Monday, March 27, 2017

Household finances are on solid ground

U.S. households' financial burdens (payments for mortgage and consumer debt, auto leases, rents, homeowner's insurance, and property tax, all as a percent of disposable income, are at historically low levels and have not budged for over five years. Moreover, the overall leverage (total liabilities as a percent of total assets) of the household sector is at 30-year lows. Coupled with the fact that weekly claims for unemployment are at historically low levels, this paints a picture of a household sector that is on financially solid ground, more so than at any time in decades.

Today the Fed released data for the fourth quarter of 2016 covering various measures of household's financial burdens. As the chart above shows, financial burdens have been historically low for over 5 years, and are substantially less now than they were prior to the past 3 recessions. I note that consumer debt includes student loans, which now total over $1 trillion and which continue to grow at a significant pace—the only area of consumer finance that is deteriorating, thanks to our beneficent government which is willing to grant student loans with little or no regard for a student's ability to pay.

Households' leverage has plunged by about one-third since the 2008 recession, as the chart above shows, and leverage is now back to levels last seen some three decades ago.

Initial claims for unemployment, shown in the chart above, haven't been so low for a very long time. Workers at social security offices around the country must have a lot of time on their hands these days!

The chart above compares unemployment claims to total payrolls. Here we see that the chances of a worker getting laid off are as low as they have ever been, and by a substantial margin. In recent weeks, only about 0.15% of the U.S. workforce has been handed a pink slip.

Household finances appear to be about as solid as they have ever been, and job security is also about as good as it has ever been. This is not to say we don't have problems, but these statistics are reassuring nonetheless, and not widely recognized.

Friday, March 24, 2017

Thoughts on the failure of Obamacare reform

I don't buy the conventional wisdom that says that this is a failure of leadership. Leadership alone cannot fix Obamacare. A solution to the problem of Obamacare is going to be extremely difficult, and it can't and shouldn't be done overnight. Obamacare was doomed to fail, as I pointed out many times over the years, because it attempted to rejigger a huge fraction of the U.S. economy, and that is something that is virtually impossible to accomplish in a successful fashion by government diktat. Only a freely functioning market economy can make something so huge and so complex work in an efficient manner. (Friedric Hayek, who died 25 years ago, explained why in this post from Mark Perry)

Thank goodness the Republicans didn't end up succumbing to the hubris that energized the Democrats under Nancy Pelosi's leadership, when they passed a bill so huge and so complex that she was forced to exhort its passage in order that they could find out what was in it. Thank goodness the Republicans didn't ram through a bill that had zero support from the opposition party (as Pelosi did), let alone strong support from their own party; that is not the way to accomplish major legislation.

Obamacare is imploding because it attempted to substitute government decree for market forces. So a fix to Obamacare is only going to work if it unburdens the healthcare market from government  influence. Ryan's proposed solution went a long way towards doing that, but it still relied on too much government interference in the healthcare market. Here's my recommendation: Let's put this intractable problem on the back burner; let's let Obamacare continue to fester; and let's wait until the Democrats beg for a solution and join in supporting new and better legislation.

Meanwhile, let's hope the Republicans can regroup and move on to tackle a big problem that should be a lot easier to solve, and which could end up delivering positive results for everyone in relatively short order: tax reform.

Successful tax reform should involve a few simple ingredients: tax rates should be lower and flatter than they are now, and deductions and subsidies should be far fewer. (Please, Republicans, please don't attempt to impose a Border Tax system on the U.S. economy, since that is very complex and it will have many unforeseen consequences, some good and some very bad. Please don't listen to Trump and his economically illiterate trade advisor Peter Navarro.) Lower and flatter tax rates coupled with fewer subsidies and deductions should boost the economy because they will reduce the amount by which the government interferes in private markets, and they will increase the incentives for the private sector to work, invest, and innovate.

Tax reform can deliver a stronger economy, and a stronger economy ought to make it much easier to reform Obamacare.

Friday, March 17, 2017

Global outlook improves

It's not just a Trump Bump that is driving stocks higher, nor is it unwarranted or unsubstantiated optimism. Rising equity prices are most likely a response to an improvement in global economic fundamentals that is just now becoming clear. Global industrial production has been rising for the past 6-8 months, and the volume of global trade picked up noticeably toward the end of last year. More recently, today's release of industrial production statistics for February shows a significant pickup in U.S. manufacturing activity in the first two months of this year. All of this was foreshadowed by a pickup in chemical activity which I noted early last summer and which continues to suggest a meaningful improvement in overall industrial production in the months to come.

The market is usually pretty good at sniffing out developments in the economy that are not yet obvious in the stats, and this is the latest example.

Here are some charts that tell the story:

U.S. industrial production statistics have been unimpressive for years, due mainly to wrenching problems in the oil patch. Eurozone industrial production in the Eurozone has been abysmal relative to modest improvement in the U.S., but it has nevertheless been improving, and this improvement become noticeably stronger about six months or so ago.

After several years of almost zero growth, U.S. manufacturing production has jumped, rising at almost a 5% annualized rate since the end of November.

The volume of world trade is a key indicator of global economic health, since expanding trade is an unalloyed good thing: increased trade is arguably the best way to improve a nation's productivity, since it allows trade partners to strongly benefit from the things they do best. In the chart above we see that world trade volumes rose at a relatively tepid 2-3% pace for a number of years, which is consistent with the recent recovery being the least impressive in modern history. But in the second half of last year world trade volume rose at a 4-5% pace. This is very good news.

The Chemical Activity Barometer has done a pretty good job of reflecting—and sometimes leading—overall economic activity in the U.S. Starting last summer this indicator started picking up, and in the year ending February it has increased by over 5%.

The chart above shows that the year over year change in the 3-mo moving average of the Chemical Activity Barometer has been a reliable predictor of improvement in U.S. industrial production. Industrial production is now beginning to improve, as predicted, having increased modestly since last March after several years of decline. More improvement should be on the way.

The chart above shows the CRB Raw Industrials commodity index, which has been rising strongly since late 2015. It's now apparent that this has been driven not by a weaker dollar (as has typically been the case), but by an unexpected and significant improvement in global economic activity. The CRB Metals index (which consists of copper scrap, lead scrap, steel scrap, zinc, and tin) has surged almost 60% since early last year. Very impressive, and it's still ongoing.

So it's not surprising that Eurozone stocks have perked up of late, as has nearly every global equity market. The current equity rally is built on a sound economic base, not on flights of fancy.