Wednesday, February 3, 2016

Davos Highlights Why Slower Growth

It's time for the World Economic Forum, and this year more than 40 heads of state and 2,500 other participants are unlikely to run short of topics to discuss. "Meeting against a backdrop of market jitters, heightened geopolitical risks and a renewed focus on climate change, there will be intense focus on how these A-listers propose to solve the challenges facing the global economy," reports Marketwatch about the meeting held at the ski resort of Davos, Switzerland.
What should be at the center of discussions is the increased inequality in wealth and income that is affecting U.S. economic growth in particular, but also the rest of the world. But instead of inequality, most of the attention has been focused on China's growth problems, as if China is the world's piggy bank. But it isn't.
How does inequality affect economic growth? Nobelist Joseph Stiglitz has written most recently about what he calls the "Great Malaise", and IMF President Christine LaGarde says is the "New Mediocre" in worldwide economic growth.

"The economics of this inertia is easy to understand," says Stiglitz, "and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom, so that as money moves up, demand goes down. And countries like Germany that consistently maintain external surpluses are contributing significantly to the key problem of insufficient global demand."

What is aggregate demand? It is an economic term that describes the overall demand for goods and services from consumers, business, and government, first formulated by the British economist JM Keynes. Professor Stiglitz's thesis is that when most of the wealth goes to the top income brackets, less of it gets spent or invested in productive enterprises.


This is evidenced by the huge amounts of wealth that is hoarded where it does the least good. Corporations are holding more than $5 trillion in cash and cash equivalent assets, rather than investing it in productive enterprises. And the Federal Reserve is holding more than $2 trillion is excess reserves in MZM deposits, meaning that they earn little or no interest.
In fact, the St. Louis Federal Reserve Bank reports the Federal Reserve Banks currently hold some $2,330, 461,000 in excess reserves (that are reserves beyond the required minimum bank capital reserves), whereas it was close to $0 before the Great Recession. Why isn't it being invested productively?
The New York Fed says it is a byproduct of the Fed's easy credit policies. The Federal Reserve Banks lend to commercial banks so that banks with constrained liquidity as a result of the Great Recession will continue to lend. Those loans end up as excess reserves on the Fed's books. But who are the banks lending to? Much of Wall Street's borrowing is for leveraged buyouts, or buybacks of stock to boost stock prices (and CEO salaries, let us not forget).
This is not where banks should be lending, if the goal is to increase productivity, and so economic growth. A major reason for the Great Malaise is the huge cutback in government investments in productive enterprises, such roads and bridges, or R&D, or education, due to the ongoing austerity policies of the western world mentioned by Dr. Stiglitz.
In the U.S., it has been conservative politicians -- mainly Republicans -- that oppose any government stimulus programs, which they believe takes wealth away from those that already have it. But that 'no compromise" mentality made infamous by former House Speaker Boehner has made everyone poorer in the long run, and our public infrastructure in grave danger of collapse.
There is some hope with the new U.S. $1.1 trillion budget agreement, plus the $305 billion Highway Infrastructure Act, plus the Paris Climate Change Accord that should pump $Billions into alternative energy technologies, will mean government is coming back into the productive investment game.
That is how our public highway system was built, after all, as well as our space program, countless medical advances, public education, disaster relief, and the Internet. It took public monies to create the new technologies that private enterprise believed was either too risky, or didn't benefit them directly. So how much longer can such austerians continue to block economic growth and a more hopeful future?

"The obstacles the global economy faces are not rooted in economics, but in politics and ideology," continues Stiglitz. "The private sector created the inequality and environmental degradation with which we must now reckon. Markets won't be able to solve these and other critical problems that they have created, or restore prosperity, on their own. Active government policies are needed."

Will those attending Davos give us any new ideas on how to boost economic growth? The Paris Accord brought 200 countries together to limit global warming. Can these 'A-listers' do any better? I doubt it.

Harlan Green © 2016

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Saturday, January 30, 2016

Why Slower Q4 Growth?

Gross domestic product — the value of everything a nation produces — expanded at a 0.7 percent annual rate from October to December. That’s a big markdown from 2 percent growth in the fall and 3.9 percent last spring. The economy expanded at a 2.4 percent clip last year, the same as in 2014, the Commerce Department said. Alas, the U.S. hasn’t topped 3 percent growth since 2005.

