Parties Differ On U.S. Economic Policy

Opinions about how to repair the economy in the United States vary from one party to the next, but broadly trend either toward reducing debt or spending more to in an effort to stimulate the financial infrastructure. The vast majority of conservative Republicans and a majority of Independents advocate reducing debt, while Conservative and Liberal Democrats favor more spending. For more on this continue reading the following article from Tim Iacono.

There’s nothing really surprising about the results of a new Pew Research poll in which one party favors deficit reduction to boost the economic recovery while the other party favors more spending, but, it is kind of interesting to see the data all in one graphic.

Following the departure of another Republican from the debt ceiling/deficit reduction negotiations, President Obama has injected himself directly into the talks in the hope that some kind of a deal can be struck prior to the debt ceiling deadline on August 2nd. Somehow, the fat tail of a U.S. debt default seems to have grown just a bit fatter.

This post was republished with permission from Tim Iacono.

Poor Housing Market Stats Prevail in May

The report for sales of existing homes in May fell 3.8% for the year along with home values, which also fell by 4.6%, following a year-over-year decline. Analysts are calling it the sign of a “double dip” recession for the U.S. housing market as interest in buying dried up along with last year’s homebuyer’s tax credit. Many factors are contributing to the drop, from a waning economy and job market to increased costs in fuel that are in turn driving up consumer costs on the whole. For more on this continue reading the following article from Tim Iacono.

The National Association of Realtors reported that existing home sales fell 3.8 percent in May to an annual rate of 4.81 million units and home values continue to decline on a year-over-year basis, the median price down 4.6 percent from a year ago to $166,500.

Distressed home sales accounted for 31 percent of all sales in May, down from 37 percent in April, and all cash transactions dropped from 31 percent t0 30 percent as more traditional homebuyers entered the market in the spring, the beginning of the seasonally strong mid-year months for property sales.

The months of supply metric rose from 9.0 months to 9.3 months in what many see as further confirmation of the ongoing “double-dip” in housing, but NAR chief economist Lawrence Yun remains optimistic, noting that temporary factors are now holding back the market. “Spiking gasoline prices along with widespread severe weather hurt house shopping in April, leading to soft figures for actual closings in May,” he said. “The pace of sales activity in the second half of the year is expected to be stronger than the first half, and will be much stronger than the second half of last year.”

Yes, we’re starting to hear a lot about a “second half recovery”, that is, after the first half of 2011 has proved to be such a disappointment.

This blog post was republished with permission from Tim Iacono.

Small Businesses Struggle, Labor Stats Sink

Analysts are drawing a connection between new Bureau of Labor Statistics numbers and a job market that appears ready for a double dip. Comparing the number of jobs generated by small businesses and start-ups during the last recession in 2001, statistics confirm that more jobs are being lost now as small businesses struggle to open or stay open. A survey conducted by the National Federation of Independent Businesses indicates that earnings trends for small business owners are in the negative and unlikely to recover as consumers slow spending. For more on this continue reading the following article from Money Morning.

After showing some improvement over the past year, the U.S. job market is now beginning a double-dip.

The reason is simple: The number of start-up businesses has hit its lowest level since at least the early 1990s.

Indeed, small businesses are the main drivers of job growth and no amount of stimulus can compensate for their absence.

For instance, between the recession that ended in late 2001 and the start of the most recent recession in late 2007, businesses that employed fewer than 500 workers added nearly 7 million employees, according to ADP payroll services. Larger businesses cut nearly 1 million employees in that period.

However, in the 12 months through March of last year, just 505,473 new businesses started up in the United States, according to the Bureau of Labor Statistics (BLS). That's the smallest number since the BLS began tracking the data in the early 1990s.

That's not all.

Businesses with fewer than 50 employees added just 27,000 jobs in May, compared to 84,000 in April and more than 100,000 in December and January.

So it's not surprising that the national unemployment rate in April climbed for the first time in six months to 9%. And after falling as low as 8.8% in March, the unemployment rate rose even higher in May, to 9.1%. Employers added just 54,000 workers in May - the smallest number in eight months.

Much has been made of the fact that many larger businesses say they plan to increase hiring during the months ahead, but that tide is beginning to turn. Optimism among U.S. chief executive officers in the second quarter actually fell from a record high in the first quarter, according to the Business Roundtable's economic outlook index.

The index decreased to 109.9 for the April-June period from a record high 113 reading in the previous three months. The Business Roundtable is an association of executives of corporations representing a combined workforce of more than 13 million employees and almost $6 trillion in annual revenue.

