Monday, September 19, 2016

Popular Economics Weekly

Janet Yellen’s Fed meets again this midweek to decide whether to raise short term rates. It probably won’t happen, because they can’t decide if the US economy is ‘half-full’—i.e., still growing enough to boost inflation—or ‘half empty’, which means the economy is barely growing.

A terrific New York Times conversation between two extraordinary women, Senator Elizabeth Warren and Tracee Ellis Ross, actress and daughter of Diana Ross, brought out what is at stake in this election between the Haves and Have-nots, and best describes the current political debate.
“Go listen to those guys on the floor of the Senate talking about people who are losing their homes,” said Senator Warren, “describing them like you’d talk about furniture that should be tossed out. It’s a “they” that’s so far away.”
“But it’s not just in politics, it’s everywhere,” said Ms. Ross. “This “otherness” that’s all of a sudden part of our culture. People grabbing to what’s theirs out of fear it might be taken away.”
Yet The Federal Reserve has said most recently household net worth rose to $89.06 trillion in the second quarter, a rise of $1.07 trillion, or 1.2 percent to a record level as a percentage of Gross Domestic Product. The gains were almost equally split between the $452 billion rise in equities and the $474 billion advance in the value of real estate. So even middle-class homeowners are benefiting from the current recovery.

The fear mongers, such as Donald Trump, would have us believe the economic pie is fixed, a zero-sum game, in Senator Warren’s words, in which the wealthiest hoard their wealth in order to spend it on themselves, for themselves. (But) “That was not America. We were building an America that said, “If we educate all our kids, we”ll actually make more (of everything),” says Warren.

New data showing middle-class household incomes growing at the fastest rate since the recession seemed to confirm that a recovery that’s remained slow and uneven is finally touching the lives of ordinary, especially middle-class Americans. So there is more of the ‘pie’ being created, not the zero-sum that Trumpeteers would have us believe.

It is also why so many seem to believe Trump’s blame-game, which wants to “blame the immigrants, blame women, blame people who have different religious beliefs than you, blame people who aren’t the same color as you,” says Warren. “Because if everyone turns on each other—then the same old system that keeps billionaires on top stays right where it is.”

In fact, this explains the almost eternal struggle between the Haves and Have-nots, as well. Capitalism, the system that Adam Smith described best in his 1776 book, The Wealth of Nations, created today’s wealth by ‘paying it forward,’ by investing part of the profits in future growth.

And that is the real game of those Haves that support Trump and all his ugliness. They want to propagate the “same-old system”, the system that must build walls to make American great again.

Harlan Green © 2016

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Friday, September 16, 2016

Poverty Level Down, As Incomes Surge

Popular Economics Weekly

Fewer Americans lived in poverty in 2015 and median incomes charted their first increase since the Great Recession, according to data released Tuesday by the Census Department. The official poverty rate fell 1.2 percentage points between 2014 and 2015 to 13.5 percent, and the number of people in poverty fell by 3.5 million, Census said. The threshold for a family of two adults and two children to be considered living in poverty was $24,036.

And new data showing middle-class household incomes growing at the fastest rate since the recession seemed to confirm that a recovery that’s remained slow and uneven is finally touching the lives of ordinary, especially middle-class Americans.

In fact, this could be the income growth needed to bring US back to 3 percent GDP growth; something that hasn’t happened since 2007 before the Great Recession. Millions of Americans escaped poverty last year and incomes rose at their biggest gainever, as the 6-year long economic recovery finally hit home for households. Median middle-class wages surged 5.2 percent between 2014 and 2015, the Census Department said Tuesday, the first annual increase since 2007, just before the economy plunged into recession.

This is in large part due to almost non-existent inflation, which has not returned to even the Fed’s 2 percent target, hence the reluctance of Janet Yellen’s Federal Reserve to raise interest rates at all this year. But that may change, as rising wages also have an effect on inflation, since wages make up some two-thirds of product costs.

An even better way to increase growth is to invest more in what would grow our economy; like infrastructure, education, R&D, the environment, etc. That’s why productivity has ground to a halt, which is the main driver of future growth.

At least 43 companies plan to cut, or leave unchanged, their capital spending levels in 2016, while about 20 are increasing, according to a Reuters review of Standard & Poor's 500 companies that have given explicit early guidance.

