Friday, April 28, 2017

Slow Q1 GDP Growth Means What?

Financial FAQs

Real gross domestic product (GDP) increased at an annual rate of 0.7 percent in the first quarter of 2017, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2016, real GDP increased 2.1 percent.


The first estimate of first quarter economic growth usually means little. Consumer weren’t spending, and they never seem to spend much in Q1, as in past years, as the BEA graph show. But with consumer confidence still sky high because of optimism that President Trump and Congress might still agree on some stimulus, spending may pick up.
There were signs of higher growth in Q1 outside of the consumers, particularly in real estate. “The deceleration in real GDP in the first quarter reflected a deceleration in PCE and downturns in private inventory investment and in state and local government spending that were partly offset by an upturn in exports and accelerations in both nonresidential and residential fixed investment,” said the BEA.
So consumer sentiments can be deceptive, even misleading, given the lack of higher consumer spending in Q1. The Conference Board reported the consumer confidence index eased back to 120.3 in April vs a revised 124.9 in March with these two months the best of the 8-year expansion. “Readings remain strongly favorable including jobs-hard-to-get which is steady at a very low 19.1 percent and points to strength for the April employment report,” said Econoday. 
Weak vehicle sales are a major negative in the quarter's consumer breakdown, pulling durable sales down at a 2.5 percent rate and offsetting a 1.5 percent rise in non-durables and a slow 0.4 percent showing for services. Weakness in consumer spending is worrisome but not other data in the GDP report. Residential investment posted a second straight very strong quarter, up 13.7 percent. And in a rare show of strength, nonresidential investment, which has been subdued, jumped at a 9.4 percent rate with both structures and equipment showing unusual strength. A surge in mining investment is a standout of the report, said the BEA.


There are more signs that growth could pick up in coming quarters. The Institute for Supply Management’s Chicago Business Barometer, a proxy for Midwest growth, ticked up 0.6 Points in April to 58.3 in April from 57.7 in March, the highest level since January 2015. New orders are the highest since May 2014, and in a sign of ongoing strength deliveries continue to slow. 

Optimism among firms about business conditions rose for the third month in a row. Three of the five Barometer components led April’s increase, with Production and Order Backlogs receding, said the report. Third Consecutive Rise in Business Confidence, New Orders Highest Since May 2014, Inflationary Pressures Ease Slightly, Prices Paid fall, as the MNI Chicago Business Barometer increased to 58.3 in April from 57.7 in March, the highest level since January 2015.
“The April Chicago report showcased another impressive month, with firms reporting solid growth. Rising demand and firm production led to a pick-up in hiring by firms. Although the employment indicator has been bumpy, in and out of contraction, if the current month’s rise is sustained, it could provide a boost to the labor market,” said Shaily Mittal, senior economist at MNI Indicators, compiler of the report.
But optimism doesn’t always translate to spending, as we know from past reports. Consumers’ incomes keep rising and were very solid in the fourth quarter at a 3.5 percent pace, but rose at only 0.3 percent in first-quarter 2017 on weak vehicle sales and lower heating bills. This is by far the worst showing since no change in fourth-quarter 2009, and would be the lowest showing for consumer spending in 5 years. What will it take for consumers to spend again?

Harlan Green © 2017


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Thursday, April 27, 2017

Pending Home Sales Decline, Because No Inventory!

Popular Economics Weekly

The Pending Home Sales Index, www.nar.realtor/topics/pending-home-sales, a forward-looking indicator based on contract signings, declined 0.8 percent to 111.4 in March from 112.3 in February. Despite last month's decrease, the index is 0.8 percent above a year ago.

Lawrence Yun, NAR chief economist, says sparse inventory levels caused a pullback in pending sales in March, with existing-home inventories in the 5 month range, but activity was still strong enough to be the third best in the past year. "Home shoppers are coming out in droves this spring and competing with each other for the meager amount of listings in the affordable price range," he said. "In most areas, the lower the price of a home for sale, the more competition there is for it. That's the reason why first-time buyers have yet to make up a larger share of the market this year, despite there being more sales overall."

That’s why the Case-Shiller Home Price index has increased 5.8 percent YoY. Housing prices are entering bubble territory, as the accompanying Calculated Risk Price-to-Rent comparison shows. It measures the ratio between housing prices and rents, and reached its highest level in 2006—meaning the housing price ratio had soared far above the historical 1-to-1 ratio of price-to-rents that prevailed in the 1980s and 90s, when housing prices rose more in line with rents. So, home buyers were paying prices they couldn’t really afford during the housing bubble, since rental rates are a better measure of incomes.



On a price-to-rent basis, the Case-Shiller National index is back to November 2003 levels, the Composite 20 index is back to August 2003 levels, and the CoreLogic index is back to July 2003, says Econoday, so we are not yet back to pre-recession price levels.

Pointing to revealing data from the March Realtors® Confidence Index, Yun worries that the painfully low supply levels this spring could heighten price growth — at 6.8 percent last month — even more in the months ahead. Homes in March came off the market at a near-record pace, and indicating an increase in the likelihood of listings receiving multiple offers, 42 percent of homes sold at or above list price (the second highest amount since NAR began tracking in December 2012).


The main reason for such “painfully lw supply” is soaring existing-home sales. “Existing sales rose a very sharp 4.4 percent to a higher-than-expected annualized rate of 5.710 million,” said Econoday. “This is the best rate since February 2007. Both components show strength with single-family sales up 4.3 percent to a 5.080 million rate and condo sales up 5.0 percent to a 630,000 rate. And year-on-year sales are moving higher, up 5.9 percent divided between 6.1 percent for single-family homes and 5.0 percent for condos.”

And housing construction is not yet catching up to demand. The first quarter ended with a thud for housing starts which fell a very steep 6.8 percent to a 1.215 million annualized rate which is the weakest since November, said the NAHB. Posting similar declines were both single-family homes, at an 821,000 pace, and multi-family, at 394,000. But housing construction does show nearly double-digit year-on-year growth, though quarter-to-quarter movement is barely perceptible.

The hope is housing construction will continue to pick up, as we expect housing demand to remain strong, and interest rates to remain low for the foreseeable future.

Harlan Green © 2017

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Wednesday, April 26, 2017

No “Art of the Deal” in 100 Days


It’s 100 days into the Trump Presidency and looking more and more like President Trump is no more effective at running the country than his business interests. His book, The Art of the Deal was meant to tout his negotiating skills, but the results were never very successful.

And neither are his legislative efforts; with no repeal of Obamacare, tax reform, an immigration ban, new trade policy, and sanctuary city victories in the offing anytime soon because of poorly thought out strategies. Instead, he threatens judges, sanctuary cities, Congress, and even other countries when they don’t support his various executive orders.

His multiple bankruptcies of the Trump Casinos when other Atlantic City Casinos were successful, Trump University charged as a criminal enterprise (under RICO), and the fact that he had to rely on Russian Oligarchs to finance his real estate empire when U.S. banks would no longer lend to him, are just the tip of the iceberg of business incompetence.

These are the acts of a bully, rather than leader, which is why he seems to have so much in common with V Putin, Marine Le Pen, and other demagogues. Acting tough can be a plus when dealing with North Korea, or even Russia, but not when dealing with Americans who don’t like him or his very anti-American policies.

It’s sad, really, that he doesn’t have the skills to really shake up the Washington establishment, which needs it badly, as the election showed. But being a successful negotiator requires more than bully tactics, even in business. He so badly stiffed his own employees, as well as states such as New York (back taxes), charities, and well as U.S. banks that they want nothing more to do with him, except in court.

This is why he is involved in more than 4,000 lawsuits at last count, according to USA Today, and more are yet to come with mounting Federal court rulings against his executive orders.

Fortune Magazine reported last June on candidate Trump’s negotiating tactics: “The legal actions provide clues to the leadership style the billionaire businessman would bring to bear as commander in chief. He sometimes responds to even small disputes with overwhelming legal force. He doesn’t hesitate to deploy his wealth and legal firepower against adversaries with limited resources, such as homeowners. He sometimes refuses to pay real estate brokers, lawyers and other vendors.”

And, “As he campaigns, Trump often touts his skills as a negotiator,” says Fortune. “The analysis shows that lawsuits are one of his primary negotiating tools. He turns to litigation to distance himself from failing projects that relied on the Trump brand to secure investments. As USA TODAY previously reported, he also uses the legal system to haggle over his property tax bills. His companies have been involved in more than 100 tax disputes, and the New York State Department of Finance has obtained liens on Trump properties for unpaid tax bills at least three dozen times.”

There may be even be more troubles ahead for President Trump, now that he is also stiffing a Republican-run House Oversight Committee investigation into General Flynn’s activities as an unreported lobbyist, which wasn’t apparently disclosed in his application for renewal of his Top Secret security clearance.

So, could this lead to his impeachment?

Harlan Green © 2017

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Tuesday, April 25, 2017

Why Is Mortgage Lending Still Restricted?

The Mortgage Corner

We can thank the Great Recession for most of it. Banks have become much more conservative, and builders are building approximately 50 percent fewer residences vs. the 2 million housing units at the height of the housing bubble.

And the very Great Recession was in some ways worse than the Great Depression, when FDR’s New Deal created jobs for those that couldn’t find work. Whereas conservative economic ideologies have triumphed since President Reagan under austerity policies (such as the 2011 government shutdown over raising the budget cap), which have restricted government spending at a time when the private sector has refused to reinvest in productive growth, even though corporate profits have soared to record levels as a percentage of GDP.

The Urban Institute has dug even deeper into the causes of tight credit. Since private sector lending dried up after the Great Recession, government GSEs, such as Fannie Mae, Freddie Mac, FHA and VA; all with some form of government guarantee, have had to step in to revive the housing market. So they account for more than 80 percent of all residential lending.

And because the US Treasury completely appropriated all the assets and profits of Fannie and Freddie in 2012, which account for 60 percent of all residential loans, they have imposed additional fees on any but the best credit risks to protect taxpayers. This in effect raised the cost of qualifying, which in turn reduces the pool of eligible home buyers and borrowers.
How much, asks the Urban Institute? “According to our estimates, an additional 1.25 million loans would have been made in 2013 if the cautious standards of 2001, rather than the severe standards of 2013, had been in place. Between 2009 and 2013, the number of “missing” loans grew from 0.50 million to 1.25 million annually, for a total of more than 4 million missing loans over the five years.”
Behind all this data lies another, more sobering fact—the record income inequality that occurred since the 1970s and was the major cause of the Great Recession. Incomes have flowed so fast to the upper income tiers since its end in 2009 that 96 percent of all income gained since then has gone to the top 1 percent.

This is in part because of the stock market rebound and loss of all those homes from the housing bust. It resulted in some $4 trillion in lost housing assets for middle-class homeowners in the main, the main source of their wealth.

It’s a phenomenon named Monopsony by economists, or the increasing monopoly power of Big Business in particular to control labor costs due to marked lack of competition. This is explained in lucid detail by Kate Bahn, an economist at the Center For American Progress, a progressive think tank.
“While overall the labor market looks fairly solid, it’s still lacking on measures of competitiveness that are giving employers outsized ability to set low wages,” says Prof Hahn. “They can reap higher profits by exploiting their workers who don’t feel confident enough to leave their current job in search of a better one. (It’s evidenced) by the historically low rates of people moving across geographies.”


The Labor Department measures it as the quits rate in their JOLTS report (Job Openings and Labor Turnover Survey) that tabulates the number of Hires and Separations each month. There was a 1 tenth downtick in the quits rate to 2.1 percent, “a subdued reading that points to lack of movement between jobs and lack of wage pull for employees,” said Econoday. The separations rate also fell, down 1 tenth to 3.5 percent.

The gap between openings and hiring first opened up about 2 years ago signaling that employers are having a hard time finding people with the right skills, said Econoday. The current spread between openings and hirings is 429,000, the widest since September. But remember, the US economy is so large that more than 5 million jobs are created and lost per month.

One would think the high number of available jobs means higher wages for all, as employers bid up salaries to attract them, but not so; just for the highly skilled. Those blue collar and service jobs that require less skill don’t have the competitive advantage of higher education and training that would boost their salaries.

And that is why the credit and housing markets have skewed towards the highest income earners, and will remain so, unless more New Deal-type programs (such as promised infrastructure spending, universal health care, stronger labor laws) help to bring back the middle class.

