More “Selfie” Households Who Rent (excerpt)

On a year-over-year basis, household formation hovered mostly below 1.0 million units from 2007 through mid-2014. Over this period, the growth rate in household formation fell below the growth of the civilian noninstitutional working-age population. The direct impact and the lingering effect of the Great Recession clearly depressed household formation. This may be finally about to change, as household formation has exceeded 1.0 million on a y/y basis every month for the past six months through March.

Many of the new households are likely to be seniors living alone or young unmarried adults living either alone or together to share living expenses. These “selfies” are more likely to rent than to buy homes. The percentage of the adult population 16 years or older who are singles has been running around 50% since June 2014. That’s up from 37% in the mid-1970s.

Since 1994 and through 2013, the percent of households with one person rose from 24% to 28%, while the percent with three or more persons fell from 43% to 39%. Since 1970, the percent of households with married couples living with their children dropped from 40% to 20% during 2012. Apparently, young selfies tend to get married later in life. During 2013, the median ages of first marriage for men and women were 29 and 27, up from 26 and 23 thirty years ago.

The homeownership rate for persons under 35 fell from a peak of 44% during Q2-2004 to 35% during Q1-2015. The rate for 35- to 44-year-olds fell from 69% to 58% over this period.

Since 2004, on balance, the number of households who rent jumped by 9 million, while the number who own fell 2.5 million since 2006. As a result, the percent of households who rent rose from a low of 30.8% during Q2-2004 to 36.3% during Q1-2015, the highest reading since Q2-1995.

Today's Morning Briefing: Build & They Will Come. (1) Is housing’s subpar recovery on a good foundation? (2) Demographic profile still favors renters over owners. (3) Household formation is picking up. (4) More younger and older “selfies.” (5) Getting married later. (6) More renters. (7) Millennials and Gen Xers are stuck. (8) Baby Boomers don’t want to cut the grass. (9) Student loan burden. (10) Affordability and availability of credit still hurdles for would-be homeowners. (11) Field of dreams and nightmares. (12) High-end buildings with sky-high rents. (13) Focus on market-weight-rated S&P 500 housing-related industries. (More for subscribers.)

The Productivity Puzzle (excerpt)

There is widespread concern about the slow growth in nonfarm business productivity. Over the past 20 quarters (five years) since Q1-2010, it is up only 0.5% on average during each of the Q1-to-Q1 periods spanning this period: 0.4% through Q1-2011, 0.9% through Q1-2012, 0.5% through Q1-2013, 0.6% through Q1-2014, and 0.3% through Q1-2015. That’s awfully weak growth.

There are lots of different reasons to be concerned. Fed Chair Janet Yellen is worried that wage gains are being held down by weak productivity. Bond investors are worried that inflation might rebound if tightening labor markets push up labor costs, with wages rising faster than productivity. In this scenario, stock investors would fret that profit margins would be squeezed if labor costs rise faster than prices. Progressives are saying that companies are using their cash and borrowings to buy back their shares rather than invest in productivity-enhancing capital equipment. They claim that’s worsening income inequality.

In other words, everyone wants to see productivity growing at a faster pace. The key reason is that productivity is the key determinant of consumers’ purchasing power (i.e., real income) and the standard of living (i.e., consumption). However, there are measures of these two variables suggesting that the productivity problem may not be as serious as widely believed. Consider the following:

(1) Long term. First, let’s keep in mind that technological innovations--which are the key drivers of productivity--tend to be lumpy. They don’t happen continuously over time, and they take time to be adopted once they are ready for prime time. We can see this by looking at the growth in productivity over 24-quarter periods. Since the early 1950s, productivity grew especially fast during the 1960s and the late 1990s and the first few years of the next decade. Before and after these bursts, the pace of productivity growth was relatively subpar.

(2) Short term. On a shorter-term basis, productivity jumped 5.2% from Q1-2009 through Q1-2010 before the slowdown since then. That boosts the average productivity growth rate a full percentage point to 1.3% per Q1-to-Q1 period over this six-year time span. I constructed a good proxy for productivity by dividing real GDP by the average weekly hours index in the private sector. I did so because there are no official productivity measures for goods and services industries in real GDP.

I constructed proxy measures of productivity in goods and services industries by dividing their contributions to real GDP by their average weekly hours indexes. Both proxies jumped during 2009. Goods productivity has continued to trend higher at a slower pace, but services productivity has dropped 5.7% from Q4-2009 through Q1-2015! That seems very odd and suggests that the government’s bean counters may be having an especially tough time counting the beans in services.

