Real Median Household Income Highest Since February 2002 (But M2 Money Velocity Continues To Tank)

According to Sentier Research, in April, real median household income reached $59,361, according to the latest report from Sentier Research. That’s up 2% since January, and is as high as it’s been since February 2002 (or 15 years). Expressed as an index, median household income was 100.9 in April, which is the first time this index has topped 100 since December 2008.

Now, if the central planners in DC can just get money velocity (GDP/Money Stock) to stop diving!

Boola, boola, boola! 

The Fed’s Dual Mandate (And The Phillips Milk Of Magnesia Curve) — Why Wage Inflation Isn’t Happening

The Federal Reserve has a dual mandate to 1) promote maximum employment and to 2) keep prices stable.  The Fed has a target rate of core inflation that is 2%; however, it has been unable to achieve this target since the end of The Great Recession even though unemployment has declined.

Yes, the Dallas Fed’s trimmed mean Personal Consumption Expenditures Inflation Rate did exceed 2% back in January 2012, but generally it has been below 2% since June 2009.

But why is inflation so low even when unemployment is so low (as in 4.4% as of April 2017)?

A partial answer lies in the dismal earnings recovery after The Great Recession. Notice in the chart below that the U-3 unemployment rate (blue line) has declined below the natural rate of unemployment (red line) as economic recovery strengthens after each recession. Except for after The Great Recession. Once again, the U-3 unemployment rate has finally dipped below the natural rate of unemployment … yet no wage inflation.

The green line represents the inverse of YoY hourly earnings growth for the majority of the population (Production and Nonsupervisory Employees). You will notice that wage growth accelerates as unemployment declines, particularly when the underemployment rate is below the natural rate of unemployment. Except for the current “recovery.”

Bloomberg has a nice piece of several reasons why the current wage recovery is so low.  Another explanation that Bloomberg did not mention is that the US saw an unprecedented wave of regulations (Affordable Care Act, Dodd-Frank, EPA, the Consumer Financial Protection Bureau, etc.) most of which did nothing to help wage growth for mere mortals. Not to mention increase capital-labor substitution (robots replacing workers). But an easy answer is that the Phillips Curve is seemingly dead (decreased unemployment correlates with higher rates of inflation).

But WHY is the Phillips Curve dead? It makes intuitive sense that wages will rise as labor slack vanishes.  But what are some other explanations for the failure of the Phillips Curve to kick in? Or maybe it is about to kick in?

Clearly, outsourcing of higher-paying jobs overseas is a factor. Or could it also be the poor quality of American education that makes students uncompetitive in the modern economy? Or are US firms not investing in plants and equipment anymore?

But with commercial and industrial lending YoY slowing and the decline in real gross domestic investment (nonresidential equipment), wage growth may still be some time away.

The Fed’s zero interest rate policies (ZIRP) and quantitative easing (QE) ..

have certainly helped pumped up asset prices (like housing and the stock market).

But not wage growth (worst post-recession wage recovery in history … or at least since 1965). In other words, The Fed has not really benefitted wage growth, only asset price growth.

Suffice it to say that have full employment AND increased wage growth would be a blessing to the economy and housing market. I hope so. I am tired of reading research papers that claim that a HUGE Millennial wage of home purchases is going to kick in any quarter. At least I hope their predictions work better than the Phillips curve.

Office Bubble? Real Estate Deals Vanish in New York As Office Rents Decline (Northern Virginia Near Worst in Office Vacancy Rate)

Commercial office space has had a fantastic run since hitting bottom in 2009/2010. Much of it with the help of The Federal Reserve’s patented asset bubble blowing technology!

Bloomberg — Concern is mounting that real estate prices have peaked following six years of record-shattering growth, and there are signs of overbuilding in large cities such as New York and San Francisco—the biggest beneficiaries of the recent boom. Landlords are cutting rents and prices, spooked lenders are holding back, and the industry loses hope for Trump tax cuts. 

Much of the slowdown has nothing to do with Trump. Concern is mounting that real estate prices have peaked following six years of record-shattering growth, and there are signs of overbuilding in large cities such as New York and San Francisco—the biggest beneficiaries of the recent boom.

Let’s take a look at weighted-average asking rents for office space for the lowest 35 metro areas in terms of rent growth from 2016 Q1 to 2017 Q1. Silicon Valley leads the nation in largest asking rent decline (-12.19%) since 2016 Q1 while Midtown New York actually grew 0.40% over the past year. Suburban Maryland (-3.23%) and Northern Virginia (-0.25%) both saw declines in asking rents.

Here are the top 35 Metro area in terms of percentage change in asking rents. Notice that while Manhattan asking rents are flat to falling while Brooklyn asking rents rose 16.51%.  Same story holds for Silicon Valley (aka, San Jose). Silicon Valley fell -12.19% over the past year while just up the road in Oakland/East Bay, asking rents rose 15%.

Average office vacancy rates nationally stands at 13.2% in 2017 Q1, down ever so slightly from 13.4% in 2016 Q1. Northern Virginia (21.3%) was edged out for the worst office vacancy rate in the US by Dayton Ohio (23.3%) and Fairfield County, CT (23.1%).  Here is the Cushman Wakefield report on Northern Virginia’s overbuilt office market. CW_VA_Survey_1Q17 (1)

The lowest vacancy rate in the nation? El Paso, Texas at 6.4%. That is a far cry from Northern Virginia’s 21.3% office vacancy rate.