But those numbers may be revised higher, as more data on imports/exports and inventories for December come in. Hence there are two more revisions to the Q4 GDP estimate put out by Commerce. Softer consumer spending, falling exports and a smaller buildup in business inventories were largely the cause of the fourth-quarter slowdown, fresh government data showed.
Graph: Marketwatch
However, the biggest drag on growth was in industrial production. Though the drop in industrial production in the fourth quarter was concentrated not in manufacturing, per se, but in mining and utilities, mostly due to falling energy prices, says Marketwatch’s Rex Nutting.

“Manufacturing output slowed in the fourth quarter, but it did grow, at an anemic annual rate of 0.5 percent. Meanwhile, mining output (mostly petroleum and other fossil fuels) plunged at a 15.5 percent rate and utilities (hurt by the warmer-than-usual fall) saw seasonally adjusted output drop at a 15.4 percent annual rate.”

On the other hand, spending on services was higher, adding 0.9 percentage points, as was spending on goods, at plus 0.5. Residential investment, another measure of consumer health, rose very solidly once again, contributing 0.3 percentage points. Government purchases added modestly to growth.

Inflation fell again, but personal consumption is holding up, as is consumer sentiment. And next week’s December unemployment report will tell us if January growth might pick up, since strong employment tends to boost consumer spending.
Consumer spending may not be that strong but consumer confidence is solid, at 98.1 in January, says the Conference Board. “Consumer confidence improved slightly in January, following an increase in December,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions held steady, while their expectations for the next six months improved moderately. For now, consumers do not foresee the volatility in financial markets as having a negative impact on the economy.”

The assessment of the current jobs market is favorable with only 23.4 percent describing jobs as hard to get. This is a low percentage for this reading and down more than 1 percentage point from December. But improvement here is offset by a dip in those describing jobs as currently plentiful, down 1.4 percentage points to 22.8 percent.

The bottom line is economic growth has slowed due to a decline in energy and commodity prices that hurts some industrial sectors, but it helps consumers. And consumers account for some 70 percent of economic activity these days. So look for increased government spending (state and national) on public works, as well as more new home construction to keep us out of a recession in 2016. This activity is all domestic, which isn’t affected by what is happening in China, Europe, the Middle East, Russia, and other third world countries.
Harlan Green © 2016 

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Thursday, January 28, 2016

More Jobs = Higher Consumer Optimism = More Housing


                
Twenty Five states had lower unemployment, reports the Bureau of Labor Statistics, as the economic recovery continues.  That is probably why consumers continue to be optimistic and housing prices continues to soar—as high as 11 percent in Portland, San Francisco, and Denver, reports the latest S&P Case Shiller Housing Price Index.


Graph: Calculated Risk

            Only 8 states, from New Mexico to Louisiana, now have more than 6 percent unemployment.  Even energy-dependent states like Oklahoma and Texas are at less than 5 percent unemployment.
            The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a slightly higher year-over-year gain with a 5.3 percent annual increase in November 2015 versus a 5.1 percent increase in October 2015. The 10-City Composite increased 5.3 percent in the year to November compared to 5.0 percent previously. The 20-City Composite’s year-over-year gain was 5.8 percent, up from 5.5 percent reported in October.




This hardly puts housing prices in bubble territory.  They rose more than 10 percent in 2014, before dipping back to the current increases.  And it is putting pressure on the housing inventory, now down to a 3 months’ supply for new housing.  So look for a continued surge in housing construction this year, which gives another boost to overall growth.


