Retail Sales, Consumers Resume Spending Ways For How Long?

Posted on April 21, 2018 by Popular Economics Weekly

Financial FAQs

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Graph: Econoday

“Autos are the big story in March,” said Econoday, “jumping 2.0 percent and finally shaking off the long lull following the replacement surge of September’s hurricanes. Excluding autos, retail sales managed only a 0.2 percent gain following only 0.2 percent and 0.1 percent gains in the prior two months in results that do not point to much consumer strength.”

Will April spending improve with the vaunted tax cuts that are putting more money in consumers’ pockets, or will consumers build up their savings, still at record lows of late? So far, just one-third of the tax cuts are benefiting consumers, while two-thirds are going into stock buybacks or CEO pay. That is what was projected by early analyses of its benefits.

Most consumer spending shows up in department stores which are having a very hard time, falling 0.3 percent after February’s 0.9 percent plunge. Clothing stores also posted a big decline in the month, at 0.8 percent, as did building materials at minus 0.6 percent and sporting goods at 1.8 percent.

If consumers don’t receive more of the vaunted tax savings, the economy won’t grow faster than the current 2.5 percent annual average, while the budget deficit could soar to $1B in the latest CBO forecast.

This means corporations have to use more of their record profits to boost employees’ pay, rather than CEO salaries and stock prices if we want to pay down any of that debt, as well, since consumers power two-thirds of economic activity.

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One major impediment to future growth will be interest rates—especially short-term rates—if they continue to rise faster than they should in this low inflation environment. The so-called yield curve—the difference between long and short-term interest rates—is flattening, which will restrict borrowing if it continues. It really means short-term rates that the Fed sets are rising faster than long-term rates, which key more to inflation expectations.

And in times such as these, with all signs pointing to future uncertainty in economic (trade wars) and geopolitical (Putin, et. al.) policies, consumers can become even more cautious in their spending ways, which would also defeat the purpose of the Republicans’ tax cuts.

Harlan Green © 2018

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The Results of Our Record Income Inequality

Posted on April 10, 2018 by Popular Economics Weekly

Financial FAQs

We know the results of trickle-down economic theory that says lower taxes and government regulations are supposed to lift all boats, as epitomized in Republicans’ latest tax bill. After the ninth year of this recovery, just 10 percent of American household benefited at all from subsequent economic growth.

In spite of the huge stock market recovery that has the S&P 500 index of largest US corporations up more than 25 percent since 2009, only the top 10 percent of income earners increased their net worth.

The busted housing bubble was a culprit, but also labor practices that have literally either outlawed collective bargaining for many workers, or enacted so called right-to-work laws that enable union members not to pay dues, even if they have benefited from union bargaining.

The result is that 25 percent of American workers earn less than poverty-level wages of $24,000 for a family of four, and household incomes haven’t risen faster than inflation since the 1980s. The national minimum wage hasn’t risen above $7.25 per hour since 2009, either.

Princeton’s Nobel laureate Angus Deaton has studied poverty and its causes for most of his professional live.

He said in a recent Project Syndicate article, a progressive journal: “Making matters worse”, he said, “more than 20 percent of workers are now bound by non-compete clauses, which reduce workers’ bargaining power—and thus their wages. Similarly, 28 US states have now enacted “right-to-work” laws, which forbid collective-bargaining arrangements that would require workers either to join unions or pay union dues. As a result, disputes between businesses and consumers or workers are increasingly settled out of court through arbitration—a process that is overwhelmingly favorable to businesses.”

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Graph: Marketwatch

This is while corporate America is expected to post its best quarter of profit growth in seven years, according to Marketwatch’s Ryan Vlastelica. “For the poorest American families, in the lowest fifth of wealth, their net worth shed 29 percent over that period. Drops of at least 20 percent were also seen in every income percentile except for those in the 80-89.9 percentile, where the decline was a more modest 5 percent. The wealthiest decile, however, saw a jump of 27 percent, as seen in the above chart.”

As I have covered in countless past columns, America actually ranks among the worst countries when it comes to income inequality, based on its Gini coefficient, a measure of the wealth distribution of a country’s residents. The coefficient for the U.S. is slightly less than 0.40, which puts it roughly even with Turkey and Botswana, and more unequal than nations as Israel, Greece, Spain, and Germany. Iceland, the most equal society measured by Deutsche Bank, has a coefficient below 0.25.

