“3 Things” is a weekly post of thoughts I am pondering, usually contrarian, with respect to the markets, economy or portfolio management. Comments and thoughts are always welcome via email, Twitter, and/or Facebook.
Housing Recovery – Not So Much
“Everyone wants a house, and that’s a big problem.
We’ve noted in the past that there is a substantial issue in the housing market right now. Too few homes are being built for the number of people that want to move into them, thus driving up prices and keeping some lower-end or first-time buyers out of the market.“
It is quite amazing that amount of optimism surrounding the housing market which has yet to recover substantially from post-financial crisis lows given the exorbitant amount of monetary stimulants injected into it.
The chart below shows the Total Housing Market Activity Index which is a composite of new and existing home sales, permits and starts. Yes, housing has recovered, but remains well below levels seen in 1999.
But let’s not let a trivial matter of data get in the way of a good story.
“Meanwhile, according to the Conference Board, although the share of households planning on buying a home in the next six months ticked down in April to 5.4%, that is significantly above the average of 3.6% recorded since 1978,” wrote Matthew Pointon, property economist at Capital Economics.
While individuals may CLAIM they want to buy a home when asked, there is a massive difference between “wanting to do something” and actually being able to do it.
Notice in the chart above that the spike in “home ownership desires” spiked in 2011 and has been steadily climbing since then. Surely, if we have a record number of households planning to buy a home, that should be reflected in the home ownership rate as well.
Considering that almost 80% of Americans can’t meet small emergencies, 1-in-5 families have ZERO members employed, and incomes are less than they were in 2000 – the chart above makes a good deal of sense. It is also why we have seen the rise of the “renter nation.”
Of course, I am assuming that Matt Pointon wasn’t talking about the newest fad in housing for Millennials: The 150-sq. ft. micro-home.
Imports Send A Warning
Yesterday, the markets received some rather distressing news on economic activity. What we manufacture domestically and EXPORT to others makes up roughly 40% of corporate profits. IMPORTS are a direct reflection of consumer demand and the U.S. “consumption function.”
Therefore, IF the economy is growing, as we are repeatedly told by the “Proletariat” then we should be seeing some growth, yes? Here are the numbers:
- Exports of goods and services decreased $1.5 billion, or 0.9 percent, in March to $176.6 billion. Exports of goods decreased $1.8 billion and exports of services increased $0.3 billion.
- The decrease in exports of goods mainly reflected decreases in consumer goods ($1.6 billion) and in industrial supplies and materials ($0.8 billion). An increase in capital goods ($1.0 billion) was partly offsetting.
Imports of goods and services decreased $8.1 billion, or 3.6 percent, in March to $217.1 billion. Imports of goods decreased $7.9 billion and imports of services decreased $0.2 billion.
The decrease in imports of goods mainly reflected decreases in consumer goods ($5.1 billion) and in capital goods ($1.6 billion).
However, this is not just a one-month anomaly. The chart below shows imports and exports on a trade-weighted basis.
When imports and exports are simultaneously declining, it has historically been coincident with extremely weak and recessionary economies. The chart below shows the same data on an annual change basis.
The decline in imports is NOT a positive signal for future economic growth. The sharp rise in the dollar, should have been a boon for consumers as the stronger dollar makes imports cheaper. However, that has clearly not been the case and suggests the domestic consumer is substantially weaker than other headline data suggests.
When a large percentage of consumer spending is consumed by rising healthcare costs (Thank you Affordable Care Act) it diverts spending away from consumption that would otherwise boost economic activity, create employment and foster higher wages. However, because healthcare service spending has risen so strongly over the last few quarters, it makes personal consumption expenditures appear economically stronger than it is.
The import/export data is suggesting that the global weakness arising from China and the Eurozone have now impacted the domestic economy. While the Fed continues to suggest that economic strength is improving, the underlying data continues to suggest it isn’t.
Of course, that is why the Federal Reserve still forgoes raising interest rates.
Are Increasing Wages Signaling A Recession?
Over the last several months, I have pushed back against the idea that record low jobless claims was an indicator of a strongly growing economy, but rather an economy near maturity of its current cycle. The chart below shows this to be the case.
This is completely logical. As the economic cycle reaches maturity, companies are running at or near full employment. Therefore, fewer terminations leads to low rates of jobless claims. When the economy heads into recession, we began to see companies lay off and terminate individuals in large numbers to cut costs and maintain shareholder profitability.
Another indicator that is also suggesting some concern over the lateness of the current economic cycle is wages. Yes, wage growth is finally happening. The problem is that historically by the time wage growth begins to happen, it is also late in the economic recovery cycle as labor markets have become extremely tight forcing wages to rise.
Of course, rising wages and employment costs (benefits, healthcare, etc.) are a direct input into the profitability equation. Therefore, as the economy slows and other cost-cutting measures, accounting gimmicks and share buybacks lose their ability to increase bottom line profitability, it is only a function of time before the focus returns to the cost of labor.
With corporate profitability currently under pressure, overall economic activity weak and global conditions deteriorating, just how long can companies sustain employment and wage growth? The answer is not long. As shown in the chart below, while a tighter labor market can push labor costs higher in the short-term, employers start reducing hours worked to offset those costs.
However, there is a point where reducing hours worked eventually gets to zero. This is especially the case when Governments mandate wage increases above the level of productive capabilities.
“Unfortunately, the real minimum wage is always zero, regardless of the laws, and that is the wage that many workers receive in the wake of the creation or escalation of a government-mandated minimum wage, because they lose their jobs or fail to find jobs when they enter the labor force. Making it illegal to pay less than a given amount does not make a worker’s productivity worth that amount—and, if it is not, that worker is unlikely to be employed.” ― Thomas Sowell
Just some things to think about.
Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, and Linked-In
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube