Friday, December 19, 2014

Conference Board’s Leading Economic Indicators Near Highs

Financial FAQs

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.6 percent in November to 105.5 (2004 = 100), following a 0.6 percent increase in October, and a 0.8 percent increase in September.

It is a further sign of strong U.S. growth in the months ahead, maybe as high as 4 percent over the next 2 quarters. GDP growth has already averaged 4.25 percent over the last 2 quarters.

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Graph: Trading Economics

“The increase in the LEI signals continued moderate growth through the winter season,” said Ken Goldstein, Economist at The Conference Board. “The biggest challenge has been, and remains, more income growth. However, with labor market conditions tightening, we are seeing the first signs of wage growth starting to pick up.”

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Graph: Econoday

“Widespread and persistent gains in the LEI point to strong underlying conditions in the U.S. economic expansion,” said Ataman Ozyildirim, Economist at The Conference Board. “The current situation, measured by the coincident economic index, has been improving steadily, with employment and industrial production making the largest contributions in November.”

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Graph: Calculated Risk

Much of the better job numbers come from industrial production that increased 1.3 percent in November after edging up in October. Manufacturing output increased 1.1 percent, with widespread gains among industries. Factory output was well above its average monthly pace of 0.3 percent over the previous five months and was its largest gain since February. It is up 13.2 percent from its low point in 2009, according to Calculated Risk.

Janet Yellen’s Federal Reserve also helped to boost growth prospects with her post-FOMC press conference in which she said that the Fed’s rates would not increase until long term job and wage growth showed a sustained pickup.

Nobelist Paul Krugman believes the Fed might wait even longer to raise their rates. “Basically, while growth and job creation have finally been pretty good lately, there is so far no sign whatever that the economy is overheating. Core inflation remains below the Fed’s target (the Fed focuses on a different measure that usually runs lower than the CPI, so this report is actually fairly far below target.)

“In fact, the opposite is happening. Domestic and worldwide inflation continues to fall, largely because of falling oil prices, which signals less use of petroleum products, ergo slowing business activity in other parts of the world. The U.S. seems to be the exception, in what we have come to call a ‘goldilocks economy’—growth without overheating.”

So we seem to have returned to a goldilocks economy much like that the 1990s that sustained high job and economic growth with little or no inflation, thanks to plentiful oil supplies that are projected to last for several years, at least.

Harlan Green © 2014

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

Tuesday, December 16, 2014

New-Home Construction, Builders’ Optimism Still Rising

The Mortgage Corner

Home builders’ optimism is still high, though builder confidence in the market for newly built single-family homes fell one point in December to a level of 57 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), following a four-point uptick last month.

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Graph: Calculated Risk

“After a sluggish start to 2014, the HMI has stabilized in the mid-to-high 50s index level trend for the past six months, which is consistent with our assessment that we are in a slow march back to normal,” said NAHB Chief Economist David Crowe. “As we head into 2015, the housing market should continue to recover at a steady, gradual pace.”

What is helping new-home demand is the lack of existing-home inventory. Total housing inventory at the end of October fell 2.6 percent to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace – the lowest since March (also 5.1 months).

Meanwhile, new-home construction that would replenish housing inventories is advancing in fits and starts, largely due to uncertain weather conditions and still tough mortgage qualification standards that lenders have only recently begun to ease. Privately-owned housing starts in November were at a seasonally adjusted annual rate of 1,028,000. This is 1.6 percent below the revised October estimate of 1,045,000 and is 7.0 percent below the November 2013 rate of 1,105,000.

Single-family housing starts in November were at a rate of 677,000; this is 5.4 percent below the revised October figure of 716,000, but double the number of multiple units being started. The November rate for units in buildings with five units or more was 340,000.

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Graph: Calculated Risk

Another reason for builders’ optimism and healthy new-home construction is the pickup in U.S. employment. Private non-farm payrolls increased 321,000 in November and the jobless rate held at 5.8 percent. The competition for jobs is also dropping, with just 1.9 unemployed workers looking for work per job opening, when it was as much as 4 workers per job opening just after the Great Recession.