There are many remedies to this situation. One has but to look at past history. Our fastest growth period was during the 1950s and 1960s, when the top income-earners’ tax bracket was 92 percent, unions were strong, and corporate CEOs earned 25 times what their employees earned. This built both the physical and digital infrastructure that gave us the record prosperity of that era. We also developed the Internet, and landed on the Moon.

That tax structure was a way of redistributing income where it would do the most public good.  Today, corporate CEOs in the largest corporations earn on average 300 times what their employees earn. We enrich the already wealthy, in other words, and neglect to plant the seed corn that would create future prosperity.

Harlan Green © 2018

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Wintry Unemployment Report Chills Markets

Posted on April 6, 2018 by Popular Economics Weekly

Popular Economics Weekly

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Graph: Marketwatch

The smallest number of nonfarm payroll jobs since last year were created in March—103,000 according to the Bureau of Labor Statistics. But it’s still pushing wages higher—to 2.7 percent annually, and the working population participation rate to 63 percent, which is finally approaching the long term 64 percent average.

It could be wintry weather has suppressed some hiring, but what looks like a full-blown trade war might also be affecting the labor market.  February and January have been revised with a net of minus 50,000 jobs. And the first quarter average of 202,000 is a bit below the fourth quarter’s 221,000, reported the Labor Department. The breakdown for March shows another very strong showing for manufacturing, up 22,000, and with professional & business services, a component that tracks labor demand, rising a strong 33,000.

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Graph: Econoday

Manufacturing activity remains strong, with the Institute of Supply Management’s March index at 59.3 percent and other indicators; such as new orders, production and supply deliveries; above 60 percent. Any number above 50 percent means a majority of the supply managers polled see an expansion in their manufacturing activity.

“This indicates strong growth in manufacturing for the 19th consecutive month, led by continued expansion in new orders, production activity, employment and inventories, with suppliers continuing to struggle delivering to demand,” said Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee.

One indicator of future manufacturing troubles was that input prices are soaring with the new tariffs on aluminum and steel—78.1 percent of the managers reported higher prices. It looks like President Trump wants a full-blown trade war to win concessions from China, the EU and other trading partners, so beware of this danger to future manufacturing jobs.

And President Trump is doubling down on the $50 billion he previously announced of China tariffs with the request for his trade negotiator to draw up a list affecting another $100 billion in Chinese goods.

“Notwithstanding these actions,” said Trump on announcing the additional tariffs, “the United States is still prepared to have discussions in further support of our commitment to achieving free, fair, and reciprocal trade and to protect the technology and intellectual property of American companies and American people. Trade barriers must be taken down to enhance economic growth in America and around the world. I am committed to enabling American companies and workers to compete on a level playing field around the world, and I will never allow unfair trade practices to undermine American interests.”

We can therefore say future employment prospects will be uncertain, to say the least.

Harlan Green © 2018

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Housing Prices Rising Too Fast

Posted on April 4, 2018 by Popular Economics Weekly

The Mortgage Corner

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Graph: Marketwatch

Housing prices are rising too fast to be sustainable over the long term says CoreLogic, a leading global property information, analytics provider. So buyers should be aware such unsustainable price rises could lead us into another housing bubble.

CoreLogic just released its Home Price Index (HPI™) and HPI Forecast™ for February 2018, which shows home prices rose both year over year and month over month. Prices increased nationally year over year by 6.7 percent — from February 2017 to February 2018 — and on a month-over-month basis, home prices increased by a very large 1 percent in February 2018 — compared with January 2018 — according to the CoreLogic HPI.

“A number of western states have had hot housing markets,” said Dr. Frank Nothaft, chief economist for CoreLogic. “Idaho, Nevada, Utah and Washington all had home prices up more than 11 percent over the last year. With the recent rise in mortgage rates, affordability has fallen sharply in these states. We expect home-price growth to slow over the next 12 months, dropping to 5 to 6 percent in Idaho, Utah and Washington, and slowing to 9.6 percent in Nevada.”

