Gas prices are continuing to rise, and people are starting to feel the pinch. Image from Wikimedia Commons.

Rising gas prices are beginning to take a heavy toll on Americans’ personal finances. Recent data indicates that personal incomes and gross domestic product are beginning to be affected by the rising cost of fuel, as more money has to be spent at the pump. Prices are inching ever closer to the record high price set several years ago.

Nine states and the capital hit $4 per gallon

As of Friday, April 29, nine states and Washington D.C. had an average price of $4 for a gallon of gas, according to CNN. The national average gas price reached $3.90 with an increase of 2 cents overnight. The cost of gas has been going up for the past 38 consecutive days, and shows little sign of stopping.

The continued increase in gas prices has been credited to increasing prices of crude oil and scheduled spring maintenance at many American oil refineries. The price of crude oil has increased 20 percent since the start of the year to $110 per barrel. Refineries, where oil is made into gasoline, often shut down for short periods in spring for annual maintenance.

Americans feeling the pinch

While high oil prices certainly don’t hurt speculators or oil companies, the consumer has been feeling the pinch. The Commerce Department, according to USA Today, noted that consumer spending picked up only 0.2 percent in March, and the rate of GDP growth slowed to 1.8 percent for the first quarter of 2011 compared to 3.1 percent in the last quarter of 2010. People are begrudgingly paying more at the pump, and it isn’t because they more gas. According to Reuters, the American Petroleum Institute observed that from March 2010 to March 2011, demand for gas rose by only 6.1 percent. The cost of gas, on the other hand, rose by 22 percent over the same period.

Government is not amused

In response to the rising gas prices, the government is looking into curbing subsidies and tax breaks for oil companies. Bloomberg reports that the proposed 2012 budget submitted by President Obama included cutting $46 billion in oil company subsidies, and members of Congress are beginning to chime in. Max Baucus, chair of the Senate Finance Committee, submitted a bill with similar intent. However, other members of Congress are skeptical, as they believe cutting subsidies will reduce oil company investment, and that gas prices aren’t set by oil companies such as Exxon or Shell. However, oil companies are certainly not complaining about climbing prices. Exxon, for instance, recently reported a 69 percent increase in first quarter income.

Sources

CNN

USA Today

Reuters

Bloomberg

Put into perspective, consumer spending is being canceled out by inflation, and the housing market could be bottoming out. Image: CC Mr. T in DC/Flickr

An increase in pending home sales in February was not enough to offset the big slide in contract signings reported in January. A February gain in consumer spending was also neutralized after being adjusted for inflation driven by rising food and energy prices. But the minutely positive data on pending home sales and consumer spending boosted stocks Monday, and some real estate experts think the housing market may have bottomed out.

Inflation and consumer spending

Consumer spending in February increased 0.7 percent compared to the month before, according to the Commerce Department. Consumer spending has risen eight months in a row, but February’s increase, adjusted for inflation, is just 0.3 percent, matching the increase reported in January. Rising food and energy prices pushed up inflation in February. After rising 0.3 percent in January, the Commerce Department said the personal consumption expenditures price index rose 0.4 percent, the fastest rate recorded since June 2009. The increase in the consumption expenditures price index effectively canceled out February’s 0.3 percent increase in personal income. Households have also been dipping into savings to cover rising food and energy prices. Savings dropped from $710.5 billion in January to $676.7 billion in February.

Pending home sales as an economic indicator

Pending home resales increased 2.1 percent in February after dropping 2.8 percent in January, according to the National Association of Realtors. Compared with February 2010, pending home sales fell 9.3 percent. Because they represent signed contracts, pending home sales are considered a leading economic indicator. The number affects existing home sales data a month or two later, when the contracts close. As for February, existing home sales — 95 percent of today’s housing market — dropped 9.6 percent from the month before. The median price for existing homes dropped 5.2 percent from February 2010, erasing all increases in home values since February 2002. New home sales plunged 17 percent in February to the lowest rate ever recorded. The median price for new homes dropped 8.9 percent from February 2010.