Also, prospective borrowers may find it easier to get a loan in 2015 as some lenders, encouraged by federal regulators, ease standards. In addition, mortgage rates are still low, enabling qualified borrowers to get relatively cheap loans. For example, 30-year fixed rate conforming mortgage rates with as little as 5 percent down have dropped to 3.50 percent in California.

Another reason for the better job numbers is industrial production increased 1.3 percent in November after edging up in October. In November, manufacturing output increased 1.1 percent, with widespread gains among industries. The rise in factory output was well above its average monthly pace of 0.3 percent over the previous five months and was its largest gain since February. It is up 13.2 percent from its low point in 2009, according to Calculated Risk.

NAR also recently released its economic and housing forecast for 2015 and 2016. NAR chief economist Lawrence Yun is forecasting existing-home sales this year to fall slightly below 2013 (5.1 million) to 4.9 million, and then increase to 5.3 million next year and 5.4 million in 2016. Yun expects the national median existing-home price to rise 4 percent both next year and in 2016.

Harlan Green © 2014

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

Monday, December 15, 2014

Retail Sales Portend +4 Percent GDP in 2015

Popular Economics Weekly

We have said that the prospect of higher interest rates next year may spur some extraordinary growth over the next few quarters, and just out holiday retail sales seem to be fulfilling that prophecy.  Consumer spending is returning to pre-recession levels, and this is without the boost from housing refinance that drove the housing bubble.

Retail sales are soaring even with lower gasoline prices (since retail prices not adjusted for inflation), up 5.1 percent YoY. This put sales back to pre-recession levels. Sales in November posted a 0.7 percent boost after rebounding 0.5 percent in October. Autos in particular jumped a huge 1.7 percent after gaining 0.8 percent in October. And retail sales ex-plunging gasoline prices increased by 6.0 percent on a YoY basis.

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Graph: Calculated Risk

Couple that with the highest U. of Michigan consumer sentiment since before the Great Recession, and we can see why consumers are spending more. It can’t be only falling gasoline prices creating more optimism. Payroll jobs are now increasing some 300,000 per month, which heartens householders’ future financial prospects.

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Graph: Calculated Risk

Sentiment surged to 93.8 for the mid-month December reading vs an already strong 88.8 in final November and 89.4 in mid-month November. This is the strongest reading since January 2007. The current conditions component is up 3.0 points from final November to 105.7 in a gain that signals month-to-month strength in consumer activity this month. The expectations component, though lagging at 86.1, is up a very sharp 6.2 points to signal rising confidence in the outlook for income and jobs, as we said.

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Graph: Econoday

The prospects for faster growth over the next 2 quarters at least may also have to be due to the possibility of higher interest rates next year, as we have been saying. But we still have severe price-cutting in many retail areas, and wholesale prices have been flat for several months.

And the Fed is worried about falling prices at both the wholesale and retail levels, rather than inflation at the moment, so don’t look for Janet Yellen’s Fed to begin to raise their short term rates, until prices have firmed and begin to climb again.

Harlan Green © 2014

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

Wednesday, December 10, 2014

The Economic Consequences of Too Much Inequality

Financial FAQs

A new report released by the World Economic Forum, ranks rising inequality as the top trend facing the globe in 2015, according to a survey of 1,767 global leaders from business, academia, government and non-profits, many of whom convened recently in Dubai.

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Its effects are barely known to economists, much less politicians. The U.S. has far and above the greatest income inequality in the developed world, as well as the highest crime and prison incarceration rates. Yet even economists such as Nobelist Paul Krugman can’t agree that this has had a measurable effect on economic growth!

