What Is ‘New Normal’ U.S. Growth?

Posted on October 10, 2018 by Popular Economics Weekly

Popular Economics Weekly

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Graph: Seeking Alpha/BLS

There is a current debate whether the U.S. will escape the ‘new normal’ of slower economic growth since the Great Recession, when American households lost a collective $9 trillion in value and consumers cut back on their spending to make up for the losses.

It is part of the debate among economists whether the U.S. and other so-called ‘mature’ economies are locked into what is called secular stagnation, an era where markets can no longer expand enough to boost economic growth that benefits all segments of the population.

The answer, alas, is slower growth in the U.S. for the foreseeable future, unless the 80 percent of wage-earning consumers find a way to bring back their lost incomes that have barely kept up with inflation since the 1970s, or governments find a way to raise enough taxes to make up for the shortfall in household incomes; by funding more public sector benefits, such as increasing the social safety net and public investments in education, infrastructure, and basic research that increase future productivity.

Why have workers’ wages and household incomes remained stagnant for so long? There has been a sharp shift of incomes and wealth away from the working classes to rentiers, or the owners of capital and their managers.

There was a sharp decline in labor productivity since 2007, for the same reason. Along with the Great Recession, businesses invested even more of their profits to enhance their own stock prices (and CEO salaries), rather than in new equipment and factories that would expand labor’s productivity, which is the preferred way to boost workers’ standard of living.

Economists also postulate that economic growth is the sum of the growth rates of labor productivity and population—the working-age population, in particular. The working-age population began its decline as baby boomers began to retire in 2001, and another six million of those workers have elected not to return to work since the Great Recession.

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Graph: Seeking Alpha

The above graph illustrates that equation. When the worker population increased—particularly when women and baby boomers entered the workforce from the 1970s onward—the U.S. had 3 percent plus economic growth. But in 2001 the boomers began to retire and we have the current worker shortage.

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Graph: Wikipedia

Real vs. Potential GDP charts as above show the departure from what would be its potential—when GDP growth averaged 3.25 percent, historically. Consumer spending makes up roughly two-thirds of aggregate demand, which is the economic term for total dollars spent for goods and services that make up U.S. Gross Domestic Product. When its other elements—net exports, capital investments, and government expenditures—also decline, we have slower growth, which has been the case since 2007.

Today we have an even worse labor problem—the current White House is on a tear to cut back on immigration quotas by 50 percent and deport as many undocumented workers, as possible—including Dreamer children who have grown up in the U.S.—when only immigrants and their offspring will provide enough working age adults to make up for the loss of the baby boomer workforce.

Harlan Green © 2018

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Tuition-Free College Is Possible

Posted on October 8, 2018 by Popular Economics Weekly

ANSWERING THE KENNEDYS CALL

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Graph: ;MarketWatch

Yes, an excellent, tuition-free college education is possible. In fact, it’s become a movement supported by non-profit organizations, as well as cities and states that support their  institutions of higher learning with taxpayer monies. Nationally, the College Promise Campaign is making news with its message and outreach stated on its website, CollegePromise.org.

“The College Promise Campaign is a national, non-partisan initiative to build broad public support for funding the first two years of higher education for hard-working students, starting in America’s community colleges. We want the first two years of college to become as universal, free, and accessible as high school has been for nearly a century,” said College Promise on it website.

That’s a start. College students have borrowed some $1.5 trillion to date with an average debt load of $35,000 per student. This wasn’t always the case for public colleges and universities. Until the 1960s, taxpayers paid most of the cost for state-run higher education, such as at the University of California system of nine UC universities and the 23 California State college campuses that were created to take in all eligible students that weren’t accepted to the nine UC campuses.

The programs vary, from scholarships that pay for 2 years of community college, to grants and scholarships that pay for all four years. But many of those colleges and universities are in smaller, out of the way locations, where educational costs are cheaper, and said institutions are eager to lure students away from the major metropolitan centers.

The above MarketWatch graph shows the huge cost disparities between public and private colleges, and many studies confirm that a public college or university education breeds as much success on reaching student life goals as do private schools.