Harlan Green © 2017

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Friday, April 21, 2017

Low Inflation Boosts Housing Sales

Financial FAQs

Existing-home sales are now accelerating to new expansion highs, says the NAR. Sales rose a very sharp 4.4 percent to a higher-than-expected annualized rate of 5.710 million. This is the best rate since February 2007. Both components show strength with single-family sales up 4.3 percent to a 5.080 million rate and condo sales up 5.0 percent to a 630,000 rate. And year-on-year sales are moving higher, up 5.9 percent divided between 6.1 percent for single-family homes and 5.0 percent for condos.

Graph: Econoday
Lawrence Yun, NAR chief economist, says existing sales roared back in March and were led by hefty gains in the Northeast and Midwest. "The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market and were successfully able to close on a home last month," he said.
"Although finding available properties to buy continues to be a strenuous task for many buyers, there was enough of a monthly increase in listings in March for sales to muster a strong gain. Sales will go up as long as inventory does."
Why the great interest rates? It’s mainly because there is still very little inflation, and the bond market that determines mortgage rates likes low inflation. A March contraction of the CPI led to sizable slowing in year-on-year rates. The total rate is 2.4 percent, down 3 tenths from February and sliding back to the Fed's 2 percent target. The core rate, which excludes food & energy, is down 2 tenths and is right at the target line. Energy comparisons are very easy right now given low prices this time last year. This makes the decline in the core a special concern.

Graph: Econoday

The median existing-home price for all housing types in March was $236,400, up 6.8 percent from March 2016 ($221,400). March's price increase marks the 61st consecutive month of year-over-year gains.

And total housing inventory at the end of March increased 5.8 percent to 1.83 million existing homes available for sale, but is still 6.6 percent lower than a year ago (1.96 million) and has fallen year-over-year for 22 straight months. Unsold inventory is at a 3.8-month supply at the current sales pace (unchanged from February), signaling a very high demand that is outstripping new-home construction, stuck at 1.22 million annual units.

The conforming 30-year fixed rate mortgage is now 3.50 percent and the so-called Hi-Balance conforming 30-year fixed rate is 3.75 percent these days for a 1 percent origination fee. This is what has kept the demand for housing on a tear, in spite of low inventories and tepid economic growth, as I said yesterday.

Harlan Green © 2017


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Thursday, April 20, 2017

Record Low Interest Rates Boost Housing

The Mortgage Corner

The conforming 30-year fixed rate mortgage is now 3.50 percent and the so-called Hi-Balance conforming 30-year fixed rate is 3.75 percent for a 1 percent origination fee in California. And this is what has kept the demand for housing on a tear, in spite of tepid economic growth, with GDP growth still stuck at 2 percent per the Philly Fed Index seen below.

Why? It’s mainly because there is still very little inflation, and the bond market that determines mortgage rates likes low inflation. The low inflation rate may be because there’s still doubt on what growth-inducing legislation may ever get through a weak President and Congress stuck in ideological warfare. So we could see builders’ record profits continue for the rest of this year, and maybe more affordable housing.

Both new-home construction and builder optimism are at post-recession highs, but with normal seasonal fluctuations (such as mid-March Northeast blizzard), says the National Association of Home Builders (NAHB).

Following an elevated February reading, nationwide housing starts fell 6.8 percent in March to a seasonally adjusted annual rate of 1.22 million units, according to the U.S. HUD and the Commerce Department. Still, new housing production in the first quarter of this year is running 8.1 percent above the pace in 2016, reports the NAHB.


This is why builder confidence in the market for newly-built single-family homes remained solid in April, falling three points to a level of 68 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) after an unusually high March reading, said the NAHB.
”The fact that current sales conditions has been over 70 for five consecutive months shows that there is continued demand for new construction,” said NAHB Chief Economist Robert Dietz. “However, builders are facing several challenges, such as hefty regulatory costs and ongoing increases in building material prices." 
The building industry is doing its share to boost growth as it continues to add jobs, with monthly employment data for February showing that home builder and remodeler employment increased by 18,900. Over the last 12 months, home builders and remodelers have added 136,000 jobs on a net basis and residential construction employment now stands at 2.707 million.