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Graph: The Spirit Level

Then what economic growth are we discussing when so many working age men (and women) are in prison, 2,300,000 at last count, the minimum wage is still $7.25 in most states, and we have had 5 recessions since 1980? Economists can’t be looking at the 90 percent of Americans that haven’t experienced any economic growth since 2009, and the recovery from the Great Recession.

The soaring inequality today matches that of 1928 before the Great Depression, and it is causing irreparable damage to our economy. Yet very little has been done about it, other than the American Recovery and Reinvestment Act’s $835 billion stimulus package of 2009 that saved or created some 3 million jobs according to the Congressional Budget Office, but whose effect petered out quickly in 2010 and reduced GDP growth to 2 percent until recently.

Economic growth has resumed with 321,000 nonfarm payroll jobs created in November, but 8 million jobs and at least $6 trillion in economic output were lost during the Great Recession, and . And with a Republican congress taking over in January, economic forecasters such as Macroeconomic Advisors are not optimistic about more job creating programs in the works due to a resumption of the budget battles soon to come, in spite of Republican protestations from new Senate Majority Leader Mitch McConnell that there will be no more government shutdowns.

Joel Prakken, a Macroeconomic Advisors co-founder, cited the effect further budget battles could have on growth in the New York Times. Past fights and the ensuing downgrade of U.S. government debt has cost approximately 1 percent in economic growth, which means instead of the 2.15 GDP growth average since Republicans took over the House in 2011, we could have had 3 percent plus growth and many more jobs.

How does inequality most affect growth? The classic answer is that since consumers power some 70 percent of economic activity, their spending power must be the driver of growth, and they cannot spend or save more with declining incomes, as the graph should make abundantly clear.

But it must be a quality of life issue, as well. How can we continue to live well in the most violent society in the developed world, with outmoded public infrastructure and educational facilities?

Richard Wilkinson and Kate Pickett’s The Spirit Level, a 30-year study of the effects of inequality, has said it best.

“Research has shown that greater inequality leads to shorter spells of economic expansion and more frequent and severe boom-and-bust cycles that make economies more vulnerable to crisis,” say Wilkinson and Pickett. “The International Monetary Fund suggests that reducing inequality and bolstering longer-term economic growth may be "two sides of the same coin". And development experts point out how inequality compromises poverty reduction.”

The consequences of growing inequality are too great to ignore.  We now know from history what they are—two great economic downturns that can only be corrected with a return to the values that have made the U.S. great—economic justice for all.

Harlan Green © 2014

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

Friday, December 5, 2014

Will 2014 Be Best Employment Year Since 1999?

Popular Economics Weekly

Calculated Risk’s Bill McBride has just come out with a noteworthy prediction. This could be the best year for private employment since 1999.

“The consensus is the economy will add another 220 thousand jobs in November (215 thousand private sector jobs).   If that happens, 2014 will be the best year for private employment since 1999.”

Well, that benchmark has already been broken with the November payrolls increase of 321,000 just out, making 2014 already the best jobs year since the 1990s. The best news was that hourly wages rose 0.9 percent and the part time, looking for work crowd shrank to 11.4 million, a big number but declining at last, as more workers found full time work.

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Graph: Calculated Risk

The change in total nonfarm payroll employment for September was revised upwards to 271,000, and the change for October was revised to 243,000, so that employment gains in September and October combined were 44,000 more than previously reported.

Why such a jump in payrolls? It could be the looming rise in interest rates. The Fed has said they will begin to raise their record low interest rates sometime next year, given that wages and salaries show more life than the current 2.1 percent per annum increases that just keep up with inflation.

That means there will be a rush to invest and build more housing and some public infrastructure before higher interest rates kick in. And it’s already starting. Construction spending just surged 1.1 percent.

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Graph: Calculated Risk

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during October 2014 was estimated at a seasonally adjusted annual rate of $971.0 billion, 1.1 percent above the revised September estimate of $960.3 billion. And more public construction projects are kicking in, which has been a drag on construction until now. But state and the federal government revenue coffers are filling again, which gives them the latitude to fix what hasn’t been fixed since 1009, the end of the Great Recession.