The College Promise Campaign, a clearinghouse and advocacy organization for free-college initiatives, counts more than 200 programs across the country offering some version of a promise program. But that is hardly enough, when most other developed countries offer a tuition-free higher education.

In fact, most EU and non-EU Nordic countries offer tuition-free college education to foreigners, as well as their own citizens. They can be found on the Top Universities website, and include France, Germany, Norway, Iceland, Finland, Denmark, and Sweden. Even South American countries, such as Argentina offer a tuition-free college education to foreign students.

These countries put the American educational system to shame. They seem to understand the importance of higher education in improving the productivity and prosperity of their citizens. What could be more important that educating our workforce in an ever-changing world, where a college degree becomes even more important?

Cornell University is the only major U.S. land-grant institution that is tuition-free for students from low and middle-income families earning less than $60,000 annually. Its description is heartening—if only other large, public universities would follow:

“Established in 1865, Cornell University is a privately endowed research university and a partner of the State University of New York. As the federal land-grant institution in New York State, Cornell has a responsibility—unique within the Ivy League—to make contributions in all fields of knowledge in a manner that prioritizes public engagement to help improve the quality of life in New York state, the nation, the world. Cornell is located in Ithaca, New York and enrolls nearly 22,000 students. With an acceptance rate of over 10%, Cornell is the Ivy League institution with the highest acceptance rate.”

We need more such education programs, if we are to compete in the modern world, needless to say.

Harlan Green © 2018

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A Weak Jobs Report?

Posted on October 5, 2018 by Popular Economics Weekly

Popular Economics Weekly

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Graph: MarketWatch

“The unemployment rate declined to 3.7 percent in September, and total nonfarm payroll employment increased by 134,000, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, in health care, and in transportation and warehousing.”

Why fewer jobs this month? A special mention of Hurricane by the BLS attempted to explain the low job formation number, said the survey. “Hurricane Florence affected parts of the East Coast during the September reference periods for the establishment and household surveys. Response rates for the two surveys were within normal ranges.”

It is possible the east coast hurricane affected Leisure and hospitality and Retail trade, which lost -37,000 jobs cumulatively. White-collar firms added 54,000 job and health-care providers filled 26,000 positions. Builders hired 23,000 workers and manufacturers 18,000.Pundits and economists are saying this happened during prior bad weather episodes as well.

“We have seen this time and time again after big hurricanes (last September being a very good example after Hurricane Harvey, when payrolls fell 33K in the initial print),” said Thomas Simons, senior money market economist, Jefferies LLC as cited by MarketWatch. “So, ignore the weakness in payrolls.”

A lack of skilled workers is holding back more job gains, particularly in construction. The number of people working in construction was 315,000 higher compared to a year earlier. But there were 273,000 open construction jobs at the end of July, according to a separate Labor Department report. And the pay is better, with average hourly wages now $30.18 per hour vs. $27.24 for all hourly workers.

The smaller Household Data survey that calculates the unemployment rate was more upbeat. “The unemployment rate declined by 0.2 percentage point to 3.7 percent in September, and the number of unemployed persons decreased by 270,000 to 6.0 million. The unemployment rate and the number of unemployed persons declined by 0.5 percentage points and 795,000, respectively, over the year,” per the BLS.

We could be reaching the lower limits of the unemployment rate, now at 3.7 percent, in other words, the lowest in 48 years. This could in itself prevent further GDP growth as hiring stagnates and more than 6 million job opening go unfilled, per U.S. Labor’s JOLTS report.

“The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.4 million over the month; these individuals accounted for 22.9 percent of the unemployed. In September, the labor force participation rate remained at 62.7 percent, and the employment-population ratio, at 60.4 percent, was little changed,” said the BLS.

“The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 263,000 to 4.6 million in September. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs.

There will also be those workers either unable or unwilling to return to work, in part because of our aging workforce. The baby boomers are retiring en masse, and the native-born U.S. population isn’t growing fast enough to replace them. So it will be up to newly arrived immigrants or the children of immigrants to continue economic growth, as I said in my last blog.

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The current administration seems to know very little of basic economics, if they don’t understand this basic fact—economic growth mirrors population growth, for the most part. Labor productivity is the other part of the economic equation for GDP growth, but labor productivity has been declining steadily since 2000, mostly because corporations have used their record profits for increased stock buybacks and stockholder dividends rather than boosting labor productivity—even after the latest corporate tax cuts.