(3) Freebies. “[T]he U.S. doesn’t have a productivity problem, it has a measurement problem.” That’s according to a 7/16 WSJ article titled “Silicon Valley Doesn’t Believe U.S. Productivity Is Down.” It reviews the contrarian views of Hal Varian, Google’s chief economist. The article notes, “[T]he only way goods and services move the official U.S. productivity needle is when consumers and businesses pay for them. Anything free, no matter how much it improves everyday life, isn’t included.” Many of today’s time-saving technologies are free, like some location-based apps, cloud computing, and robust search engines.

On the other hand, the first posted comment about the article observes: “I suspect that all the productivity gains provided by Google and the like are more than offset by the ridiculous amount of time people spend on FaceBook, Twitter, Instagram etc writing about the cute thing their dog did today, or posting a picture of what they had for lunch...”

Today's Morning Briefing: Opie Kicks the Can. (1) The best can kickers on the road. (2) Going fishing on a summer’s day down a country road. (3) Mario and Opie. (4) Between “aw, shucks” and “shock and awe.” (5) Another panic sell-off followed by another relief rally. (6) Marty Zweig’s famous mantra on steroids. (7) Another better-than-expected earnings season, especially ex-Energy. (8) Putting together the pieces of the productivity puzzle. (9) Productivity has a long boom-bust cycle because innovation is lumpy. (10) Our productivity proxies suggest bean counters aren’t counting all the beans in services. (11) The freebie problem. (12) “Mr. Holmes” (+ +). (More for subscribers.)

Happy Fourth of July! (excerpt)

In addition to barbeques and fireworks, the Fourth of July weekend is also a big one for big discount sales. Consumers are certainly in a happy mood. The Consumer Confidence Index rose from 94.6 during May to 101.4 during June, remaining near recent cyclical highs. The labor market continues to improve, with the percentage of consumers saying that jobs are plentiful at 21.4% last month, a new cyclical high and the best reading since February 2008.

An index of pending existing home sales rose in May to the highest since April 2006. That’s yet another sign of improving consumer confidence. The puzzle, though, is that Census data on household formation show that they continue to be all renters. This suggests that most of the housing transactions are between younger current owners who are trading up and older current owners who are trading down. First-time homebuyers seem to be missing in action. That may be because the Millennials are saddled with student debt, postponing getting married, and renting apartments in cities, as we discussed last week.

Finally, I should note that the five available regional business surveys for June are showing an upturn from their winter/spring soft patch. The average of the composite business indexes for the Fed Districts of New York, Philadelphia, Richmond, Kansas, and Dallas rose to 0.7 last month, the first reading above zero since February. That’s still relatively weak, suggesting that there may still be some soft spots in the economy. The Dallas survey is especially weak because the oil industry in Texas has been hard hit by lower oil prices.

Today's Morning Briefing: Land of the Free, Home of the Brave. (1) Fireworks on July 4 in US, July 5 in Greece, and July 6 in the markets. (2) Another panic attack followed by another relief rally? (3) Greece will either be kicked out or kicked down the road. (4) US fundamentals improving relative to rest of world, but valuation is a problem. (5) S&P 1500 forward earnings bottoming and turning up. (6) Consumers are in a spending mood as labor market continues to improve. (7) Housing sales looking up, although all new households are renting. (8) Trading up and down. (9) Regional business surveys still show a few soft spots. (10) Focus on market-weight-rated S&P 500 housing-related industries. (More for subscribers.)

US Consumers Still Consuming (excerpt)

I have often said that betting against the US consumer is usually a bad bet. When we are happy, we spend money. When we are depressed, we spend even more to release the dopamine in our brains’ pleasure center. That helps us feel better. We were born to shop!

I have to admit that I was starting to doubt American shoppers earlier this year. Forgive me, please. Retail sales were anemic during the first four months of the year despite the windfall from lower gasoline prices. I reckoned that perhaps the savings from lower fuel costs was offset by higher out-of-pocket medical expenses attributable to Obamacare. In addition, rent inflation has been rising faster than overall CPI prices, reducing consumers’ spendable dollars for other goods and services.

Well, never mind: Retail sales jumped 1.2% during May, and the previous two months were revised higher. On Friday, we learned that personal consumption expenditures (PCE) jumped 0.9% during May, with upward revisions during April (0.1% from 0.0%) and March (0.6% from 0.5%). Real PCE rose 2.1% (saar) during Q1, and probably rose by about 3.0% during Q2.

On a year-over-year basis, real PCE rose 3.4% through May. Real disposable personal income rose 3.5%, with real wages and salaries rising 4.8%. Over the past three months through May, real consumer spending rose 2.8% (saar), led by solid gains in durable goods (9.8) and nondurable goods (2.9) but a middling increase in services (1.7).

