(What’s Left of) Our Economy: Hold Your Applause on Inflation Progress Signs

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consumers, demand, Employment, Federal Reserve, fiscal policy, gas prices, GDP, gross domestic product, household spending, housing, inflation, Jobs, manufacturing, manufacturing jobs, manufacturing production, monetary policy, mortgages, personal consumption, personal spending, recession, retail sales, trade deficit, {What's Left of) Our Economy

At the end of last month, I wrote that if a national government (including its central bank) wants to get inflation down, it’s not a rocket science-type challenge.” Basically all that’s needed is the willingness to take some combination of the kinds of fiscal and monetary measures that are guaranteed to slow economic growth.

Keep that in mind as you read the mushrooming number of claims that America’s recent historic burst of inflation is either peaking (see, e.g., here, here, and here) or should peak soon (e.g., here, here, and here). Because wherever softening prices can be seen, levels of demand have fallen off either because goods and services are becoming unaffordable and sales are down, or because easy money has gotten harder, or some degree of both. So let’s not conclude that inflation progress stems from a sudden outburst of policy-making genius.

Anyone doubting the start of a economic downshifting should check out the many of the latest reports released by the federal government on the economy’s performance. In the first quarter of this year, the gross domestic product (GDP – the standard measure of the economy’s size) fell by 1.58 percent at an annual rate adjusted for inflation, and the pretty reliable forecasters at the Atlanta branch of the Federal Reserve system expect about the same kind of contraction for the second quarter.

If this prediction holds, the United States will have entered a recession by the most widely used yardstick – two straight quarters of what economists call “negative growth.”   

Manufacturing production – which RealityChek regulars know has held up very well during the pandemic period – has now dropped sequentially for two straight months. And a downshifting U.S. economy is importing less, which has reduced the bloated trade deficit for two straight months as well.

The employment picture is better (including in manufacturing) but on an economy-wide basis some signs of deterioration are visible as well. Chiefly, if you look at three-month averages (which help smooth out often misleading short-term fluctuations, you see that from January through March, this measure of private sector job growth totalled 527,000. From April through June, it dropped to just under 362,000, and may sink lower, as the April and May figures have been downwardly revised, signaling that the same may be in store for June’s results.

Some of the best evidence of declining affordability – across the board – come from the official retail sales figures. On an annual basis, their increase is down from the mid-double digit levels of January and February (propped up by the unusually weak numbers from the heavily pandemic-affected figures for the previous – baseline – winter), to 9.26 percent in June.

That may not sound like a lot, but when inflation is considered, these retail sales increases turn into decreases for three of the last four months through June’s preliminary report. In other words, because of rapidly rising prices, consumers weren’t actually buying more in the way of goods and services. They were simply paying more for quantities that had actually shrunk. And the month-on-month sales numbers have been negative for three of the last four months, too.

The affordability issue is especially clear from the recent decrease in gasoline prices. Yes, they’ve tumbled for more than a month. But less driving is the obvious reason. For example, here we are in the middle of peak summer driving season, when the subsiding of the pandemic supposedly has millions of Americans determined to engage in so-called “revenge travel.”

But according to the U.S. Energy Information Administration, gasoline consumption “is just above the same time two years ago [when revenge travel was popular, too, as the virus’ first wave receded, but was still taking a much bigger toll than today] but below every other year going back to 2000.”

The American Petroleum Institute added that last month’s 9.1 million barrels per day of demand was “down 2.3% y/y compared with June 2021—a third straight month in which gasoline trailed its year-ago levels.” Moreover, so far, this year’s May-June increase of 0.4 percent in gasoline use has badly “lagged the average 2.9% seasonal increase seen between May and June in 2012-2021.”

Meanwhile, the role of higher interest rates (and consequently tighter credit) is best seen in the housing market. Summarizing the latest findings of the National Association of Realtors, The Wall Street Journal just reported that “sales of previously owned homes fell for a fifth straight month, dropping 5.4% in June to an annualized rate of 5.12 million.”

The main reason? The big run up in mortgage rates has depressed mortage applications for three straight weeks has pushed them down to their lowest levels since 2000. That means they’re below where they were even during the deflation of the mid-2000s housing bubble that helped trigger the global financial crisis and Great Recession.

Most important of all, even those believing that American leaders deserve credit for figuring out a successful anti-inflation fighting strategy, should remember that although interest rates are higher, they’re far from historically high and even fall well short of even recent very low norms; and that even though some prices are down, they’re still historically high. And that’s not even considering that the supply chain troubles also contributing to recent inflation could well intensify as long as the Ukraine war drags on, and the threat of more over-the-top Zero Covid lockdowns in China can’t be dismissed.