However, Citibank seems to disagree. It’s mainly the energy sector that has cut back on new investments due to the slump in energy prices. This, however, is boosting growth in capex spending in other sectors, says Tobias Levkovich, Citigroup chief equity strategist. There's no reason to think stock buybacks, the current straw man for the lack of productive investment, are replacing capital expenditures. Rather, he said, they are complementing them.
"While misperceptions abound when it comes to companies allegedly not investing in their businesses and preferring to buy back stock instead, there is little corroborating evidence," Levkovich argued. "S&P 500 companies have had capital investment dollars ahead of the amount used for buybacks for more than four and a half years and capex has hit a record every year since 2011."
And a major reason for this is the low cost of capital is today’s low inflationary environment. So there is good reason to keep interest rate as low as possible, until we see signs of more normal GDP growth.

Harlan Green © 2016

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Monday, September 12, 2016

Why Isn't It Easier to Qualify For A Mortgage?

The Mortgage Corner

It’s not getting any easier to obtain a mortgage. This is in spite of record low mortgage rates, as low as 3.0 percent for 30-year conforming fixed rates; as well as the appearance of so-called Alt-A, non-QM mortgages with 3 to 7 year, interest only, fixed rates that require 12 months personal bank statements to verify income.

According to a report from the Urban Institute that tracks mortgage availability among other housing issues, the pool of mortgage loans made between 2011 and 2015 have even lower default rates than the more “normal” lending period of 1999 to 2003, when less than 2 percent of the loans defaulted after 10 years.

By comparison, 12 to 13 percent of the mortgage loans made at the height of the housing bubble between 2006 and 2007 defaulted within 10 years of their origination, the Urban Institute said in August, citing Fannie Mae’s data. And that was mostly due to the Great Recession and loss of some 8 million jobs.

The Urban Institute noted that of Fannie Mae- and Freddie Mac-backed loans made after 2011 and through the first quarter of 2015, 69 percent of the borrowers had FICO scores better than 750. Between 1999 and 2003, only a third of people with such mortgages had a credit score that high. Less than 1 percent of loans that have been made after 2011 have defaulted, according to Fannie Mae’s data, the Urban Institute said, even for those borrowers with FICO scores under 700

Requiring higher credit scores is just one way lenders have made it more difficult to qualify. Fannie and Freddie also pile on points for scores above 680, which was a normal mid-score before the housing bubble, and in effect boosts the interest rate. For instance, just a 1 pt. cost add on for a score below 700 is the equivalent of a one-quarter percent raise in the rate.

Other problems are due to the reforms mandated by Dodd-Frank designed to protect consumers from predatory lenders, while a good idea, have made it much more difficult for lenders and slowed down the qualification time. This includes additional delays in closings for the slightest change in rates or points enacted due to the new TRID requirements (short for TILA/RESPA Integrated Disclosure) enacted last fall.

This has made lenders much more selective in granting mortgages. We are probably back to 1980s qualification standards when many fewer loans were granted—mostly by S&Ls that disappeared after the late 1980s banking scandals.

We are in a much better position today, 7 years after the Great Recession, in other words. The inventory of loans in negative equity positions dropped by 31 percent (1.5 million) in 2015, according to Black Knight. At a total of 3.2 million, or 6.5 percent of all homeowners with a mortgage, this represents significant improvement from the peak in 2010, but is still well above “normal” levels.

 Both the S&P Case-Shiller Home Price Index and Corelogic stats show home prices rising as much as 10 and 11 percent in Portland and Seattle, respectively, in its latest 3-month averaged, same home survey, and 5-6 percent nationally on average.  This will continue to bring back housing values and lower negative equity in homes.
So there’s no reason to continue to be as cautious as mortgage lenders are today.  There is of course the political brouhaha over whether Fannie and Freddie should become private corporations again, and so separated from US Treasury control.  With their future unclear, these entities that guarantee more than 60 percent of all mortgages make lenders doubly cautious about qualifying younger, entry-level borrowers, in particular.

Harlan Green © 2016

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Wednesday, September 7, 2016

A Record In Job Openings

Financial FAQs

Not only are Nonfarm payrolls averaging some 200,000 jobs per month this year, but the Labor Department’s job openings and labor turnover survey showed 5.87 million openings, an all-time high, while hires increased to 5.23 million from 5.17 million in June. Businesses are creating jobs at a much faster rate than they can be filled, in other words.

The number of job openings are up 1 percent year-over-year. Quits are up 9 percent year-over-year. Quits are voluntary separations, which usually means workers must have found better paying jobs.

The number of people quitting jobs voluntarily was flat at 2.98 million, but that’s still up substantially from the depths of the recession, which signals more worker confidence in the ability to find another job, as I said.