This is not a formula for the prosperity of future generations.

Harlan Green © 2018

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Strong Employment Report Due Tomorrow?

Posted on October 4, 2018 by Popular Economics Weekly

Financial FAQs

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Graph: Econoday

ADP, or Automatic Data Processing, predicts 230,000 private payroll jobs could be created in September per tomorrow’s U.S. unemployment report. The reason is both the manufacturing and non-manufacturing (service) sectors reported strong hiring in their ISM indexes, which are surveys of supply managers in those industries, and where indexes above 50 indicate expansion in their sectors.

Led by a record high in employment and a 14-year high in business activity, the Institute for Supply Management’s non-manufacturing index of business activity jumped 4.5 points to 65.2. This is one of four components of the composite with the others also consistent with acceleration: new orders up 1.2 points to 61.6, supplier deliveries lengthening by 1.0 point to 57.0, and employment up 5.7 points to 62.4 in a reading. It is the strongest result yet for the composite which was established in 2008, said Econoday. 

And an exceptionally strong ISM manufacturing index came in at 59.8 for September. New orders slowed more than 3 points but remain very strong, at 61.8 and with export orders also strong at 56.0.

“Comments from the panel reflect continued expanding business strength,” said Timothy R. Fiore, Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee. “Demand remains strong, with the New Orders Index at 60 percent or above for the 17th straight month, and the Customers’ Inventories Index remaining low. The Backlog of Orders Index continued to expand, but at lower levels compared to the previous month. Consumption improved, with production and employment continuing to expand, at higher levels compared to August, despite shortages in labor and materials.”

Also good news was the continuing expansion in factory orders, up 2.3 percent; though mostly in durable goods such as aircraft, motor vehicles and ships. Commercial aircraft orders surged 69 percent with defense aircraft up 17 percent. But excluding these as well as a jump in ships & boats and a 1.0 percent rise in motor vehicles, factory orders in August managed only a 0.1 percent gain, said the report.

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Graph: Econoday

The question becomes will this strong demand and consequent economic growth continue? Fed Chairman Jerome Powell said it can continue for several years. But he also said the Fed is on track to continue raising interest rates through next year, at least. Powell said the U.S. central bank wants to raise rates to a “neutral” level that neither boosts nor restrains growth. The level of short-term rates is still far away from neutral, he said at a recent Atlantic Magazine conference.

But what, exactly, is a “neutral” rate? The benchmark for most fixed rates is the 10-year bond yield, now at 3.19 percent and rising. In the aftermath of the Great Recession it only dropped below 3 percent with the Fed’s quantitative easing programs that purchased mortgage-backed and Treasury securities.

This means interest rates could rise another one percent now that the Fed has ceased QE and is selling those securities back into the markets. Higher rates could slow housing sales with the 30-year conforming fixed rate already at 4.375 to 4.75 percent for a one point origination fee in California. Housing sales have already slowed with fewer entry-level homes being built, so that California has a one million unit housing shortfall.

A “neutral” interest rate is the rate at which the supply and demand for goods and services is in balance, which also means a top in the markets from which GDP growth will ultimately slow. That may seem common sense, but in fact the Fed has historically stopped raising their rates only when bear markets and recessions have begun.

I agree with the Fed Chair that short-term rates are still below neutral, but no more than perhaps one percent, as I said.  So look for 3 to 4 more Fed rate increases before we ‘crest’ this business cycle and begin the inevitable downturn. 

Harlan Green © 2018

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America’s Concentration Camps for Children

Posted on October 3, 2018 by Popular Economics Weekly

ANSWERING THE KENNEDYS CALL

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NYTimes.com

There should no longer be any doubt that the Trump administration is pursuing policies last used in Nazi Germany—concentration camps that now house up to 13,000 young Hispanic refugees—mostly unaccompanied minors who are seeking asylum in America.

To deal with the surging shelter populations, which have hovered near 90 percent of capacity since May, according to the New York Times, mass reshuffling is underway and shows no signs of slowing. Hundreds of children are being shipped from shelters to Tornillo in West Texas each week—mostly in the middle of the night to escape publicity–totaling more than 1,600 so far.

