U.S. Existing Home Sales Increase in January; Prices Slip
Sales of existing single-family homes increased 3.3% (3.8% y/y) to 5.690 million units (AR) during January following December sales of 5.510 million, revised from 5.490 million. Expectations had been for 5.540 million purchases in the Action Economics Forecast Survey. Sales of existing single-family homes increased 2.6% last month (3.7% y/y) to 5.040 million units following little change during the prior two months. Sales of condos & co-ops rose 8.3% (4.8% y/y) to 650,000 following a 10.4% decline.
The median price of all previously owned homes declined 1.9% (+7.1% y/y) versus January to $228,900. The average price of an existing home fell 1.4% to $271,000 (+5.2% y/y).
The total inventory of homes on the market declined 7.1% y/y to 1.690 million. The months’ sales supply of homes fell to 3.3, the lowest point since June 2004.
Warm weather probably helped the Jan. number. Plus, the effect of higher mortgage rates remains to be felt since it takes about 2 months to close a contract. The NAR estimates that mortgage principal and interest costs as a percent of household incomes rose to 15.5% in December, the highest in 9 years. And since incomes are not rising fast enough…(chart from The Daily Shot)
This could help wages catch up:
Jobless Claims Measure at Lowest Level Since 1973 A measure of layoffs across the U.S. fell to the lowest level in more than four decades last week, an indication that the labor market continues to add jobs at a healthy clip.
Here’s the same chart but as a percent of the working age population:
On the other hand, this is not a sign of economic strength, or was it the weather:
From the Minutes of the Federal Open Market Committee January 31–February 1, 2017
- Participants generally indicated that their economic forecasts had changed little since the December FOMC meeting. They continued to anticipate that, with gradual
adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would rise to 2 percent over the medium term. They also judged that near-term risks to the economic outlook appeared roughly balanced. - Participants again emphasized their considerable uncertainty about the prospects for changes in fiscal and other government policies as well as about the timing and magnitude of the net effects of such changes on economic activity.
- Regarding the outlook for inflation, some participants continued to be concerned that faster-than-expected economic growth or a substantial undershooting of the longer-run normal unemployment rate posed upside risks to inflation. However, several others continued to see downside risks to the inflation outlook, citing still-low measures of inflation compensation and inflation expectations or the possibility of further appreciation of the dollar.
- (…) a number of national surveys of sentiment among corporate executives and small business owners as well as information from participants’ District contacts indicated a high level of optimism about the economic outlook. Many participants indicated that their business contacts attributed the improvement in business sentiment to the expectation that firms would benefit from possible changes in federal spending, tax, and regulatory policies. A few participants indicated that some of their contacts had already increased their planned capital expenditures. However, participants’ contacts in some Districts, while optimistic, intended to wait for more clarity about federal policy initiatives before adjusting their capital spending and hiring. In addition, contacts in some industries remained concerned that their businesses might be adversely affected by some of the government policy changes being considered.
- A few participants commented that the recent increase in equity prices might in part reflect investors’ anticipation of a boost to earnings from a cut in corporate taxes or more expansionary fiscal policy, which might not materialize. They also expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for such policy initiatives.
- (…) most participants continued to see heightened uncertainty regarding the size, composition, and timing of possible changes to fiscal and other government policies, and about their net effects on the economy and inflation over the medium term, and they thought some time would likely be required for the outlook to become clearer.
- In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate
again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting
the Committee’s maximum-employment and inflation objectives increased. A few participants noted that continuing to remove policy accommodation in a timely
manner, potentially at an upcoming meeting, would allow the Committee greater flexibility in responding to subsequent changes in economic conditions. Several
judged that the risk of a sizable undershooting of the longer-run normal unemployment rate was high, particularly if economic growth was faster than currently expected.
Briefly said, steady Eddy even though the elections may be meaningfully changing the picture…or maybe not…Just what you would expect from a committee.
Trump’s Hard Line on Immigration Collides With U.S. Demographics President Trump hopes to deliver growth above 3% in the coming decade, which would be hard in the best of times. He and Republicans seem intent on making it harder by putting the brakes on immigration, Greg Ip writes.
It is a basic rule of economics that a nation’s output depends on the number of people it employs and how productively they work. (…)
Current legal and illegal immigration, net of emigrants (those who leave), is now around 1 million per year, or just 0.3% of the existing population, below the 0.4% average since 1790, according to an exhaustive study last year by the National Academies of Sciences, Engineering and Medicine.
That relatively modest number looms especially large in the future of the U.S. for one simple reason. Because of falling fertility rates, the natural rate of U.S. population growth (births minus deaths) has fallen to 0.4%, its lowest since the founding of the republic. On current trends, it will only get closer to zero, which means immigration will account for all the growth in the labor force. (…)
Immigration’s economic significance is greater than even these numbers indicate for two reasons. First, immigrants are usually younger than the native born population: about 65% are working age, between 25 and 64, compared with 52% of the native-born. Also, among immigrants just 5% are over 65, compared with 15% of the native born. Second, immigrants will have children who will bolster the labor force in later decades. (…)
Consider this: The working-age population grew on average 1.4% per year from 1965 through 2015, when economic growth averaged 3%. The Pew Research Center estimates that at current immigration rates, the working-age population will grow just 0.3% per year in the coming two decades. With half a million fewer immigrants per year it grows just 0.1%, and with 1 million fewer, the working-age population shrink by 0.1% per year.
(…) immigrants differ in two crucial ways from the native born. First, because they’re younger, they shoulder some of the cost of pensions and health benefits for the soaring retiree population, which are adding to budget deficits. According to Pew, the number of retirees per 100 workers will climb from 27 now to 48 by 2065 on current trends. This ratio hits 56 with no immigration.