            Builders broke ground on 1.11 million homes in 2015, more than at any point since 2007, according to a recent UBS study. That was an 11 percent gain compared to 2014. The consensus view of 1.25 million that UBS cites would represent a 13 percent gain in 2016. Their own forecast is for 1.31 million starts, an 18 percent jump.
            The result is more new home sales, as sales ran at an annual pace of 544,000, the highest since February, the Commerce Department said Wednesday. November’s previously-reported 490,000 pace was revised up to 491,000.  In all, some 501,000 new homes were sold during 2015, Commerce said, a 14.5% increase over 2014’s tally.
            Consumer spending may not be that strong but consumer confidence is solid, at 98.1 in January, says The Conference Board. “Consumer confidence improved slightly in January, following an increase in December,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions held steady, while their expectations for the next six months improved moderately. For now, consumers do not foresee the volatility in financial markets as having a negative impact on the economy.”
            Is this a good sign for future employment?  That depends if consumers continue to spend.  Retail sales have dipped below 4 percent annually in 2015, and the stock market is particularly volatile due to the uncertainty over energy prices.  But this has not affected the mood of consumers, yet. 

Harlan Green © 2016

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Wednesday, January 13, 2016

Why Has It Taken So Long?



The latest Federal Reserve press releases—firstly, the minutes of last FOMC meeting, and also its reduced projections of expected inflation—tell us the Fed is still in austerity mode, due to a fear of non-existent inflation.  And it is that unjustified fear that puts the brake on growth, since even the fear that the Fed will tighten credit conditions via its control of short term interest rates affects business investment.



The just released FOMC minutes reveals there was hardly a consensus in raising the Fed Funds rate to 0.5 percent from 0.25 percent.  Why?  Because many of the Fed Governors don’t believe inflation will rise at all this year from the present 1.3 percent annual Personal Consumption Expenditure index rate it favors.
This is while Nobelist Joseph Stiglitz has been decrying the lack of concern over the slow recovery from the Great Recession; lest we forget has grown more slowly than during the Great Depression.  And the Fed hasn’t been as proactive as I could be.
But what can duplicate the conditions that led to President Roosevelt and the New Deal programs (which were created by a woman, Labor Secretary Francis Perkins, by the way) that gave enough benefits to workers and trade unions so they could ultimately negotiate for a living wage and working conditions?
“In early 2010, I warned in my book Freefall, which describes the events leading up to the Great Recession, that without the appropriate responses, the world risked sliding into what I called a Great Malaise,” said Stiglitz. “Unfortunately, I was right: We didn’t do what was needed, and we have ended up precisely where I feared we would.”
            We needed another New Deal, in other words, but there was neither a Roosevelt with the experience and political savvy to push through the job creation programs of the 1930s, nor such a loss of faith in capitalism that prevailed then.  Let’s not forget that Herbert Hoover lost his job precisely because private industry ran for the exits, refusing to create jobs, so government job programs such as the CCC, and WPA employed those millions left jobless and became the bulwark that saved the US economy during that time.
Now we sadly have history repeating itself.  “The economics of this inertia is easy to understand,” continues Stiglitz, “and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom, so that as money moves up, demand goes down. And countries like Germany that consistently maintain external surpluses are contributing significantly to the key problem of insufficient global demand.”
            History has repeated itself in several ways.  Income inequality was this high in 1929, as well as a stock market bubble.  A six-year drought in the Midwest created the Dust Bowl, and made millions homeless.  And credit was too easy then as well and consumers overspent, believing that stock values would never fall. 
John Steinbeck described those times the best in A Primer on the '30s' by John Steinbeck, 1960, pgs. 17-31: “I remember the Nineteen Thirties, the terrible, troubled, triumphant, surging Thirties. ... I remember '29 very well ... the drugged and happy faces of people who built paper fortunes on stocks they couldn't possibly have paid for. ... In our little town bank presidents and track workers rushed to pay phones to call brokers. Everyone was a broker, more or less. At lunch hour, store clerks and stenographers munched sandwiches while they watched stock boards and calculated their pyramiding fortunes. Their eyes had the look you see around a roulette wheel ...”
Why is it important that we remember those times?  Why is it so important to learn from history, you say?  Because the Great Depression led to WWII in direct ways.  Hitler rose out of a Germany shamed by its failed economy, and so chose dictatorship.
[I]n the Thirties when Hitler was successful,” continued Steinbeck, “when Mussolini made the trains run on time, a spate of would-be Czars began to rise. Gerald L.K. Smith, Father Coughlin, Huey Long, Townsend - each one with plans to use the unrest and confusion and hatred as the material for personal power.”
And today we have blatantly racist Republican presidential candidates like Donald Trump and Senator Ted Cruz doing the same. 
Professor Stiglitz says we know what to do: “…some of the world’s most important problems will require government investment. Such outlays are needed in infrastructure, education, technology, the environment, and facilitating the structural transformations that are needed in every corner of the earth.
Therefore, “The obstacles the global economy faces are not rooted in economics, but in politics and ideology. The private sector created the inequality and environmental degradation with which we must now reckon. Markets won’t be able to solve these and other critical problems that they have created, or restore prosperity, on their own. Active government policies are needed.”
There is a price we pay for ignoring the lessons of history, in other words. 