“Roughly 100 shelters that have, until now, been the main location for housing detained migrant children are licensed and monitored by state child welfare authorities, who impose requirements on safety and education as well as staff hiring and training,” said the NYTimes.

“The tent city in Tornillo, on the other hand, is unregulated, except for guidelines created by the Department of Health and Human Services. For example, schooling is not required there, as it is in regular migrant children shelters.

“The number of detained migrant children has spiked even though monthly border crossings have remained relatively unchanged, in part because harsh rhetoric and policies introduced by the Trump administration have made it harder to place children with sponsors.”

Does the Trump administration have no shame? What made America great is the fact that we are a land of immigrants, yet President Trump and his white-nationalist supporters want to restrict immigration to 50 percent of what it was historically—“to more like those from Norway,” he has said.

“Traditionally, most sponsors have been undocumented immigrants themselves, and have feared jeopardizing their own ability to remain in the country by stepping forward to claim a child. The risk increased in June, when federal authorities announced that potential sponsors and other adult members of their households would have to submit fingerprints, and that the data would be shared with immigration authorities.”

There is a reason America and Americans have always welcomed immigrants. America has been a nation whose innovation and new industries have outdistanced its labor workforce, historically, hence been always been in need of a new influx of workers.

For most of the past half-century, baby boomers — those born after World War Two and before 1965 — have been the main driver of the nation’s expanding workforce, but now that they’re heading into retirement only two groups of workers are projected to grow over the next two decades: immigrants and those whose parents are first-generation immigrants, a new report by the Pew Research Center, a nonprofit think tank in Washington, D.C., concluded. “The most important component of the growth in the working-age population over the next two decades will be the arrival of future immigrants,” it said.

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Graph: PEW

Which is why it is so important to find a path to citizenship for the 11 million undocumented workers that fulfill jobs very few America citizens will take. And there have been several bills to give a path to those undocumented workers employed in agriculture, construction, and the hospitality industries. But, alas, congress has not been able to pass any of them.

Roughly 36 percent of plasterers and stucco masons were undocumented workers in 2014, the highest share of any occupation, according to a report released recently by the Pew Center. Some 30 percent of miscellaneous agricultural workers, 31 percent of drywall and ceiling tile installers and 28 percent of graders and sorters of agricultural products and 23 percent of sewing machine operators were also undocumented. Also 12 percent of miscellaneous personal appearance workers — manicurists and pedicurists and makeup artists — were undocumented.

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Chart: PEW

More than 43.7 million immigrants resided in the United States in 2016, accounting for 13.5 percent of the total U.S. population of 323.1 million, according to American Community Survey (ACS) data.

And a recent CNBC report mentioned America’s chronic labor shortages, as the ongoing recovery from the Great Recession is now highlighting. “A report Thursday from ADP and Moody’s Analytics cast an even sharper light on what is becoming one of the most important economic stories of 2018: the difficulty employers are having in finding qualified employees to fill a record 6.7 million job openings,” said CNBC.

But chronic labor shortages have always been the case, and are part of our history. Trump’s, racist, anti-immigration policies are only making matters worse, not to speak of what can only be called his de-facto ethnic cleansing of non-Eurocentric populations.

Harlan Green © 2018

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Housing Supply Still Too Low

Posted on October 1, 2018 by Popular Economics Weekly

The Mortgage Corner

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Graph: Econoday

Most of the construction activity is in the commercial sector, at the moment, though sales of newly-constructed homes rose 3.5 percent compared to July. The pace of new-home sales in August was 12.7 percent higher than a year ago. But large revisions to prior months were all downward, a reminder that the housing recovery still can’t satisfy the demand for single-family housing, in particular.

Economists at Freddie Mac that analyzed the pace of new housing construction found that years of underbuilding has left the U.S. with a cumulative shortfall — that is, supply compared to historical averages — of 4.6 million housing units in the years since 2000. That number is especially stark considering that builders constructed a 1 million unit surplus of homes in the bubble years of the last decade.

