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

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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

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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 in this graph that dates from January 1988 and 3 recessions (1991, 2001, and 2007).

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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

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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

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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

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Who’s To Blame For the Great Recession?

Popular Economics Weekly

Why has economic growth been so slow since the Great Recession? This is the question haunting many economists these days. Second quarter 2015 real GDP growth (after inflation) was just 2.3 percent six years after its end. This is better growth than any other developed economy, but still much too low for a sustainable recovery.

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Graph: Trading Economics

New York Times columnist and White House advisor Steven Rattner blames in part his own generation of baby boomers for their spendthrift ways that have run up so much debt, and made it harder for their millennial children to earn and save as much as their parents.

“Just to complete a dismal picture, millennials will also be the victims of the irresponsible fiscal policies pursued in large part by members of my generation. The massive budget deficits of recent years and projected needs to meet future obligations to retirees will result in a steady increase in federal debt, from less than 80 percent of gross domestic product today to an estimated 181 percent of G.D.P. by 2090.”

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Graph: The Atlantic

We know that members of the millennial generation are earning less than their parents—even those college-educated, per this graph of the decline in millennial median incomes 2007-13. And real personal incomes aren’t increasing more than 2 percent, which is also the inflation rate, these days. That has to be the major reason so-called aggregate demand—the overall growth in demand for domestic goods and services—is now less than 3 percent annually, mirroring current GDP growth rates.

And it is changes in the amount of aggregate demand (the sum of consumer spending + government spending + investment + net exports) that determines the rate of overall economic growth.

So another element in weaker aggregate demand is the massive cuts in government spending on such items as education, infrastructure and Research & Development by the conservative House majorities. Less spending on public improvements means less investments in future productivity. Delayed investments in decaying bridges, highways, energy and electrical grid networks; even the environment, means lost time and wages for the employed.

Can we blame the baby boomers for electing GW Bush, (or maybe it was the Supreme Court decision nullifying a Florida recount)? We’re talking here about the huge budget deficits generated since 2000, roots of the Great Recession, which has driven federal debt to the highest level since WWII, resulting in the loss of more than 8 million jobs and countless wealth.

But really, Bush’s first Treasury Secretary Paul O’Neill revealed in “The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O’Neill,” a book written with former Wall Street Journal reporter Ron Suskind, in great detail the reason for the huge budget deficits. The Bush administration chose to cut taxes for investors and corporations, rather than use the 4 years of Clinton budget surpluses to strengthen social security and Medicare.

Further damage was done with the invasion of Afghanistan and Iraq, which has added another $1 trillion to the deficit, after the Bush administration ignored warnings from the intelligence community that Al Qaeda was planning terrorist attacks on American soil, and that resulted in 9/11.

And then we have the consequence of VP Cheney’s policy statement that “deficits don’t matter”, echoing Ronald Reagan’s excuse for his record deficits to outspend the Soviet Union’s military machine. Government spending wasn’t cut, although the tax revenues to pay for that spending were cut during the Bush-Cheney era, which continues to add to the deficit to this day.

This massive deficit spending ultimately resulted in the Great Recession. How? Then Fed Chairman Greenspan’s policies of ultra-low interest rates and failure to regulate Wall Street excesses were designed to help pay for the Wars on Terror, while inflation rates were soaring close to 4 percent.

The result was basically free money, as inflation was increasing faster than interest rates, therefore making it more profitable to borrow than save. Hence the housing bubble, as interest rates below inflation poured gasoline on housing prices. Economists have estimated that those early years of double-digit housing price growth (as much as 20 percent) was fueled in large part by that ‘free’ money.

In the end Main Street and our middle class in particular didn’t benefit from the Bush tax cuts and reduced government revenues. We know where the money went—to the top 1 percent on Wall Street—so much so that the highest earning 25 hedge fund managers reported some $23.4 billion in annual income in 2013, for the privilege of pushing money around, instead of investing it productively.

So there is plenty of blame to go around for so much lost wealth, but the result has been that Wall Street and major corporations were the beneficiaries of the Great Recession, not Main Street.

Harlan Green © 2015

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

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Case-Shiller Home Prices Up, Ownership Rate Lower

The Mortgage Corner

Home prices have stabilized for a while, after the 2013 double-digit price surge brought on by the Fed’s various QE bond purchases and ultra-low interest rates. And homeownership rates are still dropping due mainly to affordability and lack of supply, but homeownership might improve as more new homes are being built and inventories increasing after several years of skimpy supplies.

The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a 4.4 percent annual increase in May 2015 versus a 4.3 percent increase in April 2015.The 10-City Composite and National indices showed slightly higher year-over-year gains while the 20-City Composite had marginally lower year-over-year gains when compared to last month. The 10-City Composite gained 4.7 percent year-over-year, while the 20-City Composite gained 4.9 percent year-over-year.

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Graph: Calculated Risk

And home ownership rates continue to decline, perhaps because the newer generation of entry-level householders either prefer to rent or cannot yet afford to buy a home. The US Census Bureau reported the second quarter 2015 homeownership rate dropped to 63.4 percent from 64.7 percent in Q2 2014.

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Graph: Census Bureau

We know more people are renting because housing vacancy rates are falling for both rental and homeowner housing; down 0.7 percent to 6.8 percent nationally for rentals, and to 1.8 percent for owned housing. Homeownership rates were highest in the Midwest (68.4 percent) and lowest in the West (58.5 percent). The homeownership rates in the Northeast, Midwest, South and West were lower than the rates in the second quarter 2014.

There is some optimism that homeownership rates will rise, though, as household formation returns to its historical 1 million plus per year rate. The Harvard Joint Center for Housing Studies predicts some 1.2 million households per year will be formed over the next ten years, up from the current low levels spawned mostly by the Great Recession.

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Graph: Calculated Risk

One obstacle to greater homeownership will be affordability, however, until inventories are replenished. This Calculated Risk Price-to-Rent ratio graph shows how prices are rising again in relation to rents. And when price rises outdistance rent increases over an extended period, a housing bubble ensues, as can be seen from the peak formed just before the Great Recession (large gray bar on graph).

But the Price-to-Rent ration seems to be leveling off, in part because rents are rising as well. And as rents continue to rise, it will motivate more renters to buy. And the recent increase in building permits and housing construction should help keep more homes affordable for those first-time homebuyers that want to buy.

Harlan Green © 2015

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

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