Harlan Green © 2016

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Monday, January 11, 2016

Housing Creating More Jobs In 2016



We predict housing in 2016 continuing to grow the economy.  This is mainly because new-home construction should surpass 1 million units again this year, and it is new-home construction (and sales), rather than existing-home sales, that adds to economic growth.
For instance, we see in the December unemployment report that 45,000 new construction jobs were created plus 73,000 jobs in Professional and Business Services, which include attorneys, accountants, insurance agents, architects and designers that work in the real estate industry. 

 

            Much will depend on interest rates this year, of course, but the conforming 30-year fixed rate has barely budged from its record low of 3.50 percent for a one point origination fee.   A 3.375 percent fixed rate is even available in California if a borrower wants to buy down the rate further.
            The best indicator of future sales is the NAR’s Pending Sales Index, which is based on signed contracts, and consistently in 2015 predicted sales in the range of 5 million to 5.5 million, similar to the level in the early 2000s.
            One reason we believe housing has more room to grow is that new-home construction hasn’t fully recovered from the Great Recession, and is the reason for lower sales of new homes. Sales have generally picked up through the year, but are running at half the rate of 2000 and 2001, when nearly 1 million newly built homes were sold. New-home sales rose in November to an annual rate of 490,000, which is far below the peak of around 1.2 million sales in 2005.
            More new-home sales will depend on increased household formation, which economists are predicting will return to 1.2 million new households per year.  Why?  The Millennial generation is beginning to buy as they marry and begin to raise children.
Some 1,071,000 construction jobs have been added since 2011, according to Calculated Risk.  And delinquency rates have returned to pre-recession levels—in fact are the lowest in history, according to Black Knight’s Mortgage Monitor Report, reports Calculated Risk’s Bill McBride.  This is perhaps the most important statistic for the housing recovery, since it means more borrowers are available to buy homes. Black Knight now calculates that approximately 5.2 million borrowers could likely both qualify for and benefit from refinancing at today’s interest rates.
            But if mortgage rates rise by even 50 basis points (i.e., 0.5 percent), some 2.1 million borrowers will no longer be eligible for refinancing, or buying another home, says Black Knight.
            So does the Fed really want to slow down or even kill the housing market, if it continues to raise their interest rates?   That is the real question.  This might not affect mortgage rates all that much, however, as mortgage rates depend on longer term interest rates and the bond market, which follows inflation. 
But we still have almost no inflation.  Higher food prices are balanced by lower gas and commodity prices in general, and which will continue to fall as the oil glut continues this year.  We believe that interest rates will therefore remain low throughout 2016. 
Why?  There is very little growth in the rest of the world, and developing countries like Russia and Brazil are already in recessions, while China’s economy stagnates. That means foreign investors will still flock to the one safe haven in times of uncertainty—U.S. Treasury Bonds—thus keeping our interest rates low.
  
Harlan Green © 2016

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Saturday, January 9, 2016

Still Not Enough Jobs!

The economy produced 292,000 jobs in the final month of 2015, the Labor Department said Friday. Pundits had predicted a 200,000 plus increase in nonfarm jobs. And because job creation exceeded their predictions, those pundits and some economists will say the Fed has to continue to raise their rates this year. But in spite of the good jobs numbers over the past 3 months—some 2.7 million jobs were created in 2015—there are still more than 7 million job seekers that can only find part time work or no work.

Employment gains in November and October were also considerably stronger, Labor Department revisions show. Some 252,000 new jobs were created in November instead of 211,000. October’s gain was raised to 307,000 from 298,000, marking the biggest increase of 2015.


