Thursday, September 3, 2015

Higher Productivity, Jobs, Could Mean 3.5 percent GDP

Popular Economics Weekly

It looks like we are returning to the goldilocks economy that prevailed for much of last year—low inflation and interest rates plus continued good job growth. But it also could mean better economic growth that has stayed in the 2 percent range during the Great Recession recovery to date. With Q2 GDP growth revised upward to 3.7 percent, and a solid ADP private payroll jobs report yesterday, we should have higher economic growth for several quarters exceeding 3.5 percent, at least.

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Graph: Econoday

ADP, in the July employment report, sees private payrolls rising 190,000 in August, which is a sizable 20,000 below the consensus and right at the low estimate, says Econoday. The government's private payroll reading was 210,000 in July and is expected to come in at 211,000 in August. But we see the BLS Friday unemployment report at 250,000 plus due to the very low initial weekly unemployment claims of 270,000 lately. There will of course be some seasonal adjustments cutting back payrolls as the summer workforce declines for the back to schoolers, but that is usually corrected in later revisions.

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Graph: Econoday

Labor productivity rose a huge 3.3 percent in Q2, as the gain in productivity in turn drove unit labor costs 1.4 percent lower. This is well down from the prior estimate of plus 0.5 percent and is the sharpest drop since the second quarter of 2014. Output rose 4.7 percent in the quarter while hours worked rose only 1.4 percent with compensation up only 1.8 percent, hence the surge in the GDP numbers for output and consumer spending.

China’s slowing manufacturing sector and recent Yuan devaluation will not hurt U.S. growth, nor will the stock market correction. The main reason for China’s slowdown is cheaper manufacturing costs in neighboring countries that is benefiting Vietnam, and even India. Japanese brokerage Nomura has projected Indian GDP growth at 8 percent in fiscal year 2016, in part because of cheaper commodity prices, since India has to import some 80 percent of raw materials for its manufacturing sector. It could even benefit U.S. manufacturers, as China exports are shrinking at the moment (the reason for Yuan devaluation).

In fact, stock values no longer drive most of U.S. growth, a fact that has been known to many macro economists for years. Consumer spending makes up some 70 percent of GDP activity these days. Business investment follows consumer demand, so when consumer spending rises, as it is now doing, so does the demand for business investment. Stocks today benefit holders of stock options for the most part, as well as Flash Traders, and only secondly retirement pension plans over the long run.

What would put icing on my growth prediction would be higher government spending on public projects, now growing far below its historical trend. Should conservatives give up on their attempts to choke off badly needed public spending on infrastructure and R&D (which boosts productivity even more, don’t forget), and is another component of GDP, we can then be assured of GDP growth returning to longer term historical rates for years to come.

Harlan Green © 2015

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Tuesday, September 1, 2015

Construction Leads Housing, GDP Recovery

The Mortgage Corner

Pending home sales are still rising. And that’s in large part because both residential and non-residential commercial construction is in fact soaring. The U.S. Census Bureau of the Department of Commerce announced today that construction spending during July 2015 was estimated at a seasonally adjusted annual rate of $1,083.4 billion, 0.7 percent above the revised June estimate of $1,075.9 billion. The July figure is 13.7 percent above the July 2014 estimate of $952.5 billion.

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Graph: Calculated Risk

This is huge, and another sign that housing this year may keep average U.S. GDP growth above 3.5 percent for the rest of 2015 and beyond, as the just revised Q2 growth rate of 3.7 percent is indicating. Housing has been the sluggard as a growth component in this recovery to date, but 2015 looks like the year that it breaks out.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 0.5 percent to 110.9 in July from an upwardly revised 110.4 in June and is now 7.4 percent above July 2014 (103.3). The index has increased year-over-year for 11 consecutive months and is the third highest reading of 2015, according to the National Association of Realtors.

On a year-over-year basis, private residential construction spending is up 16 percent. Non-residential spending is up 18 percent year-over-year, and public spending is up 6 percent year-over-year, reports Commerce.

That’s also why newly built, single-family home sales rose 5.4 percent to a seasonally adjusted annual rate of 507,000 units in July, according to HUD and the U.S. Census Bureau.

“This report is in line with other government data and improving builder sentiment and shows a gradual but consistent housing recovery,” said NAHB Chief Economist David Crowe. “As job growth and consumer confidence continue to strengthen, the housing market should make additional gains this year.”