So even though this kind of bitter policy medicine is needed to avoid worse inflation down the road, and genuinely harsh austerity measures (especially as long as U.S. leaders seem to lack a clue regarding the inflation-fighting potential of productivity growth improvement), American voters aren’t likely to be grateful this November – or in any elections in the foreseeable future. And who could blame them?

 

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Im-Politic: A Case for Reparations

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African Americans, education, GI Bill, higher education, housing, Im-Politic, immigrants, inequalty, mortgages, race relations, racism, reparations, wealth gap, white privilege, World War II

Here’s a RealityChek post I never thought I’d write, leading off with two ideas I never thought I’d consider: First, I’m warming a lot toward the idea of the U.S. government paying some kind of taxpayer-funded reparations to African Americans in compensation for at least one cut-and-dried historical episode of economically costly racism. Second, a main reason is that I and my family – and millions and millions of others like us – have benefited economically, and considerably, from the white privilege reinforced by this episode.

I’m still somewhat wary of a main possible result of reparations – that payment will generate an ever growing list of demands for more payments. I also remain concerned that reparations will ease much of the moral pressure felt by white and others who oppose reparations to eliminate sources of racial economic inequality ranging from lousy and inequitably funded public schools to discriminatory mortgage practices.

But the more I think about it, the more I’m convinced that these worries reflect overly simplistic “slippery slope”-type arguments to which I’ve objected in the context of other issues. Specifically, they too easily become excuses for avoiding many necessary actions. For they imply that citizens and political leaders are devoid of the judgment needed to make the kinds of distinctions any complex community or society needs to be able to identify in order to remain even minimally functional.

More important, a little research I conducted the other day brought to my attention an instance of massive, systemic racism that took place many decades after emancipation. It came in the form of the discriminatory implementation of the GI Bill of 1944, which denied more than a million black World War II veterans vital most of the opportunities created by the law to establish a foothold in the nation’s middle class, and beyond.

If you’ll remember, opening unprecedented economic opportunity to the men and women that risked their lives to save their country and indeed the world was the whole point of the legislation. The means chosen were low-interest mortgages and equally generous loans for buying businesses and farms, and stipends to finance higher education expenses. Given the importance of homes and other assets in amassing significant amounts of wealth, and of college and many vocational degrees in generating middle-class-and-beyond income levels, the strategy made perfect sense. And it worked like a charm for most of the white veterans who used it.

Inexcusably, however, as this account makes clear, most black World War II veterans were excluded from these programs by a combination of state-level official and informal barriers to participation. Just as important, the effects of this discrimination also hobbled the economic prospects of the descendents of these African American servicemen and women. One major piece of evidence – the decades-old yawning racial wealth gap, which results largely from the long limited home-owning opportunities available to African Americans.

And here’s where the story gets personal – for me and others whose ancestors only came to the United States in the late-19^th and early 20^th centuries. It’s absolutely true that our grandparents or parents never owned slaves, overwhelmingly had no hand in maintaining systemic American racism, and largely arrived from their homelands with little more than the clothes on their backs. It’s also true that many and even most worked like the dickens to achieve their share of the American Dream, and that many were the victims of at least informal discrimination at some point in their lives.

This history was long the principal basis for my own insistence that, if any reparations were to be paid, I sure didn’t owe any.

Getting down to my case, my father, and his peers in the ranks of my relatives and friends, also came from economically modest backgrounds and generally worked like the dickens. My own father was blessed with the most powerful mind I’ve ever encountered, and owed much of his success to this brainpower as well (as did so many others of course).

He didn’t buy his first home until 1963, and so just missed the chance for GI Bill mortgage assistance. But there’s an excellent chance that, despite his intellect and other talents, he’d have never gone to college without the financial aid provided by the legislation – which enabled him to attend full-time and not have to worry about helping to pay the family bills. Certainly, my grandparents never encouraged him to continue his education beyond high school. Without college, of course, there would have been no law school (at night, on top of working full-time), and without his law degree, my own upbringing mightn’t have been so comfortable, and my own higher education opportunities might have been very different.

Again, my father was so brilliant, and so driven, that I’m sure he would have achieved considerable professional success without the GI Bill. I’m similarly confident that the same applies to any number of his peers. But it’s entirely possible that they wouldn’t overall have achieved as much success. And on the whole nowhere near as quickly. More important, their GI Bill benefits relieved or at least partly relieved my father and millions of other white veterans of having to make the kinds of often difficult choices and accept the kinds of often family-straining tradeoffs that confronted black veterans denied these benefits.

