A Good Jobs Report

Financial FAQs

Should we push back the first Fed rate hike to the presidential election year of 2016, because of June’s softer-than-expected employment report? Nonfarm payroll growth came in at 223,000 vs expectations for 230,000 and above. It included downward revisions totaling 60,000 to the two prior months (May revised to 254,000 from 280,000 and April to 187,000 from 221,000), said the Bureau of Labor Statistics report.

I doubt the Fed will wait that long, as the most recent economic data shows boom times—from rising home prices, as well as construction spending, and manufacturing activity on the rise again. This could be a temporary softness, in other words, as the US economy approaches full employment.  And it is a good jobs report, given all the uncertainties affecting economic growth these days.

Softness in payroll growth was combined with softness in wage pressures with average hourly earnings unchanged in the month and the year-on-year rate moving down to 2.0 percent from 2.3 percent. But that can be deceptive. Median household wages are now rising 3 percent, which means the income ‘bar’ for 50 percent of the families doing well is rising faster than inflation.

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Graph: Marketwatch

But there is still a lot of labor slack in our job market that Fed Chair Yellen has been talking so much about. This is most evidenced by part-timers who would rather work fulltime, according to the BLS. Their numbers are declining, from 6.65 million to 6.51 million in one month, but would still have to drop by one-third to return to the range that prevailed from the 1970s until the start of the Great Recession in this Calculated Risk graph.

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Graph: Calculated Risk

And the labor force participation rate just declined to 62.6 percent, from its historical 67 percent in the Calculated Risk graph that dates from 1960. Economists are not sure of the reasons. It may be the working age population is not growing as fast—just 0.5 percent, instead of historical 1 percent, according to the latest census figures, but that shouldn’t affect the participation rate of those actually looking for work.

It could be that while more of the older workers are dropping out, the newest generation aged 16 to 35 years, now the largest segment, is just entering the work force. This is why the actual unemployment rate fell to 5.3 percent. More dropped out of the labor force (432,000 seasonally adjusted) than were newly employed, according to the household survey that also tracks the self-employed.

So look for a Fed rate increase before the end of 2015—but only one—maybe in September. That means 2016 might be a wild year, with both economic growth and politics dependent on so many factors—such as the dollar strength, inflation, the price of oil, the Eurozone, and even geopolitical uncertainty.

Harlan Green © 2015

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It’s Time For the 30-hour Week

Popular Economics Weekly

Don’t look now, but we should soon have the 30-hour work week as the standard, instead of the 40-hour work week last enshrined during FDR’s New Deal. Why, when Americans now work more hours than any other developed country?

There are a number of good reasons, and they have little to do with the ACA, or Obamacare, which has decreed that 30 hours per week is considered to be full time employment for large businesses that are required to offer insurance coverage to their employees.

But it has a lot to do with the labor slack in our job market that Fed Chair Yellen has been talking so much about, and the declining health and welfare of American workers. Thanks to the tech revolution and huge productivity gains of those past 30 years, fewer workers are needed to do the same amount of work in the digital world. So if fewer workers are needed to do the same work, then why are more employees working overtime?

Maybe because no one in America has thought through the consequences. What would it mean to share the workload with more people? The Germans certainly have done something about it. Rather than fire employees when times were tough in Germany’s last recession, firms hit hardest by the reduction in demand reduced their employees’ working hours to spread the pain.

And, the four-day workweek is nearly standard in the Netherlands, especially among working moms, according to a CNN Money article. Overall, the entire workforce averages around 29 hours a week — the lowest of any industrialized nation, according to the OECD.

Some 86 percent of employed mothers worked 34 hours or less each week last year, according to Dutch government statistics, as reported by CNN. Among fathers, about 12 percent also worked a shortened workweek. Denmark is close behind with a 33 hour average work week and five weeks of paid vacation.

“Dutch laws promote a work-life balance and protect part-time workers,” said the report. All workers there are entitled to fully paid vacation days, maternity and paternity leave. A law passed in 2000 also gives workers the right to reduce their hours to a part-time schedule, while keeping their job, hourly pay, health care and pro-rated benefits.