But what's worse is that small businesses are even more disillusioned.

In fact, a national survey of small business owners, released yesterday (Tuesday), showed declining optimism among owners of small businesses - the third straight monthly drop. That survey was conducted by the National Federation of Independent Businesses and polled 733 small businesses across the country.

"Only the big banks and the big manufacturers are winning," the NFIB said. "Earnings trends for small business are distressingly negative and the recovery is two years old."

Indeed, the biggest reason for the pessimism among small businesses is that U.S. consumers - who have been battered by tumbling home prices, tight credit, and exorbitant gas prices - aren't spending enough. Retail sales fell 0.2% last month, the U.S. Commerce Department said yesterday.

Of course, Money Morning Contributing Editor Martin Hutchinson has another explanation. He blames the worsening job picture on Washington's faulty policies.

"Washington's fiscal stimulus - including the government dumping nearly $1 trillion into such unproductive pursuits as ‘new energy' projects and state employee labor union contracts -- has generated massive budget deficits and given banks no incentive to play its key job-creation role by lending to small businesses," said Hutchinson. "Instead, the stimulus has provided temporary jobs with the government -- and those jobs are now disappearing as Washington's money runs out."

This article was republished with permission from Money Morning.

Majority of Americans Practice Poor Financial Planning

The National Bureau of Economic Research has released a report critical of American investing practices. The study indicates that most Americans are financially illiterate, and do not understand fundamental concepts regarding their borrowing practices or the dynamics of finance. People often borrow or enter into mortgages without understanding their interest rates or terms, and increasingly use risky high-interest forms of financing like payday loans and tax refund advances. This along with a seeming addiction to credit and aversion to saving has experts warning of future economic shocks stemming from large-scale personal finance mismanagement. For more on this continue reading the following article from Tim Iacono.

It’s impossible to predict what the personal finances of hundreds of millions of Americans will be like in 10, 20, or 50 years, but one thing seems certain – they’ll look back at the late-20th and early-21st century and marvel at what happened. From a nation of diligent savers where a reasonable return could be earned on risk-free investments and everyone worked toward paying off their mortgage, we’ve gradually turned into a nation of credit junkies who fall into two investment camps – increasingly destitute, risk-averse savers and speculators reaching for a higher return, many of whom will end up destitute as well.

Confirmation that we might be getting a little closer to the end of this trend and about to begin whatever phase comes next arrived in two reports this week. First, from the National Bureau of Economic Research comes a new study that indicates we Americans don’t seem to do much right these days in managing our money.

The findings reported in this work paint a troubling picture of the state of financial capability in the United States. The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks. To understand financial capability, it is important to look not only at assets but also at debt and debt management, as an increasingly large portion of the population carry debt. In managing debt, Americans engage in behaviors that can generate large expenses, such as sizable interest payments and fees. Moreover, more than one in five Americans has used alternative (and often costly) borrowing methods (payday loans, advances on tax refunds, pawn shops, etc.) in the past five years. The most worrisome finding is that many people do not seem well informed and knowledgeable about their terms of borrowing; a sizeable group does not know the terms of their mortgages or the interest rates they pay on their loans. Finally, the majority of Americans lack basic numeracy and knowledge of fundamental economic principles such as the workings of inflation, risk diversification, and the relationship between asset prices and interest rates.

You can purchase the report for $5 from NBER or have a look at some additional details in this item over at the Wall Street Journal Economics blog, but, it seems clear that the too-big-to-fail banks have millions of Americans right where they want them – dumb and in debt – and even Elizabeth Warren might not be able to save them.

When it comes to investing (i.e., for those Americans who aren’t living paycheck to paycheck while struggling with debt up to their eyeballs), things aren’t much better as the double-whammy of poor instincts and being taught poorly have investors failing to achieve their potential as detailed in this report at MarketWatch.

It might be a stretch to say that Americans, in general, are failures when it comes to investing. But given the amount of time and attention spent teaching people how to be savvy about all things money, it sure seems that way.

We simply haven’t moved the needle all that much. That seemed to be the consensus of the world-renowned experts who spoke at the recent Life-Cycle Saving & Investing Conference at Boston University.

It’s not that investors don’t understand how the economy and markets work, though that is a problem. The problem is that we have — recent trends notwithstanding — a low savings rate and high personal debt. What’s more, average investors typically have poor investment results, with various studies suggesting they tend to buy high and sell low, or trade frequently and at the wrong times.