Has the housing market bottomed out?

Because home prices continue to fall, the National Association of Realtors expects existing home sales to eventually rise 5 to 10 percent overall in 2011. Very few people are buying despite the fact that housing has become so affordable it should be one of the most attractive investments in the U.S. According to Deutche Bank, it’s now cheaper to pay a mortgage and other major homeownership costs than to rent the same house in 28 out of 54 major markets. Optimistic real estate analysts are betting that this affordability will eventually entice potential homeowners into pulling the trigger. The re-emergence of homebuyers could start raising housing prices in many markets, which could get even more homebuyers off the fence.

Sources

Bloomberg

New York Times

Fortune

Falling supply and rising demand will dramatically increase rental rates as Americans adjust their perceptions about home ownership. Image: CC kodiax2/Flickr

After about a decade of very low rent inflation, rising rents are emerging as a consequence of economic recovery. Rental vacancy rates have been dropping sharply, and rental market analysts are warning that double-digit rate increases are on the horizon. Further economic recovery may be at stake as rising rents feed inflation and subtract further from consumer spending already under stress from rising gas and food prices.

Why rental vacancy rates are falling

Rental rates have increased on average less than 1 percent per year over the past decade, according to the Commerce Department. During the recession, people who couldn’t afford to live on their own either doubled or tripled up with roommates or moved back in with their parents. Now many of these people are back on the market looking for their own place to rent. Millions of people who lost their homes in the foreclosure crisis, which continues, are also looking for apartments. Rental vacancy rates dropped from 10.3 percent in the third quarter to 9.4 percent in the fourth quarter of 2010. The 1.3 percent decline was the second-largest on record and the lowest rental vacancy rate since 2003. As rental vacancy rates continue to drop, rents will rise and the overall trend will accelerate.

How high will rents rise?

Rental rates are rising rapidly in every major U.S. metropolitan area and posing a major inflation risk. In the past three months, rents for primary residences are up 2 percent. Overall rents have increased 1 percent. In the next year, rents are expected to rise anywhere from 3 to 10 percent. In high-demand rental markets, such as San Diego, Seattle and Boston, increases could top 10 percent in the next two years. Housing costs account for 40 percent of the Federal Reserve’s core inflation calculation. Rising rents are expected to double the U.S. inflation rate from 0.8 percent in 2010 to 1.6 percent this year. By the end of the year, the U.S. inflation rate could reach 2 percent– the rate of inflation the Fed shoots for without factoring in housing, gas and food prices.

The challenge to meet rental demand

The housing crisis has changed the perception of home ownership in the U.S. as home prices continue to decline. Americans understand the economics of housing better now, and as long as a home isn’t a good investment, more will choose to rent. Rising rents are a function of supply and demand. Nearly 80 million aging baby boomers and 4.5 million people who lost their homes to foreclosure are entering the rental market. Yet multifamily rental construction starts plunged from nearly 350,000 units annually before the 2008 financial collapse to barely 100,000 annually. According to the Center for American Progress, more than 40 million new rental units may be needed in the next 30 years. In the short term, a lack of long-term financing options has few developers willing to risk building more rental housing.

Sources

CNNMoney.com

Daily Finance

CNBC

Huffington Post

Americans are saving more, even though the average income is inching up. Image: Flickr / krasi / CC-BY

Each month, the federal government releases a report on consumer saving and spending rates. These two rates are seen as indicators of consumer sentiment and economic growth. The January spending report is also being seen as a referendum on the payroll tax cut.

January personal income

The United States Commerce Department’s monthly report on personal income and spending contained a few surprises. Overall, personal income increased about 1 percent to $133.2 billion. Overall, that equals about $428 per person in increased spending power in the United States. Increased costs of fuel, food and housing mean that disposable income increased by less — about 0.7 percent. Some figures put the increase in “real” disposable income at even less — about 0.4 percent.