Then why the expectation for a slowdown in price rises over the next year? Disposable personal income (after taxes) is rising just 2.5 percent per year, which means fewer households are even eligible to buy or refinance a home in this market. Corelogic is therefore signaling that some housing markets are becoming overvalued, which means values are rising10 percent higher than the “long-term sustainable level.”

According to CoreLogic Market Condition Indicators (MCI) data, an analysis of housing values in the country’s 100 largest metropolitan areas based on housing stock, 34 percent of metropolitan areas have an overvalued housing market as of February 2018. The MCI analysis categorizes home prices in individual markets as undervalued, at value or overvalued, by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals (such as disposable income). 

And the Federal Reserve wants to continue to raise their interest rates. The Fed raised their overnight rate to between 1.5 to 1.75 percent last Wednesday. This is with rising new and existing-home sales, which is keeping inventory levels low. There is just a 3.2 months’ supply of existing homes for sale.

But the construction of single-family homes has picked up, which should ease some of the housing crunch. Econoday and the Commerce Department reported construction spending has been soft of late in the commercial sector, inching only 0.1 percent higher in February after posting no change in January, but gains are being posted for new single-family homes, up 0.9 percent for a second straight month and a year-on-year February increase of 9.5 percent. Multi-family homes, where spending has been weak, bounced back a monthly 1.2 percent for a yearly 0.9 percent increase.

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Graph: Calculated Risk

In sum, the future of housing sales may be determined by household debt loads. Current debt loads are still low while still recovering from the Great Recession. The blue line in the above graph that dates back to 1980 is mortgage debt as a percentage of personal disposable income, and it has been declining, whereas the yellow line of other consumer debt, such as credit card and installment loans, has been rising. That may reflect the low mortgage rates, but also fewer household able to qualify for mortgages, even with still record-low interest rates.

Harlan Green © 2018

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Q4 GDP Growth Up 2.9% Q/Q

Posted on April 2, 2018 by Popular Economics Weekly

Financial FAQs

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Graph: Econoday

Fourth quarter Gross Domestic Product, the total value of the country’s production of purchases of domestically-produced goods and services by individuals, businesses, foreigners and government entities, rose to 2.9 percent from 2.6 percent in its third and final revision by the Commerce Department, finishing off 2017 with a bang and raising total 2017 GDP growth to 2.6 percent.

It was mostly consumer spending, up 4 percent, but personal incomes are rising faster as well, which will boost spending and continued good growth in 2018. This is because Real Disposable Income (less inflation and taxes) rose 0.4 percent pushing the annual increase to more than 2 percent.

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Graph: Econoday

“The strongest news in the report comes from the wages & salaries component of personal income which posted a fourth straight sharp gain,” reports Econoday, “at 0.5 percent. This helped total income which rose 0.4 percent for a third straight month and also helped the savings rate which rose 2 tenths to a still modest 3.4 percent.”

This measure includes all forms of compensation including employer contributions to medical insurance and pensions and has been showing more life than average hourly earnings, which is part of the monthly employment report and is the most closely watched of all wage measures.

This did nothing to inflation, as the GDP’s price index rose 2.3 percent Q/Q, but is up just 1.8 percent annually, as is the Fed’s preferred Personal Consumption (PCE) index. So still no inflation, even though wage and salaries are beginning to surge, and labor costs account for 2/3rds of product costs.

The Fed has said it will probably raise their interest rate twice more this year, which will put the Prime Rate at 5.25 percent, raising credit card rates and crimping consumer borrowing.

But with wages soaring, that may not slow down consumer spending or the growing foreign trade deficit. The goods deficit from countries such as China is now $75B/per in February and growing. So why is this administration pushing for trade tariffs, which is already instigating a trade war, and making those same goods more expensive to Americans?

No one believes this will reduce the trade deficit, either, as the manufactured goods we export will become more expensive, as well, reducing the demand for exports.

Harlan Green © 2018

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Manufacturing Leading 2018 US Growth For How Long?

Posted on March 26, 2018 by Popular Economics Weekly

Popular Economics Weekly

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Graph: Econoday

US manufacturing looks to lead US economic activity this year. Why? Durable goods orders are growing incredibly fast, which are any products that last more than 3 years. This means aircraft and military goods, as well as appliances and other household goods.