Today's Morning Briefing: Standard of Living at Record High! (1) The last act of the Greek drama? (2) Dopamine and consumer spending. (3) Winter’s cabin fever set stage for spring spending splurge. (4) Real pay per worker at record high. (5) Real consumption per household is at record high. (6) Corporations prefer to buy back shares, pay dividends, acquire competitors, and cut expenses. (7) The logic of deals. (8) Not much inflation. (9) Why is PCED inflation lower than CPI version? (10) Yet another Chinese fire drill. (More for subscribers.)

The Productivity Puzzle (excerpt)

There is something very odd about the productivity numbers. They don’t make much sense. Productivity growth seems awfully weak given all the news articles about robots, automation, drones, the Internet of Things, and all the apps that are enabling everyone to work more efficiently.

The real output of the nonfinancial business (NFB) sector recovered from the last recession during Q4-2011, when it first exceeded the previous cyclical peak. Since then through Q1-2015, it is up 10.3%. Over this same period, NFB productivity is up only 2.3%. In other words, an 8.0% increase in hours worked accounted for most of the increase in output. On a y/y basis, real NFB output has been hovering around 3% since mid-2010. Over the same period, hours worked has been growing around 2%, while productivity has been rising around just 1%.

My hunch is that the output of the services-producing industries may be undercounted. Alternatively, productivity may be particularly weak in these industries. The easiest and best productivity gains in services-producing industries may have been gotten, and extracting more out of them is getting harder to do. Here are the relevant data points:

(1) The ratio of real GDP for goods to goods-producing payroll employment was at a near-record high of $267,810 per worker during Q1 (saar), up 1.7% y/y. The similar ratio for services rose to $81,372 per worker, down 0.1% y/y.

(2) Since the start of the data in 1947, the goods-producing “productivity” ratio is up a whopping 908%, while the comparable rate for services is up only 77%.

Today's Morning Briefing: Everyday Low Price. (1) EDLP. (2) Walmart stuffing labor costs down supply chain. (3) Is the Phillips Curve right about wage inflation, but wrong about price inflation? (4) S&P 500 Hypermarkets & Super Centers are getting squeezed. (5) Other retailers still showing upbeat metrics. (6) Is there something wrong with the productivity stats? (7) Productivity ratio falling recently in services. (8) Global economy muddling along in the mud. (9) US economy still has some soft spots. (10) Eurozone’s M-PMIs more upbeat than actual production. (11) Submerging economies. (More for subscribers.)

US Housing: Good Foundation? (excerpt)

Sales of both new and existing homes rose last month. That always happens during the spring. However, the data are seasonally adjusted, and were relatively weak earlier this year. There is an encouraging development for the housing industry in recent household formation, suggesting a higher trend in sales.

The total number of new households increased by 1.4 million y/y through March. This growth rate has exceeded the 1.0 million mark since October 2014. That’s the good news. The bad news is that all the new households are renting rather than buying their homes. The total number of homeowners peaked at 76.5 million during Q4-2006. It was down to 74.0 million during Q1-2015. The number of households who are renters rose 9.3 million since Q2-2004 from 32.9 million to 42.2 million.

That trend has clearly benefitted landlords of multi-family units and given them an incentive to build more of them. However, housing starts of such units have been back to their previous cyclical high for over a year. There was a big jump in May’s building permits for multi-family units, which reflected a surge of applications to beat the expiration of a lucrative tax break in New York City.

Single-family housing starts has been hovering around 700,000 (saar) for over a year, well below previous cyclical highs that typically well exceeded 1.0 million units. New single-family home sales rose to a cyclical high of 546,000 units (saar) during May, but that’s closer to previous cyclical troughs than peaks.

Today's Morning Briefing: Household Formation. (1) Narrowing bull market. (2) Three outperforming sectors. (3) Health Care way ahead of the pack. (4) Seeking earnings growth. (5) No bargains. (6) Dollar and oil weighing less on earnings revisions. (7) More households, but they are all renting. (8) Housing starts and new home sales still well below previous cyclical peaks. (9) Existing home sales rising, but who is buying? (10) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

No Soft Patch for Small Business (excerpt)

The NFIB survey of small firms reports a series reflecting the net percentage of business owners saying that their earnings were higher over the past three months versus lower. It has been negative since the start of the data in January 1986. It jumped last month to -7%, the highest reading since October 2005. It’s up from the series’ record low of -47% during January 2009.