Smaller increases in personal spending

While personal income did go up during the month of January, personal spending did not go up at the same rate. Overall consumer spending in the United States went up by about 0.2 percent. The remaining increase in personal income was put in savings. As a whole, Americans saved about $677.1 billion in January of 2011. This puts the personal savings rate at more than the increase in personal income. This higher savings rate indicates that consumers are being much more cautious with their money. The decreased tax burden does not necessarily translate to spending, as the taxes are showing up in small amounts in paychecks, rather than as a lump-sum payment.

What the numbers mean

Economists put heavy stock in the spending and saving rates reported month-by-month. Rarely are the estimations of monthly income, savings and spending economists offer entirely correct. The real importance in these numbers could be the changing attitude of the American consumer. For several years before the economic collapse, Americans were spending more money than they had. The increased savings rate technically will slow down overall economic recovery because it means less money is going into the economy. For long-term recovery, however, a high savings rate means that individuals have a reduced need for credit and high-risk financial products. This reduced demand means the U.S. financial system could develop a more stable base and weather future downturns more easily.

Sources

CNN Money
Census.gov
Bloomberg

Manufacturing grew for the 19th straight month at the highest rate in seven years, but several factors will challenge future growth. Image: CC Matias Garabedian/Flickr

The manufacturing sector has been leading the way as the U.S. economy climbs out of the recession. U.S. manufacturing activity rose to the highest level in almost seven years in February, its 19th consecutive month of expansion. Manufacturing growth is expected to continue as new orders outpace inventories, but uncertainties remain with employment, consumer spending, and commodity price inflation.

February ISM manufacturing index

As factories increase production to meet rising demand, U.S. manufacturing in February increased at the highest rate since May of 2004, according to the Institute for Supply Management. The ISM, a nonprofit industry association based in Tempe, Ariz., publishes a monthly manufacturing index that is widely referenced as a key economic indicator. The ISM manufacturing index, also known as the factory index, increased from 60.8 in January to 61.4 in February. Readings higher than 50 percent signify growth. Economists had anticipated more modest growth in the February manufacturing index to 60.9.

U.S. manufacturing gains momentum

The manufacturing index is being driven upward by new orders and production stimulated by strong exports. The ISM’s export index rose from 62 in January to 62.5 in February. The group’s new orders index accelerated from 67.8 to 68, the strongest rate since January 2004. The ISM production index climbed from 63.5 to 66.3. The inventories index headed the opposite direction, from 52.4 in January to 48.8. The declining inventories index shows that the supply chain will require continued replenishment, which is a strong indicator for future expansion in the manufacturing sector. Manufacturers could get an additional boost in 2011 from a government program that speeds up tax depreciation for equipment purchases, an incentive included in an $858 billion tax cut bill passed in December.

Future challenges to continued expansion

As manufacturing activity accelerated in February, hiring in the sector did as well. The ISM employment index hit 64.5, rising from 61.7 in January, the highest rate since January 1973. However, inflationary pressures loom as a threat. The ISM index of prices paid by manufacturers rose to 82 from 81.5, increasing concern that rising commodity prices, as well as rising energy prices, will be passed on to consumers already dealing with rising gas prices. Continued gains in manufacturing may face a headwind because of weakening consumer spending, which rose 0.2 percent in January, the slowest rate since June and only half the growth economists were expecting.

Sources

Bloomberg

Wall Street Journal

CNNMoney.com

Middle East unrest is driving up prices at the pump, dampening consumer spending when the U.S. economy needs it most. Image: CC Florence van Cauwerlaert/Flickr

U.S. gas prices were 6 cents per gallon higher on average than the night before when Americans awoke Friday morning. Since Sunday, U.S. gas prices have spiked 12 cents per gallon, and the trend is expected to continue. Economists warn that an oil price shock could be a major setback to the U.S. economy.

How high will gas prices rise?