Whereas in a U.S., a Gallup survey last summer found that the average for full-time employees was actually 47 hours—or 46 if you isolate those workers with just one job. Either way, that’s almost the equivalent of an extra business day on top of the usual five-day workweek. And it’s affecting our health and longevity.

Of the more than 1,200 adults surveyed by Gallup, 21 percent said they worked 50 to 59 hours while 18 percent said they worked 60 or more. Another 11 percent estimated 41 to 49 hours. It is an insanity that American workers have become such workaholics at the expense of their health, their families, and their own sanity.

The Centers for Disease Control and Prevention cites studies that found “a pattern of deteriorating performance on psycho physiological tests as well as injuries while working long hours.”

It also cited four studies that found “that the 9th to 12th hours of work were associated with feelings of decreased alertness and increased fatigue, lower cognitive function, [and] declines in vigilance on task measures.”

Wouldn’t this be the least painless way for workers to catch up to the incomes of their bosses that now earn on average 303 times their average employees’ income, according to a recent EPI study? Where have most of the productivity profits since the late 1970s gone, as illustrated by the BLS graph? To those executives and their stockholders, as this graph illustrates.

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It’s no longer a secret that America is the most over-worked country in the developed world, according to the Center For American Progress, a progressive think tank. It is the only developed country with no mandated vacation, sick leave or parental work leave allowances, which even many third world countries like Afghanistan and Ethiopia have.

In fact, it is already beginning to happen among high tech firms that allow flex hours and even work at home. A 4-day — or compressed — workweek is offered as an option to at least some employees at 43 percent of companies, according to the Society for Human Resource Management. But only 10 percent of those companies make it available to all or most of their employees.

And there are roughly two dozen local union contracts that include a compressed workweek option for public-service employees working in municipalities, universities and institutions such as prisons, according to the American Federation of State, County and Municipal Employees.

So there is no good reason America, the richest country in the world, should remain an underdeveloped, overworked country anymore.

Harlan Green © 2015

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Consumers Earn and Spend More This Year

Financial FAQs

The consumer came to life in May, boosted by a 0.5 percent rise in personal income and helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. The spending surge will also boost housing, already showing much better numbers, and the rest of the economy this year.

This is while the gains are not inflationary, at least yet, based on the very closely watched core Personal Consumption Expenditure (PCE) price index which edged only 0.1 tenth higher in May and is at a very benign 1.2 percent year-on-year rate which is actually down a tenth from an upward revised April.

Also, consumer optimism is absolutely as strong as it gets well beyond forecasts to 96.1, according to the University of Michigan consumer sentiment index. The expectations component, reflecting strong optimism for the jobs market, is an absolute standout, at 97.8 for a 12-year high and an 11.0 point surge from mid-month and a 13.6 point surge from final May, said Econoday. The survey is now back to early 2000 levels in this graph that dates back to 1978 and five recessions.

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Graph: Calculated Risk

And such increased household incomes and employment have boosted housing construction and permits, which in turn boosts lots of ancillary sectors, such as Professional Services, Insurance, and Banking. Housing starts came in at a 1.036 million rate in May which is down 11.1 percent from the April rate, as we reported – but the April rate, which was already one for the record books, was revised even  higher to 1.165 million for, and this is no misprint, a 22.1 percent gain from March.

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Graph: Econoday

Increased consumer optimism has to be why we see the gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April, which means future construction growth. Permits are the leading indicator in the report and the latest permit rate is the best since way back in August 2007. Based if nothing else than on permits, the housing sector, following the heavy weather of the first quarter, is moving to the top of the economy.

For home buying, the 30 to 39 age group (blue line) is important in this Calculated Risk graph.  The population in this age group is increasing, and will increase significantly over the next 10 plus years.   From roughly 2020 this predominately home buying age group will outnumber all the other age groups in this graph that projects out to 2060.

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Graph: Calculated Risk

This increase in the demand for goods and services, including housing, is in fact because of the millennial generation, as I’ve said in past columns. Its numbers have now surpassed their parents’ baby boomer generation, and will continue to expand as more become adults, enter the workforce, and raise families.

