Thursday, April 19, 2018

The Results of Record Income Inequality

Financial FAQs

We know the results of trickle-down economic theory that says lower taxes and government regulations are supposed to lift all boats, as epitomized in Republicans’ latest tax bill. After the ninth year of this recovery, just 10 percent of American household benefited at all from subsequent economic growth.

In spite of the huge stock market recovery that has the S&P 500 index of largest US corporations up more than 25 percent since 2009, only the top 10 percent of income earners increased their net worth.
The busted housing bubble was a culprit, but also labor practices that have literally either outlawed collective bargaining for many workers, or enacted so called right-to-work laws that enable union members not to pay dues, even if they have benefited from union bargaining.

The result is that 25 percent of American workers earn less than poverty-level wages of $24,000 for a family of four, and household incomes haven’t risen faster than inflation since the 1980s. The national minimum wage hasn’t risen above $7.25 per hour since 2009, either.

Princeton’s Nobel laureate Angus Deaton has studied poverty and its causes for most of his professional live.
He said in a recent Project Syndicate article, a progressive journal: “Making matters worse”, he said, “more than 20 percent of workers are now bound by non-compete clauses, which reduce workers’ bargaining power—and thus their wages. Similarly, 28 US states have now enacted “right-to-work” laws, which forbid collective-bargaining arrangements that would require workers either to join unions or pay union dues. As a result, disputes between businesses and consumers or workers are increasingly settled out of court through arbitration—a process that is overwhelmingly favorable to businesses.”

This is while corporate America is expected to post its best quarter of profit growth in seven years, according to Marketwatch’s Ryan Vlastelica. “For the poorest American families, in the lowest fifth of wealth, their net worth shed 29 percent over that period. Drops of at least 20 percent were also seen in every income percentile except for those in the 80-89.9 percentile, where the decline was a more modest 5 percent. The wealthiest decile, however, saw a jump of 27 percent, as seen in the above chart.”
As I have covered in countless past columns, America actually ranks among the worst countries when it comes to income inequality, based on its Gini coefficient, a measure of the wealth distribution of a country’s residents. The coefficient for the U.S. is slightly less than 0.40, which puts it roughly even with Turkey and Botswana, and more unequal than nations as Israel, Greece, Spain, and Germany. Iceland, the most equal society measured by Deutsche Bank, has a coefficient below 0.25.

There are many remedies to this situation. One has but to look at past history. Our fastest growth period was during the 1950s and 1960s, when the top income-earners’ tax bracket was 92 percent, unions were strong, and corporate CEOs earned 25 times what their employees earned. This built both the physical and digital infrastructure that gave us the record prosperity of that era. We also developed the Internet, and landed on the Moon.That tax structure was a way of redistributing income where it would do the most public good. 

Today, corporate CEOs in the largest corporations earn on average 300 times what their employees earn. We enrich the already wealthy, in other words, and neglect to plant the seed corn that would create future prosperity.

Harlan Green © 2018

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Monday, April 2, 2018

Q4 GDP Growth Up 2.9% Q/Q

Financial FAQs

Fourth quarter Gross Domestic Product, the total value of the country's production of purchases of domestically-produced goods and services by individuals, businesses, foreigners and government entities, rose to 2.9 percent from 2.6 percent in its third and final revision by the Commerce Department, finishing off 2017 with a bang and raising total 2017 GDP growth to 2.6 percent.

It was mostly consumer spending, up 4 percent, but personal incomes are rising faster as well, which will boost spending and continued good growth in 2018. This is because Real Disposable Income (less inflation and taxes) rose 0.4 percent pushing the annual increase to more than 2 percent.

“The strongest news in the report comes from the wages & salaries component of personal income which posted a fourth straight sharp gain,” reports Econoday, “at 0.5 percent. This helped total income which rose 0.4 percent for a third straight month and also helped the savings rate which rose 2 tenths to a still modest 3.4 percent.”

This measure includes all forms of compensation including employer contributions to medical insurance and pensions and has been showing more life than average hourly earnings, which is part of the monthly employment report and is the most closely watched of all wage measures.

However, it did nothing to inflation, as the GDP’s price index rose 2.3 percent Q/Q, but is up just 1.8 percent annually, as is the Fed’s preferred Personal Consumption (PCE) index. So still no inflation, even though wage and salaries are beginning to surge, and labor costs account for 2/3rds of product costs.