Spending on private construction was a seasonally adjusted 0.6 percent above the revised September estimate of $688.0 billion. Residential construction was 1.3 percent above the revised September estimate of $349.1 billion when seasonally adjusted. Nonresidential construction sank 0.1 percent below the revised September estimate of $338.9 billion, but that should be temporary, as businesses get the message that interest rates will be up next year.

And look at public construction. In October, the estimated seasonally adjusted annual rate of public construction spending was $278.6 billion, 2.3 percent above the revised September estimate of $272.3 billion.

And Bill McBride’s prediction was right on. “At the current pace (through November), the economy will add 2.89 million jobs this year (2.80 million private sector jobs),” he says.  “This is the best year since 1999 (and, for private employment, this might be the best year since 1997).”

The year 1997 was the best year with 3,408,000 jobs created, but the top 4 years were all in President Clinton’s last term, 1996 to 1999, when he also created 4 consecutive years of budget surpluses.

We therefore see the looming interest rate rises pushing more job formation (and wage rises), which will continue to boost GDP growth. This is when GDP has already risen an average 4.25 percent over the last 2 quarters. Therefore economic growth could be climbing to dizzying heights the next few quarters, so stay tuned!

Harlan Green © 2014

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

Monday, December 1, 2014

GDP Growth Higher, Case-Shiller Prices Steady

The Mortgage Corner

The economy in the second and third quarters posted its best back-to-back growth in 11 years, And the Conference Board’s Index of Leading Economic Indicators showed strong growth over the next six months. offering fresh evidence that the U.S. will enter the new year with good momentum.

The government last Tuesday said gross domestic product rose at a 3.9 percent annual pace in the third quarter instead of 3.5 percent. Combined with a 4.6 percent gain in the second quarter, the U.S. has posted its best six-month stretch of growth since the middle of 2003.

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Graph: Trading Economics

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.9 percent in October to 105.2 (2004 = 100), following a 0.7 percent increase in September, and no change in August.

“The LEI rose sharply in October, with all components gaining over the previous six months,” said Ataman Ozyildirim, Economist at The Conference Board. “Despite a negative contribution from stock prices in October, and minimal contributions from new orders for consumer goods and average workweek in manufacturing, the LEI suggests the U.S. expansion continues to be strong.”

The largest of the 10 contributors were manufacturer’s new orders, up some 10 percent, and the 10-year Treasury bond rate dropping from 2.62 percent to 2.21 percent, boosting consumer spending and housing sales.

“The upward trend in the LEI points to continued economic growth through the holiday season and into early 2015,” said Ken Goldstein, Economist at The Conference Board. “This is consistent with our outlook for relatively good, but not great, consumer demand over the near term. Going forward, there are continued concerns about slow business investment and lackluster income growth.”

 

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Graph: Econoday

S&P/Case-Shiller reported almost half of major cities tracked in Tuesday’s housing data saw prices fall in September, while almost half saw them rise,. Overall, the gauge of home prices in 20 cities was basically unchanged in September, ticking down .03 percent, a sign the summer sales market has ended.

Annnual growth cooled as well, with year-over-year home prices rising 4.9 percent in September — the slowest pace since October 2012 — compared with annual growth of 5.6 percent in August.

Here’s a chart summarizing the results:

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The leaders were Charlotte, NC, and Miami, while the year-over-year leaders in price rises were again Miami, Las Vegas and San Francisco. With the Federal Housing Finance Authority loosening some conforming mortgage qualification standards, and if conforming interest rates remain below 4 percent, we could see overall housing prices stabilize and maybe even begin to rise again in 2015.

But it all depends on the jobs market, of course, and we see robust job growth continuing into the first half of 2015, as well, before the Fed begins to raise their short term interest rates.