Harlan Green © 2015

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Why Lower Growth, Higher Corporate Profits?

Popular Economics Weekly

First-quarter economic growth wasn’t as bad as expected, yet corporate profits were much better than expected. So what are corporations doing with their profits, rather than investing in future growth?

The second revision to first-quarter GDP came in at minus 0.2 percent. Exports were near the top of the negative side, reflecting the strong dollar’s negative effect on foreign demand. A rise in imports was the quarter’s biggest negative, and consumer spending on services the biggest positive. Personal Consumption (PCE) grew 2.1 percent annually, reflecting happier consumers, and residential investment surged to 6.5 percent, as growing new and existing-home sales show the housing market in recovery.

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Graph: Econoday

This is while corporate profits continued their record ways, up 9 percent annually. So where are the profits going, with most Fortune 500 corporations paying much less than the nominal fed tax rate of 35 percent? Analyst estimates show total S&P 500 capex spending could dip 11 percent to $641.6 billion in 2015 from actual 2014 spending of $718.1 billion, marking the lowest level since 2011’s $591.5 billion, according to Thomson Reuters data.

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Graph: Econoday

“U.S. corporate spending on capital projects could fall this year to the lowest level since 2011, with steep reductions by the energy industry and companies in other sectors cutting spending amid broad concerns about global growth,” said the Thomson Reuters report. That could translate to lower job growth and weakness in the technology and industrial companies that typically benefit from capital spending.

So then what do corporations do with their excess cash? S&P 500 companies still have record levels of cash on their balance sheets—somewhere between $3.5 to $5 Trillion, according to the St. Louis Fed—as spending on stock buybacks and dividend payments has come at the expense of capex for many companies.

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Graph: St. Louis Fed

In fact, this has been to the detriment of both profits and growth of those companies that have hoarded their cash reserves, according to a Deloitte LLP report, The Cash Paradox: How Record Cash Reserves Are Influencing Corporate Behavior . “Critically, a divergence in share price between the cash hoarders and the spenders has emerged,” says Iain Macmillan, partner and head of M&A and New Growth for Deloitte LLP in the U.K.

“Since 2000, the share price performance of the small cash holding companies has outperformed their large cash holding counterparts, growing by an astonishing 632 percent compared to 327 percent for their larger cash holding counterparts. Remarkably, the gap widened even more after the financial downturn. This suggests that in the long run, the markets are rewarding companies that take a more bullish attitude toward growth.”

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Graph: Deloitte LLP

That should be a no-brainer for corporate heads (red line in graph is larger corporations). So it seems that cash buybacks and dividend payments are not the way to spend profits to increase market share and overall growth. Corporate CEOs now make on average 300 times their employees’ average income, much of it in stock options that tend to increase in value with stock buybacks and increased dividends.

It is no longer a secret that CEO compensation has reached stratospheric levels. The AFl-CIO Union website catalogues those compensation levels—with the majority from stock holdings, rather than outright salaries. JP Morgan Chase CEO Jamie Dimon earned just a $1.5 million salary in 2014, but more than $20 million in stock compensation, for example.

The Economic Policy Institute revealed Monday that the average total compensation of CEOs at the 350 largest firms was $16.3 million in 2014, roughly 303 times the average pay of their workers, reports CNN. The divide between CEO and worker pay has increased every year since 2009, when CEO salaries dropped to 196 times the average work, according to the report. While CEO pay has risen 997 percent since 1978, the average employee pay has grown 10.9 percent.

So why not raise their employees’ wages and benefits with some of the cash hoard—for instance, retirement and healthcare benefits? Then, instead of enriching themselves, those CEOs would see an increase in demand for their products and services.

This is standard aggregate demand theory, and once again obvious to those concerned with our poor economic growth record, economic growth that has been steadily declining since 1980. Consumers make up some 70 percent of economic activity these days, ergo if corporate CEOs paid their employees more, it benefits corporate bottom lines, as well!