And where is US manufacturing activity these days? It’s still increasing in most states. The Philadelphia Federal Reserve has released the coincident indexes for the 50 states for February 2017. Over the past three months, the indexes increased in 47 states (green states), decreased in two, and remained stable in one (Michigan), for a three-month diffusion index of 90. In the past month, the indexes increased in 44 states, decreased in four, and remained stable in two, for a one-month diffusion index of 80.
“Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and almost all green now,” says Calculated Risk’s Bill McBride.
So, economic growth continues into the eighth year of this business cycle. And housing is usually a leading indicator of future growth, but that will depend on what looks like lower interest rates, future (lower) inflation trends, actions of the Federal Reserve, and Congress, of course.

Harlan Green © 2017

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Tuesday, April 18, 2017

Should Trump Economics Fail?

Popular Economics Weekly

It doesn’t look good for two Trump and Republican campaign promises currently working their way through Congress: i.e., to repeal and replace Obamacare, and reform the tax code. They should really be working on what is possible; a $1 Trillion infrastructure spending bill. So the euphoria and expectations generated by the Trump victory might dissipate, and that is what’s needed to generate future growth at the end of an already long business cycle.

Why? There is massive opposition from both Republicans and Democrats to both an Obamacare replacement vehicle and tax reform proposals to date. Whereas the one campaign promise that could succeed is the upgrade and replacement of our aging public infrastructure. Both Republicans and Democrats want it for their home states and districts.

For instance, out of the 614,387 bridges in the US, more than 200,000 are more than 50 years old. The Associated Society of Civil Engineers 2016 report estimates it would cost some $123 billion just to fix the bridges in the US, and many of the one million drinking water pipes have been in use for almost 100 years. The aging system makes water breaks more prevalent, which means there are about two trillion gallons of treated water lost each year.

In fact, most of our highways and bridges were built more than 70 years ago, which is why the ASCE says public infrastructure is now behind more the $4.5 trillion in maintenance alone, such as highways, harbors, wastewater facilities and bridges.

Graph: CBO

Even more important to our security and economic well-being, is the majority of the transmission and distribution lines were built in the mid-20th century and have a life expectancy of about 50 years, meaning that they are already outdated. So between 2016 to 2025, there's an investment gap of about $177 billion for infrastructure that supports electricity, like power plants and power lines, reports the ASCE. 

There is another Republican obsession, however that may block even that possibility. It’s Trump’s preoccupation with the Wall, or pseudo Wall, and deportation of millions of undocumented workers—the majority of which have lived in the U.S. for more than 10 years. They have raised families, paid taxes, and held jobs that white and other ethnic groups are either incapable of doing (such as farm work), or refuse the low wages and benefits on this bottom rung of the labor ladder.


Any increase in their deportation could cause severe damage to growth, and maybe even end the 8 years of this growth cycle. The Center for American Progress, a liberal policy institute in Washington, is even more blunt. It estimates that a policy of mass deportation would "immediately reduce the nation's GDP by 1.4% and ultimately by 2.6%." This is when current GDP growth is just 2 percent.

None other than Fed Chairman Janet Yellen also voiced her concern in a recent speech. "Labor-force growth has been slowing in the United States," Yellen said. "It's one of several reasons, along with slow productivity growth, for the fact that our economy has been growing at a slow pace. Immigration has been an important source of labor-force growth. So slowing the pace of immigration probably would slow the growth rate of the economy."

Her comments are striking because Yellen is usually careful not to discuss topics outside her monetary policy and regulation mandate, lest her remarks be construed as political.

And, "Because capital will adjust downward to a reduction in labor — for example, farmers will scrap or sell excess equipment per remaining worker — the long-run effects are larger and amount to two-thirds of the decline experienced during the Great Recession," the CAP report says. "Removing 7 million unauthorized workers would reduce national employment by an amount like that experienced during the Great Recession."

Over 10 years, US output will have fallen $4.7 trillion short of what it might otherwise have been, CAP says. For comparison, US gross domestic product, the nation's total spending on goods and services, stood at $18.6 trillion at the end of 2016.

Those are very large numbers, which means Republicans and Democrats will have to learn to work together on what is practical and attainable to avoid the next recession.

Harlan Green © 2017

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