Less heartening was yesterday’s ISM’s Non-Manufacturing (i.e., service sector) survey for July, down 4 points to 51.4. This is the lowest rate of composite growth for this sample of the whole cycle since February 2010. But that may be a fluke, as new orders in past months were as high as 60 percent. It could be a catch-up month, in other words, as businesses sell off past months’ inventories.

Graph: Econoday

This should also keep the Fed from raising interest rates until at least December, since the jobs report of last week was a letdown, as well. The composite score is no fluke, says Econoday, with new orders for service sector products falling nearly 9 points to 51.4 for their lowest score since December 2013. New export orders are a particular disappointment, also down a steep 9 points and in contraction at 46.5 which is also the lowest score since December 2013. And backlog orders are also in contraction, down 1-1/2 points to 49.5.

Moody’s Investors Service, the bond rating firm, doesn’t see this lull as more than a blip, at least. The U.S.’s Aaa credit rating is safe no matter who wins the presidential election, according to Moody’s in a new report on Wednesday.
“The outcome of the forthcoming presidential election will not impact the Aaa stable credit rating of the United States, regardless whether Donald Trump or Hillary Clinton is elected,” the report says. “This is because the U.S.’s rating reflects the country’s very high degree of economic, institutional and government financial strength and its very low susceptibility to event risk,” says Moody’s, naming the four factors in its sovereign bond rating methodology.
What to make of the current weakness? It could be a summer lull, as businesses wait for the results of Brexit negotiations, the Presidential election, and maybe even China’s growth to resume.

Harlan Green © 2016

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Saturday, September 3, 2016

A Half-Full Jobs Report

Financial FAQs

Nonfarm payrolls rose a lower-than-expected 151,000 in August with revisions to July and June at a net minus 1,000, reported the Bureau of Labor Statistics. I would call this a half-full employment report in an economy that is not too hot, or too cold. The unemployment rate held at 4.9 percent with modest increases on both the employment and unemployment.

Earnings are very soft in this report, up only 0.1 percent in the month for a year-on-year plus 2.4 percent which is down a sizable 3 tenths from July and isn't pointing to any wage-hike flashpoint. And the workweek is down, at 34.3 hours with July revised 1 tenth lower to 34.4.

Earnings were at the bottom end of wage growth, because bars and restaurants added 34,000 new employees to lead the way in hiring. And the number of social workers also rose by 22,000, an unusually large increase, both low-paying service sector jobs. Retail also added 15,100 jobs in a sign that consumer spending is holding up.

Consumer spending last month was lifted by a 1.6 percent surge in purchases of long-lasting manufactured goods such as automobiles. Spending on services rose 0.4 percent, but outlays on non-durable goods slipped 0.5 percent (such as food and clothing).

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed at 6.1 million in August. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job.

And the manufacturing sector is showing signs of growth in Q3, even though the ISM’s manufacturing index fell below 50 percent in August for its first contractionary sub-50 reading since February, at 49.4 a more than 3 point decline.

Manufacturing, which accounts for about 12 percent of the economy, remains constrained by the lingering effects of a strong dollar and weak global demand, which have crimped exports of factory goods. A collapse in oil drilling activity following a plunge in oil prices has also squeezed manufacturing by undermining business spending, leading to weak demand for heavy machinery. In addition, a U.S. inventory correction has resulted in factories receiving fewer orders.

This may be temporary, however, as factory orders surged 1.9 percent in July for the best gain since October last year, after monthly declines of 1.2 and 1.8 percent in May and June. Orders for core capital goods (nondefense ex-aircraft) were especially strong in July, up 1.5 percent following June's 0.5 percent gain in readings that upgrade what has been a very soft outlook for business investment. Aircraft, which is always volatile in this report, is July's biggest plus, surging 90 percent in the month. But vehicles are a negative in the report, down 0.5 percent.

We therefore see mixed results for Q3, as businesses seem to be waiting for the various elections in November that will determine Congress, as well as the President. Business shouldn’t wait, however, as the US is in the best position to profit from uncertainty in the EU and elsewhere, regardless of who wins.

And there are still 7.8 million unemployed workers and 6.1 million part timers that would prefer to work fulltime, which means a half-full economy that still has room to grow.

Harlan Green © 2016

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Tuesday, August 30, 2016

US Consumers Happy Again

Popular Economics Weekly

US consumers are feeling good, with higher confidence and rising wages pushing demand for housing and consumer spending. The Conference Board’s Consumer Confidence Index rose a huge 4.4 points to 101.3 in August. It has been hovering in this range for more than one year, reflecting the strong jobs market.