The median selling price in August was $320,200, 1.9 percent higher than year-ago prices. Year to date, sales were 6.9 percent higher than the same period last year. The year-to-date comparison has declined over the course of the year, a sign of flagging momentum, as higher mortgage rates and home prices are discouraging some buyers and pushing up the supply of available homes to 6.1 months at the current sales rate.

Commercial construction held most of the action. “In August, the estimated seasonally adjusted annual rate of public construction spending was $316.7 billion,” said the Census Bureau, “2.0 percent (±2.8 percent) above the revised July estimate of $310.5 billion, with much of it in education, a good sign that states are spending on their public infrastructure.”

Strongest in the report was highways & streets, up 1.7 percent in the month. Educational spending was also strong with a 1.0 percent gain. Government spending was also very active in August, up 5.9 percent at the Federal level and up 1.7 percent for state & local, reported the Census Bureau.

The Fed made good on its promise to raise their overnight rate one-quarter percent to 2.25 percent, boosting the Prime Rate used in most revolving credit to 5.25 percent. This hasn’t dampened consumer enthusiasm yet, as consumer spending is rising at 3.8 percent in the latest revision to Q2 GDP growth, which held at 4.2 percent. Maybe it’s one last holiday fling before reality and higher inflation set in from the tariff wars?

Fed Chair Powell said in his announcement after the latest FOMC meeting: “I see the current path of gradually raising interest rates as the FOMC’s approach to taking seriously both of these risks. While the unemployment rate is below the Committee’s estimate of the longer-run natural rate, estimates of this rate are quite uncertain. The same is true of estimates of the neutral interest rate. We therefore refer to many indicators (my bold) when judging the degree of slack in the economy or the degree of accommodation in the current policy stance. We are also aware that, over time, inflation has become much less responsive to changes in resource utilization.”

It’s good to see commercial construction making a comeback, even with congress seemingly unable to pay its fair share of infrastructure spending that will be needed just to upgrade the federal highway system, as well as our energy grid that is being seriously threatened by Russian cyberattacks, according to our spy agencies.

Housing starts are attempting to catch up, as starts ran at a 1.282 million seasonally adjusted annual rate in August, the Commerce Department said Wednesday. That was 9.2 percent higher than July’s pace, and 9.4 percent higher than a year ago. But that still won’t be enough to satisfy demand.

Stephen Stanley, chief economist at Amherst Pierpont, Securities interviewed by MarketWatch’s Andria Riquier, was more blunt: “To be clear, there is fundamental softness in housing. Industry sources suggest that the relentless torrid home price appreciation in recent years has finally reached a point that numerous prospective buyers are balking. In addition, high-end homes in high-tax states are starting to see some effect from tax law changes implemented in December. On top of that, new home construction has been impacted by a run-up in materials costs this year, squeezing builders in a vice between rising costs and a diminishing appetite of prospective buyers to pay up.”

Add to that we will be soon entering the tenth year of this boom cycle, which would put it on a par with the 1991 to 2001 boom years that paid down our national debt. If only that were the case today, instead of the surging federal deficit and debt that is squeezing future public sector investments and growth.

Harlan Green © 2018

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

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How Severe Will Be The Next Recession?

Posted on September 27, 2018 by Popular Economics Weekly

Financial FAQs

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Graph: TradingEconomics.com

Why are we discussing the possibility of a severe recession when GDP growth is expected to average 3 percent this year, the highest annual average growth rate in several years? Because there is too much federal debt, to put it bluntly.

The very unpopular, all-Republican tax cuts of December, 2017 will add $1.5 trillion to the national debt over 10 years, while cutting approximately $1 trillion in Medicaid, food stamp (SNAP) and other aid to lower-income citizens.

“By 2028, America’s government debt burden could explode from this year’s $15.5 trillion to a staggering $33 trillion—more than 20 percent bigger than it would have been had Trump’s agenda not passed,” said a recent Forbes article. “At that point, interest payments would absorb more than $1 in $5 of federal revenue, crippling the government’s capacity to bolster the economy, and constraining the private sector too.”

Contrary to the claims of the President and his supporters, the U.S. can’t grow fast enough to shed this burden. Trump’s agenda on immigration and trade is more likely to stunt that growth, said Forbes. “This is almost like climate change,” remarked Mark Zandi, chief economist at Moody’s Analytics. “It doesn’t do you in this year, or next year, but you’ll see the ill effects in a day of reckoning.”