Harlan Green © 2015

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Housing Beginning to Bloom

The Mortgage Corner

Ultra-low interest rates are finally beginning to pay off.  The housing season is beginning to bloom—for first-time homebuyers, in particular. The National Association of Realtors reports total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 5.1 percent to a seasonally adjusted annual rate of 5.35 million in May from an upwardly revised 5.09 million in April, largely because of the surge in first time buyers. Sales have now increased year-over-year for eight consecutive months and are 9.2 percent above a year ago (4.90 million).

And new-home sales also soared. New single-family homes in the U.S. sold at an annual rate of 546,000 in May, hitting the fastest pace since February 2008, with growth in two of four regions, reports the U.S. Census Bureau this morning. And it revised April’s rate to 534,000. May’s sales rate was up 19.5 percent from a year earlier, signaling a healthy pick up, though recent sales rates remain below long-term averages.

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Graph: Calculated Risk

This graph shows existing-home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in May (5.35 million SAAR) were 5.1 percent higher than last month, and were 9.2 percent above the May 2014 rate.

Lawrence Yun, NAR chief economist, says May home sales rebounded strongly following April’s decline and are now at their highest pace since November 2009 (5.44 million). “Solid sales gains were seen throughout the country in May as more homeowners listed their home for sale and therefore provided greater choices for buyers,” he said. “However, overall supply still remains tight, homes are selling fast and price growth in many markets continues to teeter at or near double-digit appreciation. Without solid gains in new home construction, prices will likely stay elevated — even with higher mortgage rates above 4 percent.”

The percent share of first-time buyers rose to 32 percent in May, up from 30 percent in April and matching the highest share since September 2012. A year ago, first-time buyers represented 27 percent of all buyers.

“The return of first-time buyers in May is an encouraging sign and is the result of multiple factors, including strong job gains among young adults, less expensive mortgage insurance and lenders offering low down payment programs,” said Yun. “More first-time buyers are expected to enter the market in coming months, but the overall share climbing higher will depend on how fast rates and prices rise.”

The huge jump in existing-home sales means more demand for new homes, as we said last week. The median price of new homes fell 1 percent to $282,800 compared with May 2014, also a good sign for the first-time homebuyers. But there are still not enough homes for sale. The supply of new homes was 4.5 months at May’s sales pace, down from 4.6 months in April.

New Home Sales

Graph: Calculated Risk

This is also why housing starts came in at a 1.036 million rate in May. Though down 11.1 percent from the April rate, which was already one for the record books. But April is now revised higher to 1.165 million, a 22.1 percent gain from March. Sealing matters is another gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April.

And this is buttressed by builder confidence in the market for newly built, single-family homes in June up five points to a level of 59, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since September 2014, and in fact returns the index to pre-bubble (2001-02) levels.

Why the huge construction increase in June? This is while mortgage rates are rising, up some 0.375 percent since their most recent lows to 3.875 percent for 0 points in origination fees for a 30-year fixed rate conforming loan.

Firstly, it means consumers are confident enough in their future to begin to look for housing to support their growing families.  And the millennial generation aged 18 to 36 years has already reached their parents’ baby boomer population size, and will exceed it by 2020, according to demographers. This has to be why household formation is finally returning to normal levels of 1 million plus new households being formed per year, as the so-called echo boomers move out of their parents’ homes and or leave college to make their own nests.

So forecasters will probably be revising their second-quarter GDP estimates higher following the better housing numbers, not to mention their estimates for Thursday’s index of leading economic indicators where permits are one of the components, as we said last week.

Harlan Green © 2015

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Housing Construction Soars

The Mortgage Corner

Housing construction is taking off, as I predicted two weeks ago. The numbers show actual construction starts accelerating as well as building permits for future construction. It is also boosting builder confidence to a level that signals continued growth in new construction.

As Econoday reported, “Don’t let the headline fool you (i.e., slight drop in June), the housing starts & permits report points to solid strength for the housing sector.” Though the Calculated Risk graph shows how far the housing market is from a true recovery. It is only now returning to the lows of the 1990 recession.