The Fed has said it will probably raise their interest rate twice more this year, which will put the Prime Rate at 5.25 percent, raising credit card rates and crimping consumer borrowing.

But with wages soaring, that may not slow down consumer spending or the growing foreign trade deficit. The goods deficit from countries such as China is now $75B/per in February and growing. So why is this administration pushing for trade tariffs, which is already instigating a trade war, and making those same goods more expensive to Americans?

No one believes this will reduce the trade deficit, either, as the manufactured goods we export will become more expensive, as well, reducing the demand for exports.

Harlan Green © 2018

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Wednesday, March 28, 2018

US Manufacturing Leads 2018 Growth For How Along?

Popular Economics Weekly

Graph: Econoday

US manufacturing looks to lead US economic activity this year. Why? Durable goods orders are growing incredibly fast, which are any products that last more than 3 years. This means aircraft and military goods orders, as well as appliances and other household items.

The blue columns of the graph track monthly order totals for durable goods which came in at $247.7 billion in February for a jump of 3.1 percent compared with January. The green line tracks shipments of durables which totaled $249.7 billion for a 0.9 percent increase which is sizable for this measure.

A subset of these factory orders are core capital goods, which boost labor productivity (meaning goods produced per worker hour) that has been lagging for years. Capital goods get the most attention as demand for these, from machinery to computers points to increasing fixed investment as businesses put new equipment in place to meet what they expect will be rising demand ahead.

Much of the strength comes from core capital goods orders (i.e., nondefense ex-aircraft that boost manufacturing productivity) where year-on-year growth, moved up nearly 2 percentage points to 8.0 percent, says Econoday. One caveat is that orders for primary metals surged a monthly 2.7 percent in a gain that may reflect, based on reports from regional and private surveys, rising prices for steel and aluminum.

That is a sign that the ongoing tariff negotiations mean rising prices for manufactured and consumer goods. Let’s not forget that most of the world’s trade agreements are centered on reducing prices by locating production of these goods where they are most cheaply produced—an economic concept called comparative advantage. Adding tariffs only adds to their costs, and American consumers with their limited incomes will suffer, as we import most of our consumer products.

But Americans working in industries that use steel and aluminum products will also be affected by rising prices, which has to reduce demand for their products, as well.

It's worth noting that these prices were already climbing ahead of possible steel and aluminum tariffs announced earlier this month. Fabrication orders rose 0.8 percent in February with machinery, which is at the very heart of the capital-goods group, rising 1.6 percent.

So it seems the cost of equalizing our trade agreements will on balance do little to correct our trade imbalance, because as products become more expensive they reduce demand for those products. That is, unless the salaries of US workers and consumers increase at the same rate. But then aren’t we back to the feared wage-and-price spirals of the 1970s that caused record inflation, and caused the Fed to raise interest rates to record levels in the 1980s?

The Fed might do the same if it sees such inflation in the cards again.  The way to increase demand for anything is to lower their costs, not raise them, which our current low-tariff trade agreements have been doing.

Harlan Green © 2018

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Monday, March 26, 2018

Housing Sales, Leading Economic Indicators, Higher

The Mortgage Corner

Higher new and existing-home sales, and continued economic growth are the reason the Fed raised their overnight rate into a range between 1.5 to 1.75 percent on Wednesday. Even with consistently low inventory levels and faster price growth, existing-home sales bounced back in February after two straight months of declines, according to the National Association of Realtors.

And The Conference Board Leading Economic Index (LEI) for the U.S. that measures future growth possibilities increased 0.6 percent in February to 108.7 (2016 = 100), following a 0.8 percent increase in January, and a 0.7 percent increase in December. It points to accelerating growth this year.

Total existing-home sales, , which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, grew 3.0 percent to a seasonally adjusted annual rate of 5.54 million in February from 5.38 million in January. After last month’s increase, sales are now 1.1 percent above a year ago.

Lawrence Yun, NAR chief economist, says sales were uneven across the country in February but did increase nicely overall. “A big jump in existing sales in the South and West last month helped the housing market recover from a two-month sales slump,” he said. “The very healthy U.S. economy and labor market are creating a sizeable interest in buying a home in early 2018. However, even as seasonal inventory gains helped boost sales last month, home prices – especially in the West – shot up considerably. Affordability continues to be a pressing issue because new and existing housing supply is still severely subpar.”
New-home sales are also surging, up 2.2 percent annually in February reports the Commerce Department, and 9.4 percent in 2017 overall. Inventories are also up to a 5.9-month supply and the median sales price in February was $326,800, nearly 10 percent higher than a year ago.