As a result, some amount of reparations based on the economic impact of GI Bill discrimination seems justified to me, along with including GI Bill beneficiaries like me as payers.

Obviously, critical details would need to be worked out, along with the question of what other kinds of reparations should be considered and paid. But the GI Bill’s history amounts to a clear instance of the federal government, and many sub-federal governments, systematically awarding to one group of Americans benefits whose effects have lasted many generations, and just as systematically excluding another class of Americans with equally valid claims. And even though subsequent veterans aid programs have been put into effect much more admirably, this clearcut discrimination, moreover, has had lasting, damaging effects.

What could be more fair and ethical than openly acknowledging this inequity, and providing compensation to the victims? And seriously discussing other cmparaable wrongs that might be at least partly righted in this way?  

(What’s Left of) Our Economy: Big New Signs of Re-Bubble-Ization

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2016 elections, Allison Schrager, auto loans, balance sheets, Ben Bernanke, Bloomberg, bubbles, bubbles Federal Reserve, credit, credit cards, debt, Financial Crisis, Fox Business Debate, Goldman Sachs, housing, interest rates, leverage, loans, Matt Phillips, mortgages, quantitative easing, Quartz, revolving credit, Tracy Alloway, zero interest rate policy, ZIRP, {What's Left of) Our Economy

One of the more praiseworthy features of the Fox Business Republican debate was the discussion of the last mega-financial crisis and how to prevent a repeat. Although at their debate on CNN the Democratic presidential candidates were quizzed on the bubble and its bursting and possible remedies, the Milwaukee event marked the first time these subjects came up for the Republicans.

Better late than never, but that’s pretty strange given that the last bubbles inflated and the crisis broke out on the GOP’s watch. In fact, it’s downright disturbing. For a new meltdown remains by far the greatest economic threat to America’s future due to the Federal Reserve’s overly easy money policies – despite the latest reassurances from former Fed Chair Ben Bernanke that such warnings are ludicrous. Maybe not so coincidentally, two important new signs of re-bubble-ization have just appeared.

The first was reported by Quartz’s Matt Phillips, who pointed out that the Federal Reserve’s latest figures on Americans’ borrowing behavior showed that consumers in September took out an all-time record $28.9 billion in new loans in September. In the process, they broke a record set 14 years ago, and increased their credit outstanding by the greatest percentage since 1943 – when these records started to be kept. And even if you adjust for inflation, household borrowing is at lofty levels historically.

Many economists view such increases as a bullish economic sign – signaling that Americans are so confident about their future prospects (and repayment potential) that they’re willing to take on more debt. That may be true, but the data on wages and incomes strongly indicate that this confidence is really overconfidence. And if interest rates really are going to be raised by the Federal Reserve, even gradually, this overconfidence may be tomfoolery.

Also not so bullish – the makeup of these new loans. As economist Allison Schrager has sagely pointed out, not all borrowing decisions are created equal, even for individuals with comparable incomes. Some, like student loans, are arguably sensible investments in one’s own human capital and potential (though signs of diminished returns from a college education seem to be popping up everywhere). Others, like mortgages, are arguably sensible investments in an asset that could well appreciate in value (though the inflation and bursting of the housing bubble should have taught everyone that real estate is no longer a sure thing). And still other loans simply finance consumption – which lacks any capacity to increase one’s wealth.

Unfortunately, much of the September surge in consumer borrowing was in auto and credit card debt – which won’t bring any financial benefits.

The second sign of reb-bubble-ization was reported by Bloomberg News’ Tracy Alloway, who covered a Goldman Sachs study showing that leverage levels in Corporate America are at their highest levels in a decade – during the bubble years. In other words, thanks largely to the super-easy monetary policy pursued by the Federal Reserve since the crisis peaked, even though corporate profits have surged to new records, American business has gone on such a frantic shopping spree that its debt load has grown much faster. Indeed, according to Goldman Sachs, these debts are now at twice the levels they hit in the pre-crisis era.

Just as with consumers, rising interest rates could wreak havoc with the balance sheets of U.S. companies. And just as with consumers, relatively little of this borrowing is being devoted to strengthening these firms in what might be called the old-fashioned way – i.e., through the development of new products and services. Instead, much of this new debt has been used to fund mergers and acquisitions, and stock buybacks.