The jump in pump prices, the largest one-day increase since 2008, is tied to a surge in oil prices. Oil prices have risen more than 10 percent in the last week and hovered at about $98 a barrel Friday after hitting the highest level since October 2008 — $103 a barrel — the day before. Pump prices vary widely in different states, depending on the gasoline tax. Hawaii led the U.S. in gas prices with a $3.757 per gallon average. Wyoming motorists only paid an average of $3.014 a gallon. Energy experts expect gas price increases, which lag behind oil price increases, to continue. This week’s surge in oil prices could result in an increase in gas prices of up to 37 cents per gallon in the next few weeks, according to Moody’s Analytics.

America’s petroleum ball and chain

Rising gas and oil prices are being driven upward by speculators buying oil futures on the bet that the popular unrest and an emerging civil war in Libya could spread instability across the major oil-producing countries of the Middle East. Moody’s said gas prices usually rise about 2.5 cents a gallon for every $1 increase in the price of oil. Economists estimate that each 1-cent increase in gas prices siphons $1 billion a year away from consumer spending. Moody’s estimates that if oil prices average $90 a barrel in 2011, spending on gas will eat up about a quarter of the $120 billion payroll tax cut that Congress had intended to stimulate the economy this year. Most of the money consumers spend on gas doesn’t stay in the U.S. economy. It goes to oil-producing countries where authoritarian governments hoard their riches while the people live in poverty.

Sources

CNN

New York Times

Boston Globe

Credit standards are loosening as banks compete for loans, consumer spending increases and the lending business returns to normal. Image: CC channelR/Wikimedia Commons

Banks are continuing a trend of loosening credit standards in the U.S. According to a Federal Reserve survey, competition among banks to make loans to large companies is forcing them to ease credit terms. Banks are also making it easier for consumers to get credit cards.

Lending gains momentum

Competition among banks to make loans to prime corporate borrowers is increasing. In response, banks are easing lending standards, a sign that lack of credit will be less of a drag on economic recovery in 2011. Fifty-seven banks responded to the annual Federal Reserve survey, taken between Dec. 22 and Jan. 11, about credit quality. The consensus was that lending gained momentum in the fourth quarter, and there are signs that the trend will continue. About 80 percent of the banks surveyed anticipate an improving market for commercial loans to large and medium-sized firms. About 70 percent anticipate improvements in lending to smaller firms.

Consumer spending re-emerges

The Fed survey reported that 50 percent of banks anticipate improvement in the quality of consumer loans in 2011. At the same time, consumer spending beat forecasts in December, according to the Commerce department. Consumer spending rose 0.7 percent in December after a 0.3 percent bump in November. The Commerce Department also reported that incomes increased 0.4 percent for the second consecutive month. Economists expect the positive trend in consumer spending to continue with the payroll tax holiday and rising incomes. The U.S. economy expanded at a 3.2 percent annual pace in the fourth quarter, up from a 2.6 percent gain in the third quarter.

Credit card limits rise, credit score minimum drops

As the U.S. economy continues to improve, banks are making it easier for consumers to get credit cards. About 13 percent of banks in the Fed survey said approval standards for new credit cards loosened. About 14 percent of banks reduced the minimum credit score necessary to qualify for a credit card. About 11 percent increased credit card limits for consumers, and about 8 percent increased credit limits for businesses. Credit analysts are predicting that more borrowers will make on-time payments in 2011, banks will have fewer losses and the lending business will slowly return to normal.

Sources

Financial Times

MarketWatch

Bloomberg

CreditCards.com

Consumer spending is up with the CCI, but new jobs remain scarce. (Photo Credit: BY-SA/Quinn Dombrowski/Flickr)

The Associated Press reports that the U.S. Consumer Confidence Index (CCI) rose in January to the highest level experts have seen in the past eight months. The CCI climbed to 60.6 in January, up 53.3 from December, according to the global non-profit organization Conference Board. Shrinking unemployment and improving business conditions are believed to be key factors in the increased optimism U.S. consumers have shown in both their spending and saving habits.

Consumer Confidence Index better, but still not healthy

While economists are encouraged by the CCI’s rise to 60.6, that level is still far below the 90 that indicates at least semi-healthy consumer confidence in spending and use of short-term credit like payday loans. The Consumer Confidence Index measures how people feel about the state of the U.S. economy. The figure is based upon a survey of 5,000 households, according to the blog Banker Notes. The CCI hasn’t been above 90 since December 2007.