We keep trying to teach people (children, teenagers, young adults, 401(k) participants and the like) about money at all the wrong times, using all the wrong formats and methods of delivery.

Experts said the time is now to think differently about how we teach people about investing, with some advocating for increased use of financial entertainment, or what some call edutainment. Others are calling for increased use of just-in-time learning programs, and still others say this nation needs to address the heart of the matter.
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At the core, one reason why Americans are illiterate when it comes to money and investing has to do with numeracy, Horan said. There’s simply a lack of it among the general population. And, “when we look at the efficacy of financial literacy programs the evidence is not all that compelling,” said Horan.

Horan said that Lauren Willis, a professor at Loyola Law School, published a paper in 2008 in which Willis noted that financial education, for some consumers, appears to increase confidence without improving ability, leading to worse decisions.

I suppose, in the case of investing, you could say that Wall Street firms have millions of Americans right where they want them – confused and reaching for yield.

The “numeracy” problem cited in both reports is something that I find hard to fully appreciate, given my math/engineering background, but it sure does seem to be a problem with no easy solution in sight given the increasingly complex financial world we live in.

This post was republished with permission from The Mess That Greenspan Made.

Jobless Claims Down, Recession Worries Persist

New numbers from the U.S. Labor Department show a decline in jobless claims, but analysts say it is not enough to offset negative effects caused by the slow growth in manufacturing and job creation. Fears of a new recession loom based on an outlook that doesn’t anticipate any improvement in the near future. Optimists, however, believe once Japan picks up speed in parts manufacturing that trouble in the U.S. and elsewhere could be averted. For more on this continue reading the following article from The Capital Spectator.

Initial jobless claims dropped last week by a modest 6,000 to a seasonally adjusted total of 422,000. That’s a sign that the labor market isn’t poised to deteriorate further, but the still-elevated pace of new applications for unemployment benefits also suggests that job growth is still struggling. In one respect, we dodged a bullet--for now. But let's be clear: nothing less than robust job growth will suffice to offset what looks to be a new summer slowdown in the offing. It's still too early to talk about a new recession, but the risk is inching higher. That threat remains small, but the change in trend isn't encouraging.

The recently stalled decline in new jobless claims is particularly worrisome in the wake of yesterday’s news from 1) ADP on the sharp slowdown in job creation last month and 2) the downshift in manufacturing activity for May. That leaves us waiting for confirmation or rejection of ADP’s estimate with tomorrow’s update on May nonfarm payrolls from the Labor Department. The consensus forecast among economists expects a sharply lower number vs. April’s 268,000 gain in private jobs, according to Briefing.com, but nothing quite so steep as the ADP reversal that was reported yesterday.

Meanwhile, Ed Yardeni of Yardeni Research writes in a note to clients today that he’s not all that surprised by the latest batch of soft economic reports. What's more, he suggests that once the statistical dust clears, the forces of growth will retain the upper hand. As he explains:

When initial unemployment claims rebounded back over 400,000 during the week of April 9, we suspected that the shortage of Japanese car parts might be a bigger problem for manufacturers, especially in the auto industry, than was widely recognized. By May 2, we were convinced. That’s when we lowered our estimates for real GDP growth to 2% for both the second and third quarters.

And on his blog Yardeni advises:

A shortage of parts made in Japan is temporarily disrupting global manufacturing, in general, and the auto industry, in particular. In the US, the purchasing managers index (PMI) for manufacturing declined from 60.4 during April to 53.5 in May. It was led by sharp drops in the New Orders Index (from 61.7 to 51.0) and in the Production Index (from 63.8 to 54.0). Interestingly, the Employment Index dropped by less (from 62.7 to 58.2), and it remained above 50. The Inventory Index dropped below 50 (from 53.6 to 48.7). That’s consistent with the view that manufacturers are drawing down their parts inventories while they wait for more supplies from Japan.

Given Japan’s crucial role in supply parts to auto manufacturers around the globe, “the soft patch has gone global,” Yardeni concedes. But he stresses that a soft patch isn’t the same thing as a new recession. He notes that severa manufacturers'l purchasing managers indices (PMIs) around the world, while falling lately, are still above 50, indicating growth. “Please notice that there is no great tragedy in any of these PMI indicators.”

In short, a bit of optimism from one analyst in a world that’s suddenly knee-deep in pessimism. Tomorrow may shed new light on whether Yardeni’s optimism is warranted.

This post was republished with permission from The Capital Spectator.