Economists had forecasted gross domestic product would be revised up to 3.3 percent in Q2, but business investment was stronger than expected. Business investment helped, but it was consumers, buoyed by low interest rates and inflation boosting their confidence in future jobs and rising incomes that got them spending again.

The Commerce Department said investment in nonresidential structures was revised to show an increase rather than a contraction, reflecting stronger spending on commercial and healthcare construction. Spending on residential construction, which includes brokers' commissions, was also raised from 6.6 to 7.8 percent. More gains are likely this quarter after the Pending-Home sale report showed an increase in contracts to purchase previously owned homes (i.e., existing-homes) in July.

The large spending uptick on private construction was at a seasonally adjusted annual rate of +1.3 percent (±1.0%). Residential construction was at a seasonally adjusted annual rate of $380.8 billion in July, 1.1 percent (±1.3%). Nonresidential construction was at a seasonally adjusted annual rate of $407.0 billion in July, 1.5 percent (±1.0%).

This can only mean more jobs are being created in construction and Professional Services in the upcoming Friday unemployment report. More good news for U.S. jobs growth, in other words.

Harlan Green © 2015

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

Thursday, August 27, 2015

Consumers Lead Growth, and Business Investment

Financial FAQs

The U.S. economy grew at a faster 3.7 percent annual clip in the second quarter, up from the initial estimate of 2.3 percent, the Commerce Department said Thursday. Why was that a surprise to those short sellers afraid of Chinese market contagion, now that the DOW and all stock indexes have soared over the past 2 days?

It’s a repeat performance of the past 2 years. Those severe winters stopped growth in the first quarters of 2014 and 2015, which then snapped back once the Polar Vortex deep freeze melted away. Q1 GDP grew just -0.9 and + 0.6 percent, respectively during those winters. But the Q2s rebounded to 4.6 and 3.7 percent, respectively, once Spring came. So China’s economic ups and downs have had very little effect on U.S. growth.

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Graph: Trading Economics

Economists had forecasted gross domestic product would be revised up to 3.3 percent, but business investment was stronger than expected. Business investment helped, but it was consumers, buoyed by low interest rates and inflation boosting their confidence in future jobs and rising incomes that got them spending again. There were no ‘confidence fairies’ worried about budget deficits, in other words.

Consumer spending, always the main engine of U.S. economic activity, led the way. Spending was revised up to 3.1 percent from 2.9 percent in the second quarter after a sluggish 1.8 percent gain in the first three months of the year. No wonder, when eastern and Midwestern shoppers could barely venture from their homes during the deep freeze.

And newly revised figures from the Commerce Department show that businesses invested at a faster rate. Businesses increased investment by 3.2 percent increase instead of a drop of 0.6 percent, with spending on structures such as office buildings rising by 3.1 percent instead of an initial drop of 1.6 percent.

This is huge for real estate, in part due to lower interest rates holding down construction costs. But there was also a large build in retail inventories in anticipation of back to school and holiday shoppers. The value of inventories, which adds to GDP, increased by $121.1 billion in the second quarter instead of a previously estimated $110.0 billion.

In fact, it was real (after inflation) final sales to private domestic purchasers up 3.3 percent, a measure of activity without inventories, that did the most to boost GDP growth.

The bottom line is that consumer confidence is soaring to new heights, as we said yesterday. An enormous improvement in the current labor market (e.g., rock bottom initial unemployment claims) drove the consumer confidence index well beyond expectations, to 101.5 in August for a more than 10 point surge from July. A rare 6.5 percentage point drop to 21.9 percent in those describing jobs as currently hard to get points to outsized gains for the August employment report.

Why is this a surprise? With the unemployment rate down to 5.3 percent, and more than 8 million jobs created since 2008, maybe consumers are finally convinced the U.S. economic growth is for real. The gain for this confidence reading lifts the present situation component, a near term confidence reading, to 115.1 for a more than 11 point increase over July that points to consumer power for August (and maybe September, October, then into the holidays).

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Graph: Econoday

With consumer spending soaring, corporate profits continue to surge, hence the increase in business investment. Just reported profits in the second quarter came in at $1.824 trillion, up a year-on-year 7.3 percent.

So let’s not forget that gas prices are closing in on $2 per gallon in many parts of the country, which holds down inflation, which in turn boosts incomes. So consumers are beginning to show they are the real beneficiaries of lower oil-energy prices, no inflation pressures, and rising incomes.

Harlan Green © 2015

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

Wednesday, August 26, 2015

Better Economic Growth Coming?

Popular Economics Weekly

Barron’s economist Gene Epstein forecasts the possibility tomorrow’s Q2 GDP growth could be revised from 2.3 to 3.5 percent. I believe he’s a bit optimistic, but today’s snapback of stocks does mean that emerging market problems may have panicked the day traders that are seldom interested in fundamentals.

Those fundamentals are impressive—durable goods orders are up, and consumer confidence is soaring. New-home sales are advancing due to rock bottom interest rates, thanks in part to plummeting oil prices. And gas prices in some east coast areas are close to $2 per gallon. That is boosting retail sales and Fall season back to school spending.

Consumer confidence is soaring to new heights. Econoday reports “Enormous improvement in the assessment of the current labor market drove the consumer confidence index well beyond expectations, to 101.5 in August for a more than 10 point surge from July. A rare 6.5 percentage point drop to 21.9 percent in those describing jobs as currently hard to get points to outsized gains for the August employment report.”

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Econoday

This reading will have forecasters scratching their heads. The gain for this reading lifts the present situation component to 115.1 for a more than 11 point increase from July that points to consumer power for August.

And consumer spending is consequently soaring. Big upward revisions underscore a very solid and very important retail sales report. Retail sales rose 0.6 percent in July with June revised to unchanged from an initial reading of minus 0.3 percent and with May revised to a jump of 1.2 percent from 1.0 percent. The revisions to June and May point to an upward revision for second-quarter GDP.

Exports have been weak but they didn't hold down July's durable orders which, for a second straight month are strong and strong nearly across the board. New orders rose 2.0 percent in the month which easily beat out top-end Econoday expectations for 1.2 percent. Excluding transportation, orders rose 0.6 percent which is near the top-end forecast for 0.7 percent. Capital goods data show special strength with nondefense ex-aircraft orders up 2.2 percent following June's 1.2 percent gain and with related shipments up 0.6 percent following a gain of 0.9 percent.

Lastly, even new-home sales have picked up, which gives a boost to economic growth within the construction, insurance, and professional occupations. New home sales rose solidly in July from a downdraft in June, up 5.4 percent to a 507,000 annual pace. Year-on-year, sales have surged, up 26 percent. The strength in sales has thinned an already tight market where supply is at 5.2 months, down from 5.3 months in June and compared with 6.1 months a year ago.

Harlan Green © 2015

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

Tuesday, August 25, 2015

Record Post-Recession Home Sales, Construction, Case-Shiller Prices in July

The Mortgage Corner

With all the bad news coming from the stock market, it’s good to know that this hasn’t affected the housing market. In fact, it’s pushing interest rates lower, so that a conforming 30-year fixed mortgage rate has dropped to 3.50 percent in California. And that will continue to boost home sales (and prices, of course). That’s why Case-Shiller shows two cities already above their bubble highs, and the Conference Board’s Index of Leading Economic Indicators (LEI) shows continued strong growth ahead.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased a whopping 2 percent to a seasonally adjusted annual rate of 5.59 million in July from a downwardly revised 5.48 million in June. Sales in July remained at the highest pace since February 2007 (5.79 million), have now increased year-over-year for ten consecutive months and are 10.3 percent above a year ago.

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Graph: Econoday

Lawrence Yun, NAR chief economist, says the increase in sales in July solidifies what has been an impressive growth in activity during this year's peak buying season. "The creation of jobs added at a steady clip and the prospect of higher mortgage rates and home prices down the road is encouraging more households to buy now," he said. "As a result, current homeowners are using their increasing housing equity towards the downpayment on their next purchase."

And demand is well ahead of thin supply, at 4.8 months at the current sales rate vs 4.9 and 5.1 in the two prior months and 5.6 months in July last year. Sales are up 10.3 percent year-on-year, well ahead of the median price which, at $234,000, is up 5.6 percent.

The S&P/Case-Shiller U.S. National Home Price Index recorded a higher year-over-year gain with a 4.5 percent annual increase in June 2015 versus a 4.4 percent increase in May 2015. The smaller 10-City Composite had marginally lower year-over-year gains, with an increase of 4.6 percent year-over-year. Denver and Dallas are the two cities now above their 2007 bubble highs, while Denver (+10.2%), San Francisco (+9.5%) and Dallas (+8.2%) had the biggest year over year increases.