The Fox Business debate, however, does deserve criticism in one sense. It followed an entirely conventional course in focusing on crisis-proofing American finance by improving Wall Street regulation. Certainly such improvement has been warranted. But the financial crisis was rooted in weaknesses in the real economy. Until presidential candidates start presenting realistic plans for fostering more good jobs and the incomes they generate, and for spurring more production and the earnings they generate – which would reduce the need for binge borrowing in the first place – a new financial crisis looks much more like a matter of “when,” not “if.”

Im-Politic: Jeb Bush’s Bubbly Florida Economy

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2016 elections, construction, Financial Crisis, Florida, Great Recession, growth, housing bubble, Im-Politic, Jeb Bush, Jobs, mortgages, real estate

To lay my cards on the table right away, I’m not a Jeb Bush fan. I don’t like the former Florida Governor’s stances on trade and immigration policy. I don’t find him at all impressive on any major domestic economic issues or on foreign policy. And I would be troubled by the (further) triumph of nepotism his election as president would signal. (And yes, a Hillary Clinton victory would create much the same problem.)

At the same time, except for the dynasticism angle, I have many of those above problems with many of this year’s other Republican presidential hopefuls. So the following isn’t meant to sway your political preferences – just to remind you how looking under the hood is every bit as important in evaluating office-seekers as in analyzing economic data. And more specifically, why your antenna should have been set off today by Bush’s claims about his economic record in the Tallahassee statehouse.

According to Bush, during his 1999-2007 tenure as governor, “We made Florida number one in job creation and number one in small business creation. 1.3 million new jobs, 4.4 percent growth, higher family income, eight balanced budgets, and tax cuts eight years in a row that saved our people and businesses 19 billion dollars.”

But the dates of his term represent a broad hint that these economic achievements amounted to a pyrrhic victory for the state. For Bush’s governorship occurred during the interlocking housing and credit bubble that marked the whole U.S. economy during the previous decade. And anyone who’s been following housing in recent years knows that few mortgage markets were more bloated than Florida’s, and that few states have suffered more from the bubble’s bursting.

The official U.S. government data bear out this claim. Between 1999 and 2007, Florida’s economy strongly outgrew the nation’s as a whole, expanding by 35.63 percent after inflation versus 21.86 percent for the United States overall. But the housing bubble was a major reason. The real estate sector fueled 22.33 percent of the state’s real growth during that period, and construction contributed another 6.51 percent. Nation-wide, real estate generated 14.44 percent of real growth from 1999 to 2007, and construction actually shrank, as building activity began losing steam before the financial crisis struck full blown.

Largely as a result, during the two years after Bush left office, Florida’s economy contracted by just over 10 percent after inflation – a much deeper downturn than the 3.22 percent nation-wide slump. So Florida during the Jeb Bush years paid even less attention to the quality of growth than did America as a whole during the comparable George W. Bush years, and paid the price.

Jeb Bush is technically correct in touting Florida job creation during his governorship. From 1997 to 2008, total non-farm employment increased by 1.35 million – a 20.28 percent gain that was nearly double the 10.76 percent rise in jobs nationally. But the housing bubble, again, was a major contributor. During the 1999-2007 Bush years, construction and real estate produced 12.90 percent of those Florida job gains, versus 12.61 percent nationally. (All these and the following employment data are not seasonally adjusted.)

Even more revealingly, this job-creation mix resulted in Florida faring much worse than the rest of the nation during the recession in employment terms as well. From the recession’s December, 2007 onset (just when Jeb Bush’s second term was ending), through the nation’s employment nadir in absolute terms (January, 2010), the state lost 11.67 percent of its total non-farm jobs. The overall economy lost 8.26 percent of its jobs. This Florida out-performance was led by a stunning loss of more than 40 percent of its construction jobs (versus 28.81 percent nation-wide) and 16.52 percent of its real estate jobs (versus 10.92 percent nation-wide).

Jeb Bush can by no means be blamed for the housing bubble. But by the same token, that bubble deserves considerable credit for the Sunshine State’s apparent economic success during his governorship. Sadly for Floridians, their bubble left them even less well prepared for its bursting than most of the rest of their fellow Americans. Would Jeb Bush perform any better as president? No one can know for sure. What is certain is that his experience in state office can’t possibly provide any clues.