January’s 60.6 CCI is the highest since a 62.7 mark in May 2010, when it appeared that the U.S. economy was ready to take off again. Yet the summer was sluggish economically, and the CCI flagged. Unemployment surged to the highest levels seen in the U.S. since the 1930s, and unemployment levels still haven’t regained their footing since they hit bottom in June 2009.

Hope of job deliverance

The AP reports that a survey from the National Association for Business Economics shows that the number of companies optimistic about hiring is at a 12-year high. This coincides somewhat with the reaction consumers gave to a Conference Board survey regarding the state of the job market, as the percentage of respondents who feel jobs are too hard to come by is down to 43.4 percent. That’s about a 3 percent drop from December. The percentage of those polled by the Conference Board who expect to see more jobs available in six months was also on the rise, from 14.2 percent in December to 16 percent in January.

Consumer spending up, unemployment down

The 2010 holiday shopping season was a boon for consumer spending, as sales increased at the fastest rate in six years. The new Social Security tax cut is expected to contribute to further consumer spending. Meanwhile, unemployment was down 0.4 percent from November to December, yet U.S. job creation only produced 103,000 jobs.

Sources

Associated Press

Banker Notes

Plunkett Research on U.S. retail

New reports on retail sales and consumer confidence present conflicting data until one reads between the lines. Image: CC Svadifari/Flickr

Retail sales and consumer confidence are key economic indicators closely watched by economists and investors. People often assume retail sales and consumer confidence would rise and fall in tandem. But separate reports released Friday show a strong 2010 retail sales trend followed by declining consumer confidence in January.

Retail sales surge in 2010

Retail sales in the U.S. increased at a greater rate in 2010 than in any year since 1999, according to the Commerce Department. From 2009 to 2010, U.S. retail sales increased 6.8 percent, the strongest growth since an 8.2 percent surge in 1999. December retail sales rose for the sixth month in a row, increasing 0.6 percent to $380.9 billion after rising 0.8 percent in November. Despite the holiday shopping season, December’s gain was less than expected, largely due to harsh winter weather. Department store sales dropped 1.9 percent, the steepest decline in two years. But online sales rose 2.6 percent month-over-month to ensure an overall monthly gain.

Consumer confidence a fickle index

Despite the strong retail sales trend, consumer confidence in January declined unexpectedly. The Thomson Reuters/University of Michigan consumer confidence index for January fell to 72.7 from 74.5 in December. A Bloomberg News survey of economists predicted a bump in the consumer confidence index to 75.5. Analysts are saying rising gas and energy prices, combined with the snail’s pace of job creation are to blame. Unemployment fell to 9.4 percent in December, but at the present rate of economic growth, the labor market will take years to recover. Higher gas prices increased sales at gas stations 1.6 percent last month. Energy prices rose 4.6 percent in December.

Data bode well for consumer spending

Consumer confidence has dropped so far this month, but economists say the consumer expectations index is a more accurate economic indicator. The consumer expectations index looks at how people feel about what their finances will look like six months down the road. The Commerce Department reports that it increased to 68.2, the highest mark since last June. The strengthening consumer expectations index bodes well for consumer spending, the lion’s share of U.S. economic output. Although recent reports offer conflicting information, the trend in retail sales appears strong enough to drive economic recovery, if not employment.

Sources

Bloomberg

Financial Times

Wall Street Journal

More people went back to work in December than economists predicted as 279,000 private sector jobs were created in December. Image: CC Paul Holloway/Flickr

Private sector jobs were created in December at a pace more than doubling expectations, according to a report released Wednesday. Another jobs report indicated that job losses dropped to the lowest level in 10 years. The two reports submitted ahead of the Labor Department jobs report due Friday may show that the U.S. labor market may have bottomed out at last, but a long uphill climb lies ahead.