In addition, Republicans in control of congress left no funds for spending on badly needed infrastructure repairs and upgrades, the spending that would actually increase overall productivity and future economic growth. Economists calculate such spending would add $1.25 to $1.50 to the GDP for every dollar spent on improving our roads, bridges, electrical grid, airports; not to speak of better water and sewer treatment facilities.

And the Federal Reserve announced today at the end of their FOMC meeting that they are raising interest rates one quarter percent for the third time this year and signaled it will raise the cost of borrowing again in December, ending the long period of accommodative credit policies enacted since the end of the Great Recession. This will constrict credit and reduce consumer demand by raising the cost of everyday borrowing on credit cards and installment loans that are based on short-term rates.

They are doing this at the wrong time with inflation still low, personal incomes barely increasing, and no discernable benefits for most consumers from the tax cuts. The Fed on Wednesday increased its target for its benchmark lending rate to a range of 2 percent to 2.25 percent. Rates are now at their highest level since shortly after the bankruptcy of Lehman Brothers in the fall of 2008.

It will probably be those latest tax cuts and rising debt load that sinks the current 9-year recovery, just as the GW Bush tax cuts erased four years of budget surpluses at the end of the longest growth cycle ever—from 1991-2001—contributing to the Great Recession and record federal debt of today.

This is while a larger federal budget is about to be signed by President Trump with no new taxes enacted to pay for it. It is not how to run a successful business, or country.

Harlan Green © 2018

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Was There Ever A Soft Landing?

Posted on September 25, 2018 by Popular Economics Weekly

Popular Economics Weekly

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Graph: MarketWatch/R Shiller

“The Federal Reserve has a chance to do something no U.S. central bank has done before, if it can slow the economy and raise the unemployment rate without pushing the economy into recession,” said Peter Hooper, chief economist at Deutsche Bank Securities in a MarketWatch interview.

“The Powell Fed can make history by engineering a soft landing from below,” Hooper said in the interview.

Good luck, is my response, as no Fed has engineered a soft landing in the past. A soft landing is when US economic growth gradually slows rather than crashes at the start of a recession, as evidenced by the five recessions experienced just since 1981 in which homeowners and financial markets suffered great losses.

Fed Chairman Jerome Powell was stating his so-called “Powell Doctrine” at the annual Jackson Hole symposium of leading economists. He said the Fed should respond to actual market conditions—for instance, whether inflation is too high or too low—rather than macroeconomic formulas that attempt to predict future downturns, such as formulas economists use to determine a “neutral rate of inflation.”

He said in his speech: “I see the current path of gradually raising interest rates as the FOMC’s approach to taking seriously both of these risks. While the unemployment rate is below the Committee’s estimate of the longer-run natural rate, estimates of this rate are quite uncertain. The same is true of estimates of the neutral interest rate. We therefore refer to many indicators (my bold) when judging the degree of slack in the economy or the degree of accommodation in the current policy stance. We are also aware that, over time, inflation has become much less responsive to changes in resource utilization.”

Nobel economist Robert Shiller, who won his Nobel Prize studying individual and group behavior in financial markets, is already warning about an irrational exuberance being fed by record corporate profits which could lead to a so-called “hard landing” of the economy. Excessive profits are just one of the indicators Chairman Powell says the Fed should focus on.

Corporations have actually been reporting record profits for years—in 2014 it was the highest as a percentage of GDP, historically—and corporate profits are being further supercharged by the huge reduction in the corporate capital gains tax enacted in December 2017.

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Graph: Econoday

“Apparently, investors believe that this boom is going to last, or at least that other investors think it should last, which is why they are bidding up stock prices in a dramatic response to the earnings increase,” said Professor Shiller.

“The reason for this confidence is hard to pin down,” continued Shiller, “but it must be rooted in the public’s loss of healthy skepticism about corporate earnings, together with an absence of popular narratives that tie the increase in earnings to transient factors. Talk of an expanding trade war and other possible actions by a volatile U.S. president just does not seem strongly linked to talk of earnings forecasts — at least not yet.”