Not surprisingly, the 12-month average of the earnings series is highly correlated with the NFIB small business optimism index. When small business owners are optimistic because their earnings are improving, they tend to hire workers. Sure enough, the percentage of small companies expecting to increase employment is up to 11.6%, the highest since February 2008. The percentage of small firms with job openings is up to 25.4%, the highest since December 2001.

The latest NFIB survey noted: “Owners report that the labor market is, from an historical perspective, getting very tight. Owner complaints about ‘finding qualified workers’ are rising, job openings are near 42 year record high levels, and job creation plans remain solid. Over 80 percent of those hiring or trying to hire in May reported few nor no qualified applicants.” In an obvious dig, the report added that there’s not much the Fed can do to increase the supply of qualified workers.

Today's Morning Briefing: Small Business Is Big. (1) Jury is out on soft-patch verdict. (2) No soft patch for small business owners. (3) Businesses create jobs, not governments. (4) Small businesses lead the way. (5) Corporate profits lead employment and capital spending. (6) Hard to find qualified workers. (7) Capital spending improving, but lagging. (8) A real jolt in JOLTS. (9) SMidCaps vs. LargeCaps. (10) Falling oil prices have had bigger impact on earnings than rising dollar. (11) Margins getting squeezed among SMidCaps as they ramp up hirng. (More for subscribers.)

Is the Soft Patch Over? (excerpt)

The soft patch may be over. The latest batch of economic indicators is certainly more upbeat than previous ones. Most importantly, I am impressed with May’s 0.6% m/m increase in our Earned Income Proxy (EIP), which is highly correlated with wages and salaries in the private sector. It’s also highly correlated with retail sales excluding gasoline, though the two series have diverged so far this year, with the latter lagging the former.

A sharp rebound in May retail sales would confirm that the soft patch is over. May auto sales did rise to 17.8 million units (saar), the highest since July 2005. We still have some concerns that rapidly rising tenant rent and out-of-pocket health care costs may be offsetting some of the positive impact of our rising EIP. May’s retail sales will be reported this Thursday. An upbeat housing-related indicator was April’s Pending Home Sales Index, which rose to the highest level since May 2006. It tends to be a good leading indicator for existing home sales.

And, of course, there was plenty of good news in Friday’s employment report. Most impressively, full-time household employment rose by 630,000 during May, having risen 2.6 million over the past 12 months. While wage gains remain relatively subdued around 2% on a y/y basis, the latest three-month changes are mostly around 3%, on average, at an annual rate.

Today's Morning Briefing: Peter Pan. (1) By the shores of Lake Winnipesaukee. (2) Seven strategists and economists with seven opinions. (3) Consensus vs. contrary scenarios. (4) Kuroda says we can fly if we believe we can. (5) Japanese inflation close to zero again despite all the pixie dust. (6) Draghi plays Captain Hook. (7) Less deflation, more growth in Eurozone. (8) Dudley: On your mark, get set, wait. (9) Fed policy is market dependent too. (10) Is the US soft patch over? (More for subscribers.)

New Home Sales Still in the Basement (except)

On Tuesday, the Bureau of Census reported that new home sales (a more timely barometer of the housing market than existing home sales) rose 6.8% to 517,000 units (saar) in April, but that followed a 10.0% drop in March. Nevertheless, these sales remain on an uptrend that started in mid-2011. The bad news is that the latest pace of activity isn’t much better than the previous cyclical lows in this series starting back in 1970.

The recent rebound in household formation should be bullish for new home sales. Over the past year through March, the number has increased 1.5 million, back to the fast pace last seen in the middle of the previous decade. The problem is that the number of households renting rose 1.9 million, while the number of home-owning households fell 0.4 million.

Today's Morning Briefing: Lack of Conviction. (1) Convinced vs. unconvinced investors. (2) Ice patch vs. soft patch. (3) Chart technicians seeing bearish patterns again. (4) S&P analyst’s share count is bullish. (5) S&P 500 forward earnings recovering as Energy stops plunging. (6) Fed working to avoid tightening tantrum. (7) Regional business surveys diverging. (8) Upticks in capital goods orders and new home sales don’t put an end to soft patch. (9) BEA working on fixing GDP’s residual seasonality problem. (More for subscribers.)

How the Fed Depressed the Recovery (excerpt)

In my opinion, the Fed has significantly contributed to the weakness of the current economic expansion as follows:

(1) By keeping interest rates near zero for so long, risk-averse savers have had to accept bupkis for returns on their liquid assets, which rose to a record $10.7 trillion during the week of May 11. Many of them have been saving more, thus spending less. The 12-month sum of personal saving has been running around $700 billion since the end of the financial crisis in 2008, double the pace during the 1990s and the first half of the previous decade.