“Consumer confidence improved in August to its highest level in nearly a year, after a marginal decline in July,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of both current business and labor market conditions was considerably more favorable than last month. Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pick-up in growth in the coming months.”
And consumer spending is reflecting that optimism. Consumer spending last month was lifted by a 1.6 percent surge in purchases of long-lasting manufactured goods such as automobiles. Spending on services rose 0.4 percent, but outlays on non-durable goods slipped 0.5 percent (such as food and clothing).

Personal income increased 0.4 percent in July after rising 0.3 percent in June. Wages and salaries advanced 0.5 percent. This is while savings rose to $794.7 billion from $776.2 billion in June, still a 5 percent savings rate, which means consumers are saving for the possibility of another rainy day.

Who can blame consumers for being cautious? But with housing markets taking off, it looks at long last that housing supplies are returning to normal. The Case-Shiller Home Price Index is now rising a more normal 5 percent per year, down from its recent 10 percent rise in 2013-14, as more housing comes on the market.

In boom cities like Portland and Seattle prices rose 12.6 and 11 percent, respectively, while Denver and Dallas were some 9 percent higher in June. Cities that suffered the most from the bust are also recovering in such areas as California’s Central Valley and San Francisco’s East Bay; cities such as Stockton and Vallejo that filed for bankruptcy because of the housing bust.

So what has been keeping economic growth in the 1 percent range of late, over the last 3 quarters? Most of it comes from a slowdown in labor productivity due to businesses’ refusal to invest in capital improvements. Labor productivity is at a historic post WWII low, increasing just 1.3 percent since the Great Recession, as I said last week. Normally, so-called cap-ex spending should also surge after such a downturn for production to catch up with depleted inventories, but it hasn’t this time.

Instead, corporations have been using their record profits to buy back stock, enhancing their own and stockholders incomes, a major cause also for the record income inequality. That has to change, needless to say, if voters have anything to say in the upcoming elections.

Harlan Green © 2016

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Friday, August 26, 2016

The Fed Can’t Really Grow US Economy

Popular Economics Weekly

Most eyes are watching Janet Yellen and the Fed’s Jackson Hole conference, where she hinted at a possible raise in short term rates this September. Higher rates are really not needed. Nothing she says in Jackson Hole can really affect longer term economic growth, which is the real problem. The record low interest rates engineered by the Fed have barely raised inflation since the Great Recession, and done almost nothing to increase investment and future growth.

Marketwatch economist Rex Nutting highlighted the low investment climate of today. We are still in an investment recession. The record low amount of investment (capital expenditure) spending by the private sector, local, and national governments as a percentage of GDP since the Great Recession has meant we are using up what we have invested to date in public and private productive capacity without replacing it.
The result is a record low productivity rate and low-paying jobs in the service sector that mostly cater to domestic demand. “Who’s preparing the United States for the 21st century?” writes Nutting. “Nobody, really. Not the 22 million private businesses, not the 118 million households, and not the 90,000 state, local or federal government agencies. Most troubling, there’s still very little investment in the buildings, equipment and intellectual property that we ought to be putting into place today as the foundation of our prosperity tomorrow.”
We see as evidence the lackluster growth in this morning’s second revision to Q2 GDP growth at only a plus 1.1 percent annualized rate following even softer rates in the prior two quarters of 0.8 and 0.9 percent. Yet consumer spending increased 4.2 percent in Q2. So what are consumers buying? Mostly imported foreign products produced overseas.

Much of that is due to the flight of manufacturing jobs overseas that Bernie Sanders and Donald Trump have been railing about. But the flood of cheaper imports is also because of our low productivity rate due to the obsolescence of things that increase productivity, which means better transportation, power transmission, education and R&D investments that would enable Americans to produce more efficiently, and so compete with cheaper foreign products.

 Labor productivity is at a historic post WWII low, increasing just 1.3 percent since the Great Recession. It is calculated at output per hour of work. In Q2 2016, for instance, output increased 1.2 percent while hours needed to produce that amount increased 1.8 percent. Normally, productivity should also surge after such a downturn for production to catch up with depleted inventories, but it hasn’t this time.

This is one area in which both Republicans and Democrats seem to be in agreement. Both advocate increased spending on public and other productivity enhancing projects, but not who should pay for them. It has to be taxpayer funded if private industry won’t step up. And Hillary, for one, is proposing to penalize those corporations that spend their profits on stock buybacks that enhance CEO incomes, rather that projects that would enhance their long term growth. Such ‘inducements’ seem to be the only way to keep US competitive in what is now a global economy.

Harlan Green © 2016

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