Irrational over-exuberance has been a problem in the past for investors, and was highlighted by then Fed Chairman Greenspan in his famous 1996 speech. He was right, but the actual downturn happened four years later with the dot-com, high tech recession of 2000.

So even with the best of information and intentions, the Fed will find it hard to predict when and if a soft landing is possible.

Harlan Green © 2018

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Corporate Governance Reform—Women Make A Difference

Posted on September 24, 2018 by Popular Economics Weekly

ANSWERING THE KENNEDYS CALL

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NYTimes.com

California State Senator Hannah-Beth Jackson’s upcoming Senate Bill SB826 on reforming corporate governance will make corporations more responsive to the needs of the societies in which they operate by requiring more women to serve on their boards.

This is heady stuff, as research has shown that women on a corporate board are more likely to “create a sustainable future” by, among other things, instituting strong governance structures with a high level of transparency.

A 2012 UC Berkeley Hass School of Business study entitled, Women Create a Sustainable Future, to list just a few of the benefits of adding more women to corporate boards, are more likely to be:

· Companies that proactively invest in renewable power generation and related services.

· Companies that proactively address the environmental risks embedded in their financing decisions.

· Companies that provide strong employment benefits and performance incentives and offer employee engagement and professional development programs.

· Companies that offer products with an improved nutritional or healthier profile and have sought credible verification for its healthier status.

“Women and sustainability are two sides of the same coin …. Corporations build better societies if they have balanced boards,” said Halla Tomadottir, executive chair and co-founder of Audur Capital in Iceland, interviewed in the study. Ms. Tomadottir was on the all-female board of the only Icelandic bank that didn’t go into bankruptcy in 2008 during the Great Recession.

Perhaps her most famous quote, made in the Michael Moore documentary, Where to Invade Next? was “One woman on a board is a token, two women a minority. It takes three women to make a difference.” (sic)

“Take for example, a company like Nestlé,” says the Hass study, “which has recently turned its focus toward creating shared value with its product offerings in three areas: nutrition, water, and rural development. Nestlé uses science-based solutions to improve the quality of life through food and diet. “This type of social initiative is well aligned with corporate sustainability for Nestlé. Our research findings to date suggest that having more women corporate directors is correlated with these types of strategies and outcomes. Nestlé’s Board of Directors has three women.”

Senator Jackson’s bill, “no later than the close of the 2019 calendar year, would require a domestic general corporation or foreign corporation that is a publicly held corporation, as defined, whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California to have a minimum of one female, as defined, on its board of directors, as specified. No later than the close of the 2021 calendar year, the bill would increase that required minimum number to 2 female directors if the corporation has 5 directors or to 3 female directors if the corporation has 6 or more directors.”

The behavior of corporations and corporate boards has come under scrutiny particularly since the December 2017 massive corporate tax cuts that its supporters touted would repatriate some of the $3 trillion in overseas assets, as well as raise the incomes of its employees.

But that hasn’t happened to date, as the focus of corporations’ increased profits since then have been to return the windfall to investors and corporate CEOs—either by buying back more shares, going private, or indulging in Wall Street’s merger and acquisitions’ game, rather than creating sustainable programs that would profit society at large as well as themselves.

In a 1970 Times magazine article, the free market economist Milton Friedman argued that businesses’ sole purpose is to generate profit for shareholders. Moreover, he maintained, companies that did adopt “responsible” attitudes would be faced with more binding constraints than companies that did not, rendering them less competitive.

“There is one and only one social responsibility of business — to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” -Milton Friedman, New York Times Magazine, September 1970.

How the world has changed since then! We now know that ignoring environmental and social issues can be bad for business. Companies that pollute their local communities risk poisoning their customers. Ignoring the state of the local school system can mean depleting the pool of qualified workers. Exploiting workers risks higher turnover and training costs, not to mention greater difficultly in attracting the most qualified candidates.

As part of its findings, SB826 provides some impressive supportive data about the benefits of board gender diversity, including the following:

“(1) A 2017 study by MSCI found that United States’ companies that began the five-year period from 2011 to 2016 with three or more female directors reported earnings per share that were 45 percent higher than those companies with no female directors at the beginning of the period.