(2) Ultra-easy money attracted investors rather than nesters into the housing market following the 2008 crisis. They bought up all the cheap homes and drove home prices back up to levels that may be unaffordable for many first-time homebuyers.

(3) As I’ve discussed many times over the past year, thanks to the Fed, corporate bond yields have been trading below the S&P 500’s forward earnings yield since 2004, providing companies with an incentive to buy back their shares and engage in M&A rather than invest in plant and equipment.

Cheap money did stimulate some business investment, but the increased capacity wasn’t matched by more demand, resulting in some deflationary pressures. Stock prices have soared, but this has exacerbated the perception of widespread income and wealth inequality.

Today's Morning Briefing: Tiptoe Through the Soft Patch. (1) Tiny Tim and Janet Yellen. (2) Is the Great Recession over yet? (3) ECI wages get a footnote. (4) Yellen still worrying about underwater homes. (5) Three abating headwinds. (6) Fed sees 2.5% real GDP growth ahead. (7) Yellen is in one-and-done camp. (8) What’s the matter with Kansas? (9) Are the headwinds abating? (10) Here is how the Fed’s policies have depressed consumer and business spending, and housing activity. (11) What’s the matter with the dollar, bonds, and stocks? (More for subscribers.)

Bond Market: Sprechen Sie Deutsch? (excerpt)

Yesterday’s much weaker than expected US retail sales report initially caused the 10-year US Treasury bond yield to fall in the morning. Then it spent the rest of the day moving higher. The comparable pesky German bond yield continued to move higher to 0.73% from its record low of 0.03% on April 17. The US bond yield has been joined at the hip with the German one all year.

While April’s payroll employment report put a Fed rate hike back on the table yet again for June, the retail sales report arguably took it off the table--yet again. That should have been bullish for bonds. Instead, the dollar took a dive on the soft-patch sales report. The weaker dollar lifted the prices of precious metals and oil (before crude oil inventory data depressed them), which also unnerved bonds.

A 2% bond yield looks attractive for the US 10-year Treasury given the subdued outlook for the Fed’s rate hiking. The problem is that if the German yield gets there, the US yield will be closer to 3%. That would make it even more attractive as long as you didn’t buy the bond at 2%.

Today's Morning Briefing: Consumers Not Registering. (1) Less “ka-ching” around the world. (2) A demographic theory of secular stagnation. (3) Older workers can’t depend on broke social welfare states. (4) May you live a long life and have lots of savings. (5) How governments depressed fertility. (6) US retail sales join the soft-patch batch. (7) China’s senior moment? (8) Japan, Italy, and Germany are at the top of median-age ranking. (9) Spotting some shoppers in Europe. (10) Bonds learning to speak Deutsche. (11) Focus on market-weight-rated S&P 500 Retail industry. (More for subscribers.)

US Consumers: Chill in the Air (excerpt)

Yesterday’s March retail sales report was certainly disappointing. It suggests that the winter’s big chill has turned into the spring’s sloppy soft patch. Bond yields fell on the news, which might force the Fed to postpone liftoff from mid-year to later this year.

The weakness in retail sales from December through February didn’t jibe with the strength in employment and consumer confidence. Another surprise was that the windfall from falling gasoline prices didn’t show up in better spending in other retail categories. Then March employment data turned weak, and the month’s 1.0% gain in retail sales excluding gasoline (to a new record high) wasn’t much of a spring rebound following the 0.8% decline from December through February. Even worse, on an inflation-adjusted basis, core retail sales (excluding autos, gasoline, and building materials) fell 1.3% saar during Q1.

What’s the problem? It might be our health. American consumers now spend a record $8,066 per capita annually on health care. Thanks to Obamacare, we are all paying more to the piper. The out-of-pocket costs of health care have increased significantly, with higher premiums and co-pays and bigger deductibles. Unfortunately, it’s hard to quantify this because statistics are not available. The government’s data show total spending on health care without showing payments made by the government, insurance companies, and consumers.

Today's Morning Briefing: Paying the Piper. (1) T-Day! (2) Road crews filling potholes on a hit-or-miss basis. (3) It’s good to be king. (4) Who pays taxes? (5) From winter’s ice patch to spring’s soft patch. (6) Postponing liftoff? (7) Not much spring in March retail sales. (8) Health care out-of-pocket outlays infecting retail sales? (9) Excluding energy, revenues growth holding up. (10) Lots of geopolitical hot spots. (11) Talking points vs. wish lists. (12) Focus on market-weight-rated S&P 500 Retail. (More for subscribers.)