The blue columns of the graph track monthly order totals for durable goods which came in at $247.7 billion in February for a jump of 3.1 percent compared with January. The green line tracks shipments of durables which totaled $249.7 billion for a 0.9 percent increase which is very sizable for this measure.

A subset of these factory orders are core capital goods, which boost labor productivity (i.e., goods produced per worker hour) that has been lagging for years. Capital goods get the most attention as demand for these, from machinery to computers points to increasing fixed investment as businesses put new equipment in place to meet what they expect will be rising demand ahead.

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And very convincing strength comes from core capital goods orders (i.e., nondefense ex-aircraft that boost manufacturing productivity) where year-on-year growth, moved up nearly 2 percentage points to 8.0 percent, says Econoday. One caveat is that orders for primary metals surged a monthly 2.7 percent in a gain that may reflect, based on reports from regional and private surveys, rising prices for steel and aluminum.

That is a sign that the ongoing tariff negotiations mean rising prices for manufactured and consumer goods. Let’s not forget that most of the world’s trade agreements are centered on reducing prices by locating production of these goods where they are most cheaply produced. Adding tariffs only adds to their costs, and American consumers with their limited incomes will suffer as we import most of our consumer products.

But Americans working in industries that use steel and aluminum products will also be affected by rising prices, which has to reduce demand for their products, as well.

It’s worth noting that these prices were already climbing ahead of possible steel and aluminum tariffs announced earlier this month. Fabrication orders rose 0.8 percent in February with machinery, which is at the very heart of the capital-goods group, rising 1.6 percent.

So it seems the cost of equalizing our trade agreements will on balance do little to correct our trade imbalance, because as products become more expensive they reduce demand for those products. That is, unless the salaries of US workers and consumers increase at the same rate. But then aren’t we back to the feared wage-and-price spirals of the 1970s that caused record inflation?

The way to increase demand for anything is to lower their costs, not raise them, which our current low-tariff agreements have been doing.

Harlan Green © 2018

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Housing Sales, Leading Growth Indicator, Higher

Posted on March 23, 2018 by Popular Economics Weekly

The Mortgage Corner

Higher new and existing-home sales, and continued economic growth are the reason the Fed raised their overnight rate into a range between 1.5 to 1.75 percent on Wednesday. Even with consistently low inventory levels and faster price growth, existing-home sales bounced back in February after two straight months of declines, according to the National Association of Realtors.

And The Conference Board Leading Economic Index (LEI) for the U.S. that measures future growth possibilities increased 0.6 percent in February to 108.7 (2016 = 100), following a 0.8 percent increase in January, and a 0.7 percent increase in December. It points to accelerating growth this year.

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, grew 3.0 percent to a seasonally adjusted annual rate of 5.54 million in February from 5.38 million in January. After last month’s increase, sales are now 1.1 percent above a year ago.

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Graph: Econoday

Lawrence Yun, NAR chief economist, says sales were uneven across the country in February but did increase nicely overall. “A big jump in existing sales in the South and West last month helped the housing market recover from a two-month sales slump,” he said. “The very healthy U.S. economy and labor market are creating a sizeable interest in buying a home in early 2018. However, even as seasonal inventory gains helped boost sales last month, home prices – especially in the West – shot up considerably. Affordability continues to be a pressing issue because new and existing housing supply is still severely subpar.”

New-home sales are also surging, up 2.2 percent annually in February reports the Commerce Department, and 9.4 percent in 2017 overall. Inventories are also up to a 5.9-month supply and the median sales price in February was $326,800, nearly 10 percent higher than a year ago.

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Graph: Econoday

And, “The U.S. LEI rose again, despite a sharp downturn in stock markets and weakness in housing construction in February,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The LEI points to robust economic growth throughout 2018. Its six-month growth rate has not been this high since the first quarter of 2011. While the Federal Reserve is on track to continue raising its benchmark rate for the rest of the year, the recent weakness in residential construction and stock prices – important leading indicators – should be monitored closely.”

What recent weakness? Single-family starts, which are key to restocking the new home market, rose 2.9 percent to a 902,000 rate which is up 2.9 percent from this time last year.

Director Ozyildirim was really talking about the fears of a trade war with Trump’s tariffs on China and Japan about to be enacted. The administration is exempting Australia, Brazil, S Korea, Great Britain, EU, Mexico and Canada at the moment.

Total housing inventory at the end of February rose 4.6 percent to 1.59 million existing homes available for sale, said the NAR, but is still 8.1 percent lower than a year ago (1.73 million) and has fallen year-over-year for 33 consecutive months. Unsold inventory is at a 3.4-month supply at the current sales pace (3.8 months a year ago).

What about future interest rates? Fed Chairman Powell wants to toe the “middle ground” on rates, which means raising them slowly this year, as he sees no inflation at all on the horizon. The problem with raising interest rates with so little inflation is it crimps household spending and so growth. This particular set of conditions—raising interest rates with little inflation—has always been the precursor to a recession.

Harlan Green © 2018

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POTUS’s Reptilian Brain

Posted on March 20, 2018 by Popular Economics Weekly

Popular Economics Weekly

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Does this description sound familiar? “Territoriality, hierarchical structure of power, control, ownership, wars, jealousy, anger, fear, hostility, worry, stuck or frozen with fear, aggressiveness, conflict, extremist behavior, competitiveness, cold-blooded, dog-eat-dog beliefs, might is right, and survival of the fittest,” is one definition of reptilian behavior.

It also describes the behavior of President Donald Trump. Psychotherapists have been attempting to explain POTUS’s behavior in psychological terms. Many have said he suffers from NPD, or Narcissistic Personality Disorder, defined in the DSM V treatment manual, as “… grandiosity, seeking excessive admiration, and a lack of empathy (Ronningstam & Weinberg, 2013).”

But why not turn to the biological sciences to describe President Trump’s behavior? The human brain is most simplistically described as having 3 parts; the earliest reptilian brain that contains our brute survival mechanisms; the mammalian limbic brain is the center of emotions and empathy; and neo-cortex the thinking part that modulates urges emanating from the other regions of the brain because of its ability to reason and judge.

A more basic way to define the reptilian brain is it contains the fight, flight, or freeze commands when an animal or human feels threatened. I am reminded of the behavior of pet Pythons, the largest of our snakes, who have literally turned on their owners—some eaten, others strangled, even though said Pythons were supposedly domesticated.

The most common explanation given by Herpetologists for such ‘aberrant’ behavior is that some pet Pythons were just biding their time when handled by their owners—they were measuring the size of their owner to know if they could be ingested. So they were following their basic instincts, as Trump is want to do. There have been cases of adult humans being attacked and fully ingested by Burmese Pythons—the largest Pythons—in the wild, as well.

What else could explain the behavior of this President whose success can only be attributed to a lifetime of lies and deceptions; who has ‘ingested’ those working closest to him by destroying their reputations, if they displease or are no longer of use to him?

The human species is mammalian because we give live birth to our offspring. But mammals evolved originally from reptiles; hence we still have the earliest reptilian brain that has been called the “lizard brain” because it provides the basic elements we need to survive.

This also explains POTUS’s authoritarian behavior, as perhaps that of the most extreme autocrats; Hitler, Stalin, and Vladimir Putin, who have literally killed their opponents.

The question is how much longer Americans will tolerate such reptilian behavior.

Harlan Green © 2018

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Single Family Construction, Consumer Sentiment, Higher

Posted on March 20, 2018 by Popular Economics Weekly

The Mortgage Corner

The US economy is booming, even with trade wars looming, and Putin attacking democratic institutions everywhere. The good news is interest rates and inflation are still extremely low, and consumers ebullient over their current status.

Why not, with the unemployment rate down to 4 percent, and 313,000 new nonfarm payroll jobs just created in February? Also the Labor Department’s JOLTS survey reported there were a far higher-than-expected 6.312 million job openings though it included downward revisions to prior months. All in all, openings are a huge 729,000 above hires which came in at 5.583 million.

This probably explains the high number of single-family housing starts—more jobs mean more demand for housing with housing inventories at multi-year lows. Single-family starts, which are key to restocking the new home market, rose 2.9 percent to a 902,000 rate which is up 2.9 percent from this time last year. And single-family completions rose 3.0 percent in the month to 895,000 and will offer immediate supply to the market.