(2) In 2014, Credit Suisse found that companies with at least one woman on the board had an average return on equity (ROE) of 12.2 percent, compared to 10.1 percent for companies with no female directors. Additionally, the price-to-book value of these firms was greater for those with women on their boards: 2.4 times the value in comparison to 1.8 times the value for zero-women boards.

(3) Credit Suisse conducted a six-year global research study from 2006 to 2012, with more than 2,000 companies worldwide, showing that women on boards improve business performance for key metrics, including stock performance. For companies with a market capitalization of more than $10 billion, those with women directors on boards outperformed shares of comparable businesses with all-male boards by 26 percent.”

The business world can no longer afford to ignore what it takes to create a sustainable future, a future in which our children can enjoy the fruits of our labor. How can we otherwise enjoy a world growing more populous with limited resources and a warming planet?

Harlan Green © 2018

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

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Homeowners Preserve Rising Home Equity

Posted on September 20, 2018 by Popular Economics Weekly

The Mortgage Corner

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Graph: MarketWatch/Black Knight

American homeowners have amassed a record $6 trillion in equity in their properties, according to a study by real estate data firm Black Knight, a figure boosted by surging home prices and a trend of owners staying put longer. But rising interest rates and caution resulting from the housing troubles of a decade ago are limiting how much of that equity is getting tapped.

“As the second quarter came to a close, the total amount of tappable equity available to homeowners with mortgages surpassed the $6 trillion mark for the first time in history,” said Ben Graboske, executive vice president of Black Knight’s Data & Analytics division. “There is now $636 billion more tappable equity available than at the start of 2018, and nearly three times as much compared to the bottom of the market in 2012.”

Homeowners are staying in their homes longer in part because of fears of another housing bust that was part of the Great Recession, in other words. In 2016 and 2017 sellers had stayed in their homes a median 10 years, up from a median of six years all the way back to 1985. This is also because there are fewer homes to buy as housing inventories have shrunk drastically.

Inventory of starter and tradeup homes were down 12-13 percent compared to a year ago, one of the biggest drops in years, Trulia chief economist Ralph McLaughlin said. McLaughlin is hoping that rising home prices will entice more owners to sell, even though mortgage rates have risen from their low of 3.5 percent to 4.25 percent for a 30-year fixed conforming loan with a 1 point origination fee. But that is still historically low, when fixed mortgage rates were in the 6 percent range just a few years ago, and even as high as 16 percent in the mid-1980s.

Existing-home sales are still strong, however, according to the National Association of Realtors. Total existing-home sales, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, did not change from July and remained at a seasonally adjusted rate of 5.34 million in August. Sales are now down 1.5 percent from a year ago (5.42 million in August 2017).  

Lawrence Yun, NAR chief economist, says the decline in existing home sales appears to have hit a plateau with robust regional sales. “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum,” he said. “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.”

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Graph: Calculated Risk

Higher interest rates aren’t stopping new homes from being built, either. August Housing starts jumped 9.2 percent to a 1.282 million annualized rate which is well above July’s upwardly revised 1.174 million rate, according to the U.S. Census Bureau. But permits, which are the forward looking component of the report, fell 5.7 percent to a 1.229 million rate.

Looking at starts, multi-family construction that has slowed 29 percent to a 406,000 rate for year-on-year growth, which had been in the negative column, was up 38 percent. Single-family homes, which are the more important of the readings, rose 1.9 percent to an 876,000 rate that, however, is fractionally lower than a year ago, down 0.2 percent.

Where do interest rates go from here? The Conference Board has predicted economic growth could average 3 percent or higher for the rest of this year, which will continue to boost interest rates somewhat. Their leading economic index rose 0.4 percent in August following even stronger gains in the prior two months, the Conference Board said Thursday. The LEI is a gauge of 10 economic indicators meant to signal peaks and valleys in the business cycle and the broader economy.

But our take is there just isn’t enough consumer demand to push rates much higher. Consumers have been paying down their overall debt as a percentage of household income, as well as borrowing less. It is corporations that loaded up on easy money the past several years and now have to worry about paying it back if there is a downturn.

Harlan Green © 2018

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

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