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Graph: Calculated Risk

This mismatch of supply vs. demand means even higher existing-home prices ahead. Especially since housing construction is just beginning to play catch up after years of low growth—no coincidence, given the rising demand for housing of any kind—rental as well as for prospective homeowners. Led by a strong jump in single-family production, nationwide housing starts inched up 0.2 percent to a seasonally adjusted annual rate of 1.206 million units in July, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. This is the highest level since October 2007.

It’s also why the Conference Board’s Index of Leading Economic Indicators (LEI) continues to show moderate growth for the next 6 months, and is up 1.7 points from January to July. “The U.S. LEI fell slightly in July, after four months of strong gains. Despite a sharp drop in housing permits, the U.S. LEI is still pointing to moderate economic growth through the remainder of the year,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board.

Swings in housing permits have been distorting recent LEI readings including for July. Permits, which fell 16 percent in Tuesday's housing starts report, more than offset what are a run of mostly neutral readings among other components. Given the uncertainties of measuring housing data (readings with plus or minus 11 percent variations are common) the index could have added another 0.54 points to the July indicator, instead of subtracting that amount, for a much stronger reading.

The strongest component is the rate spread which reflects the Fed's ongoing accommodative policy. Also pointing to strength are initial jobless claims, which are at rock bottom lows, and the report's credit index which points to a rise ahead for lending.

So what’s happening in China and the so-called emerging markets (including the Petro states, and Russia) will help to keep interest rates low, housing strong, and maybe the Fed from raising their short-term rates for some time to come.

Harlan Green © 2015

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

Wednesday, August 19, 2015

Higher Birth Rates Are Here

The Mortgage Corner

The mellennial generation, now aged 18 to 36 years, are beginning to drive higher birth rates. And that means more households being formed, which will ultimately create a higher demand for housing. Actually, a 4 million birth rate was breached in 2007, and births then declined due to the Great Recession. But the millennials are back above the 4 million birth rate again.

And housing construction is surging—no coincidence, given the rising demand for housing of any kind—rental as well as for prospective homeowners. Led by a strong jump in single-family production, nationwide housing starts inched up 0.2 percent to a seasonally adjusted annual rate of 1.206 million units in July, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. This is the highest level since October 2007.

“This month’s drop in the more volatile multifamily side is a return to trend after an unusually high June,” said NAHB Chief Economist David Crowe. “While multifamily production has fully recovered from the downturn, single-family starts are improving at a slow and sometimes intermittent rate as consumer confidence gradually rebounds. Continued job and economic growth will keep single-family housing moving forward.” 

Births had declined for five consecutive years prior to increasing in 2013. They are about 7.7 percent below the peak in 2007 (births in 2007 were at the all-time high - even higher than during the "baby boom"). “I suspect certain segments of the population were under stress before the recession started,” says Calculated Risk’s Bill McBride, “- like construction workers - and even more families were in distress in 2008 through 2012. And this led to fewer babies.”

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Graph: Calculated Risk

The above historical graph dates back to 1909, and the largest dip was before and during the Great Depression. It hit bottom in 1933, before beginning to rise again until it hit the baby boomer bulge of the 1950s and 60s.

This has to be the main reason home builder sentiment is at a 10-year high. The new home sector is increasingly a central source of strength for the economy and builders are increasingly optimistic, says the NAHB. The housing market index rose 1 point to a very strong 61 in August with the future sales component leading the way at 70. Current sales are at 66 with traffic continuing to lag but less so, at 45 for a 2 point gain in the month.

“Today’s report is consistent with our forecast for a gradual strengthening of the single-family housing sector in 2015,” said NAHB Chief Economist David Crowe. “Job and economic gains should keep the market moving forward at a modest pace throughout the rest of the year.”

Single-family starts rose 12.8 percent to a seasonally adjusted annual rate of 782,000 units after an upwardly revised June reading while multifamily production fell 17 percent to 424,000 units. And rising single family starts is another sure sign that more families and households are being formed.

What age group is having the most births? It is women in their 30s. The preliminary birth rate for women aged 30–34 in 2014 was 100.8 births per 1,000 women, up 3 percent from the rate in 2013 (98.0). The rate for this group has increased steadily since 2011. The number of births to women in their early 30s also increased in 2014, by 4 percent.