And, “The U.S. LEI rose again, despite a sharp downturn in stock markets and weakness in housing construction in February,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The LEI points to robust economic growth throughout 2018. Its six-month growth rate has not been this high since the first quarter of 2011. While the Federal Reserve is on track to continue raising its benchmark rate for the rest of the year, the recent weakness in residential construction and stock prices – important leading indicators - should be monitored closely.”
What recent weakness? Single-family starts, which are key to restocking the new home market, rose 2.9 percent to a 902,000 rate which is up 2.9 percent from this time last year.  Director Ozyildirim was really talking about the fears of a trade war with Trump’s tariffs on China and Japan about to be enacted. The administration is exempting Australia, Brazil, S Korea, Great Britain, EU, Mexico and Canada at the moment.

Total housing inventory at the end of February rose 4.6 percent to 1.59 million existing homes available for sale, said the NAR, but is still 8.1 percent lower than a year ago (1.73 million) and has fallen year-over-year for 33 consecutive months. Unsold inventory is at a 3.4-month supply at the current sales pace (3.8 months a year ago).

What about future interest rates? Fed Chairman Powell wants to toe the “middle ground” on rates, which means raising them slowly this year, as he sees no inflation at all on the horizon. The problem with raising interest rates with so little inflation is it crimps household spending and so growth. This particular set of conditions—raising interest rates with little inflation—has always been the precursor to a recession.

Harlan Green © 2018

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Tuesday, March 20, 2018

POTUS's Reptilian Brain

Does this description sound familiar? “Territoriality, hierarchical structure of power, control, ownership, wars, jealousy, anger, fear, hostility, worry, stuck or frozen with fear, aggressiveness, conflict, extremist behavior, competitiveness, cold-blooded, dog-eat-dog beliefs, might is right, and survival of the fittest,” is one definition of reptilian behavior.

It also describes the behavior of President Donald Trump. Psychotherapists have been attempting to explain POTUS’s behavior in psychological terms. Many have said he suffers from NPD, or Narcissistic Personality Disorder, defined in the DSM V treatment manual, as “… grandiosity, seeking excessive admiration, and a lack of empathy (Ronningstam & Weinberg, 2013).”

But why not turn to the biological sciences to describe President Trump’s behavior? The human brain is most simplistically described as having 3 parts; the earliest reptilian brain that contains our brute survival mechanisms; the mammalian limbic brain is the center of emotions and empathy; and neo-cortex the thinking part that modulates urges emanating from the other regions of the brain because of its ability to reason and judge.

A more basic way to define the reptilian brain is it contains the fight, flight, or freeze commands when an animal or human feels threatened. I am reminded of the behavior of pet Pythons, the largest of our snakes, who have literally turned on their owners—some eaten, others strangled, even though said Pythons were supposedly domesticated.

The most common explanation given by Herpetologists for such ‘aberrant’ behavior is that some pet Pythons were just biding their time when handled by their owners—they were measuring the size of their owner to know if they could be ingested. So they were following their basic instincts, as Trump is want to do. There have been cases of adult humans being attacked and fully ingested by Burmese Pythons—the largest Pythons—in the wild, as well.

What else could explain the behavior of this President whose success can only be attributed to a lifetime of lies and deceptions; who has ‘ingested’ those working closest to him by destroying their reputations, if they displease or are no longer of use to him?

The human species is mammalian because we give live birth to our offspring. But mammals evolved originally from reptiles; hence we still have the earliest reptilian brain that has been called the “lizard brain” because it provides the basic elements we need to survive.

This also explains POTUS’s authoritarian behavior, as perhaps that of the most extreme autocrats; Hitler, Stalin, and Vladimir Putin, who have literally killed their own people.

The question is how much longer Americans will tolerate such reptilian behavior.

Harlan Green © 2018

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Friday, March 16, 2018

A Gangbuster Employment Report

Popular Economics Weekly

The U.S. added 313,000 new jobs in February, the biggest gain in a year and a half and clear evidence that a strong economy has plenty of room to keep expanding, said Marketwatch. The unemployment rate of 4.1 percent remained at a 17-year low.

And despite the big increase in hiring, wage growth did not keep up. Hourly pay rose 4 cents to $26.75 an hour, but the yearly increase in wages tapered off. The 12-month increase in pay slipped to 2.6 percent from a revised 2.8 percent in January.