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Graph: Calculated Risk

Housing starts came in at a 1.036 million rate in May, down 11.1 percent from the April rate but the April rate, which was already one for the record books, is now revised higher to 1.165 million, a 22.1 percent gain from March. Sealing matters is another gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April.

And builder confidence in the market for newly built, single-family homes in June rose five points to a level of 59, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since September 2014, and in fact returns the index to pre-bubble (2001-02) levels.

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Graph: Calculated Risk

“The HMI indices measuring current and future sales expectations are at their highest levels since the last quarter of 2005, indicating a growing optimism among builders that housing will continue to strengthen in the months ahead,” said NAHB Chief Economist David Crowe. “At the same time, builders remain sensitive to consumers’ ability to buy a new home.”

All three HMI components posted healthy gains in June. The component gauging current sales conditions jumped seven points to 65, the index charting sales expectations in the next six months increased six points to 69, and the component measuring buyer traffic rose five points to 44, said the press release.

Why the huge construction increase in June? This is while mortgage rates are rising, up some 0.375 percent since their most recent lows to 3.875 percent for 0 points in origination fees for a 30-year fixed rate conforming loan. Firstly, it means consumers are confident enough in their future to begin to look for housing to support their growing families.

And this is, of course, the millennial generation aged 18 to 36 years that has already surpassed their parents’ baby boomer population size, and will exceed it by 2020, according to demographers.

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Graph: CNBC

Also, household formation is finally returning to normal levels of 1 million plus new households being formed per year, as the so-called echo boomers move out of their parents’ homes and or leave college to make their own nests.

Household formation has been unusually low over the past seven years, averaging 577,000 new households. Whereas, there are approximately 15 million new households per decade being formed during normal times.

So, “there’s a ton of people living in basements,” Tommy Lee of Fundstrat Global Advisors said in an interview with CNBC’s “Trading Nation.” “Two quarters of pretty decent household formation isn’t getting everybody out of the basement. I think this means we have multiple years where household formations are well over 1.3 million, 1.4 million.”

Forecasters will be revising their second-quarter GDP estimates higher following today’s report, says Econoday, not to mention their estimates for Thursday’s index of leading economic indicators where permits are one of the components.

Harlan Green © 2015

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Higher Retail Sales + Consumer Confidence = Growth

Popular Economics Weekly

The consumer showed a lot of life in May, driving up retail sales 1.2 percent with gains sweeping nearly all components. A leading component in the month was motor vehicle sales which jumped 2.0 percent, excluding which retail sales still rose a very strong 1.0 percent. Another component showing special strength was gasoline sales which got a boost from higher prices.

Still, excluding both of these components, retail sales ex-auto ex-gas gained a very solid 0.7 percent. These results offset weakness in April, when total sales rose only 0.2 percent (upward revised from no change).

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Graph: Econoday

Consumer sentiment is also up, jumping nearly 4 points to 94.6 which is well above expectations for 91.2. The gain is centered in the current conditions component, up 6.0 points to 106.8, which offers an early signal for June-to-May consumer strength. The expectations component shows a smaller but still healthy gain, up 2.6 points to 86.8. The gain here points to confidence in the jobs outlook.

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Graph: Econoday

What does all this mean? Apart from vehicles and gasoline, building materials & garden equipment stores, were up 2.1 percent in what is a good sign for the housing sector. Clothing & accessories stores rose 1.5 percent while non store retailers rose 1.4 percent. Department stores, which sank a steep 2.9 percent in April, rebounded with a 0.8 percent gain.

And, there were solid upward revisions to the two prior months with total sales in April moving from unchanged to plus 0.2 percent and March moving from plus 1.1 percent to 1.5 percent. The May burst and April revision have forecasters raising their second-quarter GDP estimates while the March revision has them raising their first-quarter revision estimates.

This should mean we will see much better GDP growth for the rest of 2015, and maybe into 2016, which is a Presidential election year, let us not forget, as the unemployment rate continues to fall. And Presidential years have historically shown better growth, for some reason.

Harlan Green © 2015

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