 percent to 86.3 in May, and is now 0.2 percent above a year ago. In the Midwest the index rose 6.3 percent to 105.4 in May, but is still 6.6 percent below May 2013. Pending home sales in the South advanced 4.4 percent to an index of 117.0 in May, and is 2.9 percent below a year ago. The index in the West rose 7.6 percent in May to 95.4, but remains 11.1 percent below May 2013.

Yun expects existing-homes sales to be down 2.8 percent this year to 4.95 million, compared to 5.1 million sales of existing homes in 2013. The national median existing-home price is projected to grow between 5 and 6 percent this year and in the range of 4 to 5 percent in 2015.

Harlan Green © 2014

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Austerity Must End With Q1 GDP Plunge

Posted on June 30, 2014 by Popular Economics Weekly

Popular Economics Weekly

The final Q1 2014 GDP growth estimate of minus (-2.9) percent, down from the second (-1) percent drop, was a shock for several reasons. Firstly, it means our domestic economy is still sputtering, five years after the end of the Great Recession. Secondly, it means it will take more than Janet Yellen’s accommodative Fed to boost economic growth to a sustainable level.

And lastly, austerity policies that have basically frozen economic growth since then have to end. By that we mean those policies that have lowered tax revenues and limited government spending for too long. They have literally been counter-productive, and hobbled economic growth.

gdp.jpg

Graph: Trading Economics

Average economic growth over the past 4 quarters has dipped to just 2 percent, mainly because Q1 personal consumption dipped to 1 percent from its initial 3.1 percent estimate. And inventories weren’t replenished, maybe due to the horrid winter. But government outlays also shrank, not due to the weather, contributing to the growth shrinkage.

depression

What should be done? More government investment in public works, for starters. It was New Deal government-funded programs that brought US out of the Great Depression by 1933. It only retrenched back into the Depression when Congress and FDR decided to balance the budget in 1937 by cutting back prematurely on government spending.

Growth came back quickly by 1939 with just a small increase in New Deal spending. Though it took WWII to complete the recovery when government had to spend what was necessary to win the war. The budget deficit wasn’t an issue—though it rose as high as 120 percent of GDP—because government debt was paid down quickly after WWII from rising consumer incomes and spending.

Today we do not have rising middle class incomes due to many causes, including globalization of the workforce, regulations that make restrict collective bargaining and make it easier to fire workers. So as during the Great Recession, government has to create those jobs that would lower the jobless rate and boost consumers’ incomes again.

The evidence that public works programs boost growth is plain for all to see. Even the 2009 American Reinvestment and Recovery Act (ARRA) stimulus created or saved up to 3 million jobs, according to the Congressional Budget Office.

The lack of public spending today is due to budget austerity—cutting government spending prematurely when the private sector isn’t yet prepared to spend—something that is afflicting European countries as well as US. It is preventing faster growth everywhere that such budget cutting policies have been enacted.

In fact, Europe plunged back into a second recession because its northern contingent led by Germany insisted on cutting the budgets of Greece, Spain, and Ireland. This reduced their revenues and increased their deficits, plunging them back into recession. So the only way they could compete in the euro zone was to lower workers’ incomes, further compounding the pain.

Austerity has happened in the US with a conflicted president and Congress that won’t utilize the $billions sitting in banks and on corporate balance sheets by either increasing their taxes, or borrowing more at record low interest rates. It is those who oppose higher taxation and government spending that is bringing US closer to 1937. Hence the debt ceiling debacle that downgraded US federal debt.

govt

Graph: Calculated Risk

And right now, it is specifically the lack of government spending (red bar on graph) on necessary public works that is holding by GDP growth. In other words, we are in the grip of those same Austerians that insist the cure is more pain for the heavily indebted, instead of creating more jobs that would pay down that debt by restoring growth and full employment.

The Fed has tried to putting more cash in the hands of investors to encourage them to invest in more productive capacity, which is finally boosting residential investment (blue bar on graph). But the looming end of QE3 by year end will end that support of lower Treasury and mortgage rates. So it is time for Congress and the Obama Administration to act, if we want to prevent a return to depression-era growth, as happened in 1937.

Harlan Green © 2014

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