The rate for women aged 35–39 was 50.9 births per 1,000 women, up 3 percent from 2013 (49.3). The rate for this group has increased steadily since 2010. The number of births to women in their late 30s increased 5 percent in 2014.

Need we say more about the rising birth rate? All signs point to another upsurge in new household formation, needless to say, the main driver of real estate sales and the concomitant sectors that aid and drive RE—jobs in construction, insurance, professional fields, and banking, for starters.

Could it be that the real estate industry will drive 3 percent plus GDP growth for the rest of 2015, even if interest rates rise slightly? Rates are still at record lows with the conforming 30-year fixed rate at 3.625 percent for 1 origination point, and purchase mortgage applications still up 19 percent year over year, reports the Mortgage Bankers Association.

Harlan Green © 2015

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

Monday, August 10, 2015

Unemployment Rate Stuck

Popular Economics Weekly

The U.S. pumped out another 215,000 new jobs in July, but it doesn’t look like this is enough to convince the Fed to begin to raise rates in September. Workers still aren’t getting decent raises and millions of Americans are working parttime, or have stopped looking for work.

The steady flow of new jobs during the late spring and summer offer some evidence the economy is moving again after growth slipped earlier in the year during a harsh winter, for the second successive winter. The U.S. has added an average of 235,000 jobs a month since May, up sharply from a 195,000 pace in the first quarter.

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Graph: Marketwatch

The numbers are good, but neither wages nor inflation are rising enough to show any sign of 3 percent plus GDP growth, which is what it takes to reach full employment. Non-farm payrolls rose just about as expected, up 215,000 in July with upward revisions adding 14,000 to the prior two months. But the unemployment rate is unchanged at 5.3 percent.

Wages show some traction, up 0.2 percent in the month with the year-on-year rate over 2 percent at 2.1 percent. The average workweek is up, rising to 34.6 hours from a long run at 34.5. The labor force participation rate, which dropped sharply in June, held at 62.6 percent.

But, the employment cost index that measures both income and worker benefits rose only 0.2 percent in the second quarter, far below expectations and the lowest result in the 33-year history of the report. Year-on-year, the ECI fell 6 tenths to plus 2.0 percent which is among the lowest readings on record.

Why is the question plaguing economists. The Fed’s Vice-Chairman Stanley Fischer believes it is temporary, due to the oil glut and falling energy prices. "The interesting situation in which we are is that employment has been rising pretty fast relative to previous performance and yet inflation is very low. And the concern about the situation is not to move before we see inflation as well as employment returning to more normal levels," he said.

The record ECI low is plus 1.4 percent back in the early recovery days of 2009 when, apparently unlike today, there was enormous slack in the labor market. The ECI's two components both fell back sharply with wages & salaries moving down to plus 0.2 percent from 0.7 percent in the first quarter and benefits to plus 0.1 percent vs the first quarter's plus 0.6 percent. Year-on-year, wages & salaries are up 2.1 percent  with benefits,  despite  Obamacare, below the 2 percent threshold at 1.8 percent. The data are a reminder of the big decline in average hourly earnings during June, which fell 3 tenths from May to 2 percent even.

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Graph: Econoday

Other details in the employment report look surprisingly solid with payrolls rising 60,000 in trade & transportation, for a third straight strong gain, and professional & business services rising 40,000 to extend their long healthy run. Retailers continue to add jobs, up 36,000 for their third straight strong gain with the motor vehicle subset up 13,000 and reflecting the strength of car sales. Manufacturing, which is usually weak, rose a notable 15,000 in the month with construction, where lack of skilled labor is being reported, showing a modest gain of 6,000.

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Graph: Econoday

Why won’t the Fed from a September rate hike? Inflation is still too low, in part because wages and salaries aren’t yet rising. Inflation in June as measured by the core PCE price index, rose only 0.1 percent for a very low 1.3 percent year-on-year rate that won't be moving up expectations for the Federal Reserve's rate hike. The year-on-year rate is at a 4-1/2-year low and has remained below 1.5 percent since November. The overall price index rose 0.2 percent in June with its year-on-year rate, reflecting the collapse in oil prices, at only plus 0.3 percent.

So the collapse in oil prices, and Iran Nuclear deal seem to be keeping more than inflation in check. It is reducing employment in the energy sector, though helping consumers in other ways. So other areas in the economy will have to take up the slack.

Harlan Green © 2015

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