Following Up: More on Delusions of Immigrants Saving the Economy

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amnesty, bubbles, executive amnesty, Following Up, Goldman Sachs, home ownership, housing, illegal immigration, Immigration, mortgages, Obama, Open Borders, The Wall Street Journal, Urban Institute

Since I’m kind of (understandably!) fast tracked and trade policy’d out, I thought I’d shift this afternoon to another way the U.S. bipartisan political establishment is shafting Main Street America: Open Borders- and amnesty-friendly immigration policies.

These policies’ leading edges – consisting of President Obama’s recent executive immigration orders – are of course presently stuck in the courts, similarly to how the offshoring-friendly trade strategies also backed by the White House and Congress’ Republican leaders are now stuck on Capitol Hill. But “stuck” is hardly the same as “dead,” and therefore ongoing vigilance is needed – especially since most of the president’s liberal Democratic critics on trade policy are wholeheartedly with him on immigration.

A stout pillar of the liberal case for boosting immigration levels and amnesty-ing the illegal population already in the country (or otherwise creating a “path to citizenship”) is the idea that the youth and energy of newcomers is crucial to American hopes to solving any number of major economic problems – from slow growth to the entitlements crisis. This post from last September presents a sample of these claims.

As I pointed out, liberals’ optimism regarding immigrants’ prospects for attaining the American Dream clashes violently with their decided pessimism that it’s within reach of anyone not to the manor born. And now The Wall Street Journal has reinforced the case for bearishness. Earlier this week, correspondent Nick Timiraos reported on this conclusion of a recent study on the likely future of American home ownership:

“Last decade’s housing crisis could give way to a new one in which many families lack the incomes or savings needed to buy homes, creating a surge of renters and a shortage of affordable housing….Demographics tell the story. Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average.”

Note in particular the timeframe: through “the next decade.” Also of interest is the attempt by some Goldman Sachs economists to find a silver lining in the numbers: “They noted in an April report that even though Hispanics, for example, have lower homeownership rates than non-Hispanic whites, those rates have been rising for the past four decades.”

This point is of interest because the reckless extension of mortgages to low-income Hispanics during the bubble decade was a major source of that period’s housing insanity. In other words, their rising home ownership rates were part of the problem with which the nation is still struggling.

The lesson remains the same. If you want to increase greatly the ranks of low-income Americans, and/or if you want new justifications (and new voters?) for more and bigger government welfare programs, you’ll keep favoring Open Borders-style immigration policies. If you want national prosperity to be built on a sustainable foundation, you’ll favor sensible restrictions.

(What’s Left of) Our Economy: If You Think U.S. Households are Financially Healthier, Think Again

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auto loans, consumers, debt, deleveraging, household finances, housing, mortgages, student loans, {What's Left of) Our Economy

How I wish I’d written Allison Schrager’s new BusinessWeek post on trends in U.S. consumer debt! This economist performs the invaluable service of reminding us that all forms of borrowing decidedly are not created equal, especially when it comes to judging the state of Americans’ household finances and whether it really is improving.

The conventional wisdom has concluded that, by most standard measures – like absolute levels of debt, debt as a share of incomes, and delinquencies on mortgages and other kinds of loans – U.S. consumers on average are financially healthier than they’ve been in many years. But Schrager shows that the mix of U.S. household borrowing is strongly suggesting the opposite.

As she points out, since the recession broke out, and especially since the housing bust reached historic proportions, Americans have been borrowing less to finance purchases that arguably could increase their long-term wealth and financial health, and borrowing more to finance purchases with no conceivable investment value whatever.

Think of it this way, Schrager writes: Although Americans clearly got wildly overoptimistic about mortgages, buying a home has been a good investment throughout most of American history and even today (depending on the actual transaction) at worst could well hold a family’s housing costs stable for decades. In many ways, Americans still seem to be overestimating the economic value of a college education, but most research indicates that, all else equal, college graduates still out-earn their non-graduate peers.

But mortgage debt is coming down steadily, and student loan growth – though enormous – has been pretty constant year on year. These developments have helped slow down the growth of overall consumer credit. But overall borrowing has begun increasing again and today stands at a new all-time high. What gives?

Schrager’s article shows that the increase has been fueled mainly by a resurgence of credit card debt and auto loans. Many of these purchases may be necessary for day-to-day living, she acknowledges. But from a financial standpoint, she notes, such spending goes to assets that can only fall in value.

Continued gushing by the business media and even many economists about how plucky American consumers remain reveals that, even having suffered an historic financial crisis, the nation as a whole still hasn’t learned that all forms of growth aren’t necessarily good. Schrager’s post shows that crucial lessons about consumer de-leveraging are being ignored as well.