But continuing to raise interest rates will only hurt economic growth, when real GDP growth is still in the 2 percent range. In fact, annual GDP growth has averaged just 2.21 percent since 2010, and been declining since 2000.

Why the slow growth? A major reason is the decline in household incomes since the 1970s that have barely kept up with inflation. Hourly pay has risen just 2.5 percent in the past 12 months, matching a six-and-a-half-year high—which isn’t very high. And that has hurt personal consumption—i.e., consumer spending—which hasn’t been able to rise enough to offset the other factors holding back growth—such as almost no government investment in R&D, and public infrastructure, seriously hurting economic productivity.

That’s because most jobs were created in the lower-paying service sector, while millions of higher-paying manufacturing jobs have migrated overseas. So most workers aren’t getting big bumps in their paychecks. Hourly pay usually rises at a 3 percent to 4 percent annual pace when the economy is really humming.

And that is the ‘real’ reason we have had almost non-existent inflation. It is the hourly pay of the 80 percent of non-supervisory workers that contribute two-thirds of product costs, and it is the direction of product costs that determine whether prices are rising (or falling).

In fact, the Fed should be signaling it wants inflation to rise to the 3 to 4 percent range, a sign that wages are finally rising beyond inflation.  Because that would raise market interest rates that savers are calling for, without the Fed having to intervene.

Harlan Green © 2016
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Wednesday, January 6, 2016

Why Does Bernie Love Denmark?

Presidential candidate Bernie Sanders is breathing fire on the campaign trail these days, including his most recent campaign speech that advocated the breakup of too-big-to fail banks.  "We will no longer tolerate an economy and a political system that has been rigged by Wall Street to benefit the wealthiest Americans in this country at the expense of everyone else," said Sanders.

Then why does Senator Bernie Sanders love Denmark, and has been mentioning it and the other Scandinavian countries as ideal models for a developed country, one he would like the U.S. to emulate?

“In Denmark, social policy in areas like health care, child care, education and protecting the unemployed are part of a "solidarity system" that makes sure that almost no one falls into economic despair,” he said in a 2015 Huffington Post article. “Danes pay very high taxes, but in return enjoy a quality of life that many Americans would find hard to believe.”



 A recent Center For Economic Policy and Research report highlighted the differences between Nordic countries and the United States.  The differences are mainly because of their superior social safety nets.
           
For instance, the U.S. has the lowest average longevity at 78.8 years, vs. Denmark’s 80 years, while citizens of Iceland and Sweden live 82 years.  Do their colder climates have something to do with it?  No, more likely is the fact that they have to work fewer hours for almost the same income, with better health, educational and retirement outcomes.

  
It’s well-known that U.S. health care costs are double that of all other developed countries, as are infant mortality rates, while homicide rates are more than double of any other developed country.  We know, for instance, there are more than 32,000 gun deaths per year in the U.S., with the majority due to suicides—which also tells us the mental toll that comes with an inadequate social safety net that doesn’t support its citizens.

So it should be no surprise the U.S. has the highest income developed world, before and after taxes and transfers. The higher the Gini Coefficient number portrayed in the graph, the higher the inequality.  With the exception of the United States, there is a perfect correlation between market inequality and the role of fiscal policy in reducing inequality.

That is to say, western capitalist-oriented economies generate profits that go to the major wealth holders, so fiscal policies need to rebalance this effect.  And that is what the Nordic countries in particular, do so well.  “Countries with greater levels of market income inequality are more proactive at reducing inequality through their tax and spending systems,” says the CEPR.

Then why is there opposition in our Congress, particularly, to U.S. citizens having the same benefits as other developed countries, when we are supposed to be the richest country in the world?  It’s the successful opposition to higher taxes by the wealthiest among US.  The wealthiest have succeeded in reducing their taxes and tax rates since President Reagan, the first ultra-conservative Republican president.

The result is ugly—and shows the U.S. is not the land of opportunity for many Americans.  Instead, we have the result of a largely unregulated financial system--higher death rates, violent crime and incarceration rates, as well as inadequately funded health care, retirement, and educational systems. 
 
Harlan Green © 2016

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