Construction companies hired 61,000 people to mark the biggest increase in 11 years. Retailers added 50,000 jobs, as did professional-oriented businesses. And manufacturers filled 31,000 positions. Workers also put more time in on the job, reversing a weather-induced decline in the first month of the year.

What’s more, the economy added 54,000 more jobs in January and December than previously reported. Altogether, the economy has gained an average of 242,000 new jobs in the past three months. That’s much stronger than the 182,000 monthly average in 2017.

Hourly pay is still not rising fast enough to cause inflation. We have to watch the 10-year T Bill for any signs of future inflation. Its yield is still below 3 percent, so the Fed might not raise their rate as quickly. The Chicago Fed’s Charles Evans just suggested the Fed could wait until mid-year before hiking short term rates.

But effects of the steel and aluminum tariff hikes will be the big unknown for inflation. If this initiates a trade war with the EU and China, in particular, all bets are off for continued high growth as rising primary metal prices will boost inflation with a vengeance, and endanger the jobs of those 6 million workers that make products from those metals.

There is also a problem with our national savings rate. Marketwatch’s Rex Nutting points out it has sunk to a post-WWII low, which means more foreign investment than ever is needed to fund our balance of payments problem; something better trade agreements won’t cure. Because Americans still like to import more consumer goods than they export manufacturing goods and services, as I said yesterday.

Consumer products and automobiles are the primary drivers of the current $566 billion trade deficit. In 2017, the United States imported $602 billion in generic drugs, televisions, clothing, and other household items. It only exported $198 billion of consumer goods. The imbalance added $404 billion to the deficit. America imported $359 billion worth of automobiles and parts, while only exporting $158 billion.

So there are many caveats to continued strong jobs growth in 2018. Firstly we can’t have a trade war, and secondly, foreign investors still must buy enough US stocks, bonds, and Treasury securities to keep long term interest rates stable.

Harlan Green © 2018

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Wednesday, March 14, 2018

Where is the Inflation, and Higher Growth?

Financial FAQs

The drumbeat for a higher inflation target is picking up. The Chicago Fed’s Charles Evans recently advocated a less hawkish Fed stanch on maintaining the 2 percent inflation target with few signs of inflation even on the horizon.

Elizabeth Sawhill, a Senior Fellow at Brookings in a New York Times Op-ed, on the heels of February’s almost record 313,000 job creation number, is also saying that higher inflation would be desirable after many years of too low inflation.
“In fact, a high-pressure economy, with wages and prices a little higher than we’ve become used to, might actually do a lot of good for the people who need it most,” said Sawhill. “Working families need a tight labor market — and higher wages — to get ahead. It would be a costly mistake to raise rates too much or too soon.”
I have been saying this for years, as we know that higher growth and higher inflation go hand-in-hand, which in turn boosts wages. The Fed’s preferred PCE and retail CPI indexes have remained below 2 percent since 2008, while the GDP growth rate has also averaged just 2 percent.

Why don’t we have higher growth? Because higher GDP growth requires corporate profits reach those that will invest or spend them, including governments, working folk, and corporations have been better at buying back their own stock rather than investing their profits, as I’ve also been saying in past columns. While governments have been living on austerity budgets since the Great Recession.
“We are in the midst of a big fiscal and monetary experiment, says Sawhill. “And as with any experiment, the consequences are unknown. What we do know is that the costs of the Great Recession were enormous — at least $4 trillion in lost income, or about $30,000 per household, according to my calculations. The biggest losses were experienced by those in the bottom and middle portions of the income distribution who lost jobs and saw much of the equity in their homes destroyed.”

What is the best way to boost growth and wages? It is to boost labor productivity, which is a measure of the amount produced per hours worked, and largely depends on capital investment.  The productivity chart above portrays it’s fluctuations over the years with Q4 2017 showing no change in labor productivity at all.

How do we improve productivity?  It is very basic economic theory--improve capital investment. Taxing those that don’t invest their profits in productive uses—the wealthiest among us and corporations—would allow governments to spend more on education, infrastructure, environmental protection, R&D, health care; need I go on? By doing so, we boost extremely low labor productivity, and even a slight boost in productivity can boost everyone’s standard of living.

So it really means reversing the politics du jour in Washington that is paid for by Big Business lobbyists, and the Fed policy of raising interest rates before there are any real signs of inflation.

Harlan Green © 2018

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