Fed Chair Janet Yellen standing next to her patented asset bubble machine.

 

Commercial/Multifamily Borrowing Up 9 Percent from Last Year (Retail Originations Down 23%)

The retail sector can’t seem to buy a break these days. With 8,600 brick-and-mortar stores may close their doors in 2017, lending was expected to decline.

According to the Mortgage Bankers Association, commercial/multifamily originations rose 9% from Q1 2016.

That is the good news.

The bad news? 1) Retail originations fell 23% from Q1 2016.  2) CMBS/Conduit originations were down 17%. 3) Hotel originations were down 40%.

The good news? 1) Healthcare originations were up 22%. 2) Industrial originations were up 40%. 3) Multifamily originations were up 14%.

Notice that Fannie Mae/Freddie Mac multifamily origination programs were up 33% from Q1 2016.  At the same time, Life Insurance Companies saw 0% growth in commercial/multifamily originations.

Thanks to The Federal Reserve, short-term interest rates remain suppresed and have for the last ten years.

Office originations grew at a listless 2% from Q1 2016. On-line retailers like Amazon have helped shrinked the retail footprint. But will shared office space and the internet finally drive a spike through office space when employees can work remotely?

So, will this be the final countdown for office space?

“The Big Short” Revisited: Housing Starts Fall 2.6% In April, Multifamily Starts Fall 9.6%

Tra-la, its May!  And it is time for the April housing construction release from the US Census!!

While total housing starts are down -2.58%, 1 unit starts are actually up slightly.  So where is the big drop off? 5+ unit (multifamily) starts fell 9.6% in April.

1 unit housing starts peaked in January 2006, crashed, and are now back to levels seen at the end of the 1991 recession.

What does this have to do with the book and movie “The Big Short?” Well, there was an enormous housing construction bubble that started building after the 1991 recession culminating in the peak in January 2006. It has taken over 10 years to get back to 1991 levels.

5+ (Multifamily) starts? While they declined nearly 10% in April, they are still generally higher since before The Great Recession.

Multifamily serious delinquency rates have been quite tame for Fannie Mae and Freddie Mac, even during the financial crisis. This chart compares Fannie and Freddie multifamily delinquency rates withe FHA’s overall delinquency rate that includes single family. (Note: the FHA serious delinquency rate is so high that it is on the left axis).

While the book and the film “The Big Short” blamed Collateralized Debt Obligations (CDOs) for the financial crisis, clearly the US went on single-family housing construction boom that fizzled-out in after peaking in January 2006.

Construction loans, funded at the shorter-end of the Treasury curve, dropped dramatically with The Fed’s dropping of their benchmark Fed Funds Target rate.

As the rate remained depressed, home prices started to rise rapidly as construction spending spiked. As The Fed tried to cool off the bubble, it was too late.

Blaming CDOs, CDO^2 and synthetic CDOs was too easy of a target for blame.  How about the US economy was running out of gas and we relied on housing construction to drive GDP growth?

At least The Big Short got part of the over-building fiasco correct in Florida, but then blamed it on mortgage brokers.

 

Retail Wasteland: Mall Retailer Macy’s Suffers Earnings Decline … Again

Yes, the retail massacre continues, at least for mall stores.

Macy’s. the venerable retailer. saw comparable store sales at owned plus licensed stores decline -4.6%, below the already depressed estimate of -3.5%.

Here is a chart depicting Macy’s declining fortunes.

The reaction for Macy’s equity?

Now, not all retail store sales are slumping. Home improvement giant Lowe’s is actually gaining ground. Likely because I just bought a dishwasher at Lowe’s.

Internet companies and home improvement are leading US earnings growth while non-HI retailers are sucking wind.

I wonder if the Macy’s Thanksgiving Day parade will be replaced with an Amazon parade where everyone stays at home ordering goods?

I hope The Who does a new version of Teenage Wasteland and renames it Retail Wasteland.

 

 

Bubbles? Shiller P/E Ratio Nears Roaring ’20s Bubble High As Home Prices Increased 43.6% Since Feb ’16

Supreme Court Justice Potter Steward said in 1964 in the Jacobellis v. Ohio case,  “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [hard-core pornography]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.”

Asset bubbles too are difficult to define, but I know it when I see it.

Take Robert Shiller’s P/E Ratio measure for stocks. There was a Roaring ’20s bubble which burst in 1929 (Black Tuesday), there was the infamous Dot.com bubble. On March 10, 2000, the NASDAQ Composite peaked at 5,132.52, but fell 78% in the following 30 months.

Now we are seemingly in yet another stock market bubble and almost at the P/E Ratio level of the Roaring ’20s bubble (but not near the dizzying heights of the Dot.com bubble … yet).

Stocks do seem awfully “frothy.” But what about home prices? The Case-Shiller 20 composite home price index has grown 43.6% since February 2012.  While home prices are not growing as fast as they did during the home price bubble of the last decade, they are going at a rate that is twice as fast as earnings (wage) growth.

These certainly look like asset bubbles. If it looks like a bubble and acts like a bubble, it probablyis a bubble.

“Shhh. Don’t say the word “bubble!”