Second, they tend to bring skills that are in great demand. A recent National Bureau of Economic Research study by John Bound, Gaurav Khanna, and Nicolas Morales found that the influx of tech workers using the H-1B visa, a permit for skilled workers, during the late 1990s depressed the wages of U.S. computer workers and scientists by 3% to 10% but made the overall country better off by boosting innovation and reducing prices for consumers. (…)
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Four Reasons a Crackdown on Illegal Immigrants Could Disrupt the U.S. Labor Market Illegal immigrants are younger, more likely to work, and concentrated in particular industries and states.
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Trump Deportation Policy to Echo in Real Time as Farm Wages Rise
Trump says Republican border tax could boost U.S. jobs
This is from Phil Gramm, an economist who has served as a Democratic Congressman (1979–1983), a Republican Congressman (1983–1985) and a Republican Senator (1985–2002) from Texas. He was a senior economic adviser to John McCain‘s presidential campaign from the summer of 2007 until July 18, 2008.
(…) In this happy world of assumptions, foreign producers, not American consumers, would absorb the cost of the new tax. Yet what is missing is any analysis of how tax preferences for exports and penalties on imports would drive up the value of the dollar. The real-world adjustment process would involve painful dislocations of capital and labor.
If imports cannot be deducted as a business expense, retailers selling imports and manufacturers using imported parts would face an immediate explosion in costs, which they would try to pass on to customers. Higher retail prices would result in fewer purchases, lower profits, layoffs, and the failure of marginal businesses. As the demand for imports declines, fewer dollars would be exchanged for foreign currencies to buy imports, and the value of the dollar would start to rise.
Similarly, since revenues coming from exports would not be taxable under the House bill, profits, capital investment and employment would surge in exporting industries. Cheaper U.S. exports would cause foreigners to demand more dollars to purchase them, and the value of the dollar would rise.
If the value of the dollar actually appreciates over time by 25%, all of these business adjustments then would have to be reversed. The 12% of the economy that produces exports would experience first a boom and then a bust, while the 15% of the economy using imports would experience a bust and then a boom.
If everything eventually returns to where it started—an improbable event, given that the value of U.S. exports plus imports makes up only 0.3% of total dollars traded—border adjustment is simply a gimmick that convulses $5.2 trillion of the economy to collect $120 billion in new taxes. If the value of the dollar does not rise by 25%, border adjustment is a massive industrial policy that distorts a larger share of the economy than all the special-interest provisions in all the other U.S. tax laws combined.
Even if we imagine that the value of the dollar could instantly rise by 25%, circumventing the adjustment process, the list of unintended consequences would still be immense. Much of the world’s public and private debt is denominated in dollars, and a rapid increase in the value of the dollar would cause massive financial upheavals and bankruptcies. A 25% increase in the dollar’s value would imperil American investments abroad—including hundreds of billions of dollars in private and state pension funds and university endowments. The domestic tourism industry, which does not get a tax subsidy on its sales to foreigners visiting the U.S., would be devastated.
Border adjustment will be challenged under international trade agreements. Proponents tell us that not taxing exports is only treating our income tax like a value-added tax, which normally is not imposed on exports. But countries with VATs also have income taxes. Could the U.S. persuade the World Trade Organization that exempting exports from income taxes is the equivalent of doing so for a VAT or sales tax? That’s doubtful, but if the answer is yes, other countries could do it as well—dissipating any U.S. advantage from subsidizing exports.
No other country in the world disallows the deductibility of imports, and here there is no parallel to a VAT. This policy is protectionism pure and simple, and the WTO would surely say so, opening America up to retaliation and possibly triggering a trade war. (…)
Trump Policies Rattle European Central Bankers His political style has caused concerns, but his economic policy, particularly his protectionist stance, causes a shudder among policy makers who see globalization as a critical driver of wealth.
Trump calls China ‘grand champions’ at manipulating currencies Treasury Secretary Mnuchin wants a thorough review before slapping China with such a label
2 MAJOR SURPRISING DISCOVERIES
But, there is also valuation swings from time to time…:
(…) Rising valuations shouldn’t be dismissed. The S&P 500 has a forward price/earnings ratio of 17.6, the highest multiple since 2004 and above the averages of the past five, 10, 15 and 20 years.
Even with earnings growing again, that valuation can’t be justified without corporate tax reform and stimulus. The higher the market goes, the more dependent it is on success of Donald Trump’s policies.
Timing the US market a big challenge for passive investors With stocks looking expensive, exit strategies set test for tracker funds
(…) Holders of passive funds are, then, generally terrible market timers, buying at the top and selling at the bottom. They could also, by buying now, be contributing to the top. The average active equity fund keeps about 3 per cent in cash, according to the Investment Company Institute, while passive funds have negligible cash. Thus a switch of $50bn from active equity funds to passive, intended merely to reduce costs rather than to time the market, leads to an extra $1.5bn being put to work buying stocks. This is helping push the market up and could yet work in reverse if investors start to sell on the way down. (…)
David Rosenberg:
Over the past 89 years, only once (1995) did the S&P 500 fail to at least post a 4.4% decline from some interim peak. (…) Fully three-quarters of the time, these intra-year corrections were 10% or more (the average was 17% and median was 13%).
Forget market timing. This is all about risk management. As valuations and/or conditions fluctuate one way or the other, wise investors should adjust their risk exposure according to their own individual profile. That said, when valuations are extreme, like they were in 2009 and like they are getting to now, individual profiles should not matter as much. John Authers in the FT:
The long-term returns of the stock market are concentrated in a few days. Javier Estrada of the IESE Business School showed that over a period of 40 years, missing only the best 10 days would have cost investors about half their capital gains, while avoiding the 10 worst days would have led to 2½ times the capital gains.