Harlan Green © 2014

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

Saturday, November 29, 2014

Republicans Just Don’t Get It--II

Financial FAQs

Why don't Republicans get it? The 11 million illegal immigrants who have lived and raised families in the U.S. is the latest millstone around their necks that derails any hope of a Republican presidency. Last year a bi-partisan Senate passed a bill on a 68 to 32 vote that would eventually allow them citizenship, but John Boehner refused to bring it up to a House vote.

And so President Obama just issued a directive that will defer 5 million illegals from any legal action, which polls show 85 percent of Hispanics support. And we are a country founded by immigrants with every ethnic and racial group protected by our constitution.

Republicans haven’t really gotten it since the 1970s, when they supported policies to maximize profits at the expense of jobs and household incomes by weakening government oversight and regulations. It is a well-documented story of poor job creation and middle class income reductions that enabled the massive transfer of wealth (and power) to business owners and corporate CEOs—the investor class—and away from their employees that has continued today.

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Forbes.com

Yet a country is only as strong and able to care for and protect its citizens as its government. That’s been the history lesson that today’s Republican leaders have forgotten—the lessons that earlier Republicans knew. It was Republican Presidents, such as Eisenhower that built our freeway system (when the maximum income tax rate was 92 percent), and President Nixon signed the Clean Air Act with a unanimous Senate.

The 1970s soon changed such cooperation. Republicans and their business interests began creating policies that made government more business friendly and less middle class friendly. Maybe it was the Arab Oil Embargo and the realization of how vulnerable we were to a disruption of energy supplies. It was also the era of so-called stagflation that lasted until 1980 with its sky high inflation and devalued assets.

We saw the growth business friendly lobbies, such as the Business Roundtable that began to spend heavily to influence elections and ease trade restrictions. That’s when President Reagan sounded the death knoll for unions (and collective bargaining) with the firing of Air Traffic Controllers in the PATCO strike. Corporations suddenly found it easier to terminate their employees and export those jobs and manufacturing plants overseas.

Household incomes began to shrink forever after, as President Reagan pushed through cuts in the maximum income tax rates for the wealthiest that had enabled Presidents Eisenhower to build our public infrastructure (when the maximum income tax rate was 92 percent), and Johnson to finance the Great Society that lowered poverty rates.

It was the beginning of President Reagan’s Trickle Down economic policies that his Budget Director David Stockman (in The Triumph of Politics) soon realized created horrendous budget deficits, with very little trickling down to the middle classes and below.

It made the conservatives credo of self-sufficiency a lie, as Republicans now blocked any attempt to raise the minimum wage. For how could families be self-sufficient and live on a minimum wage, unless they held two and three jobs, thus harming their families, and children of any chance for a good education?

Republicans have continued their all-out assault on government with their attempts to defund Obamacare that how insures tens of millions for the first time at lower costs, while continuing their efforts to privatize social security and Medicare.

Even public safety has been compromised with their refusal to help states rebalance their budgets that resulted in the loss of so many public employees during the Great Recession, such as police and teachers.

There is in fact no area that Republicans haven’t weakened the public commonweal. Every one of the Democrats’ infrastructure and job creation bills since 2011 have been blocked by either Senate or House Republicans in the name of paying down the public debt. Yet the productivity improvements and increased tax revenues generated by those jobs and an upgraded infrastructure are the only way to pay down that debt. And Republicans backed by their conservative lobbyists will no doubt continue to do so, until our road and bridges are no longer drivable.

It is a sad state of affairs when Republicans are no longer the wealth creators, but have become the party of no. Instead of finding ways to increase our productive capacity and boost household incomes, which are the real wealth creators, they continue to benefit the few at the top of the food chain, most of whom are only interested in enriching themselves.

PS—In an update of the 2012 jobs chart shown above, more net jobs have been created under Obama — 5,142,000 as of the August jobs report — than under George H.W. Bush — 2,637,000 — and George W. Bush — 1,282,000 — combined, according to the Federal Reserve Bank of St. Louis.

Harlan Green © 2014

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