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Graph: Econoday

The booming labor market also explains why the U of Michigan’s consumer sentiment survey jumped 2 points to 102, the highest reading in 14 years. Current conditions, where strength hints at ongoing gains for both consumer spending and employment, reports Econoday, is up nearly 8 points to 122.8 and reflects growing confidence in the lower income bracket. Expectations, which is the other component of the index, is actually down 1.4 points to 90.0 and reflects income doubts among the higher bracket.

But beware of consumers’ ebulliance, as they are tapped out, even with the upcoming tax break in April from the higher standard tax deduction. Their personal savings rate is down to a mere 3.2 percent, with might explain the declining retail sales numbers after robust holiday sales in November.

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Graph: Econoday

Retail sales have fallen over the past 3 months from their November high. Department stores were especially weak in February, down 0.9 percent, reports Econoday. What isn’t a surprise is a 4th straight month of decline at vehicle dealers, down 0.9 percent in a drop that re-emphasizes the effect of the spike in the hurricane season which pulled sales forward because so many vehicles were lost due to the floods.

But nonstore retailers jumped a monthly 1 percent. Building materials are also positive, up 1.9 percent that reverses a 1.7 percent decline in January, which is why we see the rise in single-family home construction during this winter season.

Slowing consumer spending and the ultra-low savings rate should tell the Fed there is no incipient inflation. Consumers now account for three-quarters of economic activity, so how can there be higher inflation, if consumers are unable to push prices higher?

Stay tuned, as mortgage rates are still at the low end. The 30-year conforming fixed rate is holding @ 4.0 percent for a 1 point origination fee. But the Fed will probably raise their short term rates on Tuesday, anyway.

Harlan Green © 2018

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Where is Inflation, and Higher Growth?

Posted on March 14, 2018 by Popular Economics Weekly

Financial FAQs

The drumbeat for a higher inflation target is picking up. The Chicago Fed’s Charles Evans recently advocated a less hawkish Fed stanch on maintaining the 2 percent inflation target with few signs of inflation even on the horizon.

Elizabeth Sawhill, a Senior Fellow at Brookings in a New York Times Op-ed, on the heels of February’s almost record 313,000 job creation number, is also saying that higher inflation would be desirable after many years of too low inflation.

“In fact, a high-pressure economy, with wages and prices a little higher than we’ve become used to, might actually do a lot of good for the people who need it most,” said Sawhill. “Working families need a tight labor market — and higher wages — to get ahead. It would be a costly mistake to raise rates too much or too soon.”

I have been saying this for years, as we know that higher growth and higher inflation go hand-in-hand, which in turn boosts wages. The Fed’s preferred PCE and retail CPI indexes have largely remained below 2 percent since 2008, while the GDP growth rate has also averaged 2 percent.

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Graph: tradingeconomics.com

Why don’t we have higher growth? Because higher GDP growth requires that corporate profits reach those that will invest or spend them, including governments, working folk, and corporations have been better at buying back their own stock rather than investing their profits, as I’ve also been saying in past columns. While governments have been living on austerity budgets since the Great Recession.

“We are in the midst of a big fiscal and monetary experiment, says Sawhill. “And as with any experiment, the consequences are unknown. What we do know is that the costs of the Great Recession were enormous — at least $4 trillion in lost income, or about $30,000 per household, according to my calculations. The biggest losses were experienced by those in the bottom and middle portions of the income distribution who lost jobs and saw much of the equity in their homes destroyed.”

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The best way to boost growth and wages is to boost labor productivity, which is a measure of the amount produced per hours worked, and largely depends on capital investment.  The productivity chart above portrays it’s fluctuations over the years with Q4 2017 showing no change in labor productivity at all.

How do we improve productivity?  It is very basic economic theory–improve capital investment. Taxing those that don’t invest their profits in productive uses—the wealthiest among us and corporations—would allow governments to spend more on education, infrastructure, environmental protection, R&D, health care; need I go on? By doing so, we boost extremely low labor productivity, and even a slight boost in productivity can boost everyone’s standard of living.

So it really means reversing the politics du jour in Washington that is paid for by Big Business lobbyists, and the Fed policy of raising interest rates before there are any real signs of inflation.

Harlan Green © 2018

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