Service sector lead the way in job creation

Private sector jobs in the U.S. increased by 297,000 in December, blowing away economists’ expectations. The report issued by the payrolls firm Automatic Data Processing showed that the service sector — industries such as health care, finance, education and communications — led the way in job creation with 270,000 new hires in December. The ADP report said the production sector–manufacturing and construction jobs — added 27,000 new hires in December. Economists surveyed by Bloomberg had estimated a December hiring increase of 100,000 jobs.

Fewest job losses in 10 years

While private sector job creation surged in December, a report from Challenger, Gray & Christmas, a company that helps laid off workers find jobs, said that employers cut 59 percent fewer jobs in 2010 than in 2009. According to the report it was the fewest job cuts since 1997. The report also said job cuts dropped 34 percent in December from November to 32,000, the lowest tally of monthly job losses since 2000. Bloomberg reports that the Labor Department jobs report due Friday will show that the U.S. unemployment rate in December dropped to 9.7 percent.

U.S. labor market has a long way to go

If private sector job creation continues to accelerate, economists predicts that a subsequent increase in consumer spending could help U.S. economic recovery find another gear. But Daily Finance suggests that the numbers should be taken with a grain of salt. One month of strong jobs data does not signal the beginning of a trend. Plus, despite exceeding low expectations, job creation has a long way to go. Even at an accelerated rate it will take years, not months, to recover from a recession that left the U.S. economy with a deficit of 15-to-17 million full-time jobs.

Sources

Bloomberg

Daily Finance

CNN

U.S. GDP, driven by consumer spending, was higher in the third quarter than first reported, but not high enough to lower the unemployment rate. Image: CC Charlie Brewer/Flickr

U.S. GDP growth in the third quarter has been revised to a higher rate than reported earlier. However, as the economy struggles to get in gear, that’s not saying much. U.S. gross domestic product expanded at a 2.5 percent annual rate from July through September, about half the rate needed to affect the unemployment rate.

Consumer spending drives U.S. GDP

Gross domestic product, the value of goods and services produced in the U.S., is used as a broad measure of economic growth. The 2.5 percent growth of U.S. GDP in the third quarter was driven by consumer spending and increased exports. According to a Commerce Department report, consumer spending was predicted to rise 2.6 percent but increased at a 2.8 percent annualized pace, the strongest result since 2006. Exports were revised upward to 6.3 percent from the 5 percent originally reported. The U.S.economy expanded 3.2 percent in the past four quarters, the strongest year-over-year growth since the first quarter of 2005.

Obstacles to economic growth

The Commerce Department report also revised wages and salaries in the second quarter upward from a $51.1 billion increase to a $97.4 billion increase from the first quarter. The new figures suggest that consumers could have the resources to continue supporting economic growth in the near future. But the increase in consumer spending isn’t expected to be enough to offset the drag of a moribund housing market. Prices remain depressed by anemic sales and a huge inventory of unsold homes and foreclosures. The National Association of Realtors said existing-home sales slipped 2.2 percent in October. The median price for a home sold in October dropped 0.9 percent from a year ago.

High unemployment will persist

Most economists agree that a U.S. GDP annualized growth rate of 2.5 percent does nothing to move the unemployment rate downward. The consensus is that until GDP hits at least 5 percent growth, unemployment will be stuck at 9.6 percent. Growth is forecast at about a 2.3 percent rate for the rest of the year.

Sources

Associated Press

Bloomberg

MarketWatch

In a move everyone was waiting for Wednesday, the Fed announced QE2 -- printing money to buy $600 billion in Treasurys -- an effort to stimulate the sluggish economy. Image: CC NC in DC/Flickr

Just about everyone knew the Federal Reserve would launch another round of quantitative easing after the midterm elections. What wasn’t known was just how much quantitative easing the Fed was going to launch. The suspense ended Wednesday when the Fed announced it would buy $600 billion in Treasury bonds between now and June 2011.

The Fed’s big bond purchase

The Federal Reserve hopes to jolt the sluggish economy into recovery by pumping billions of dollars into the financial system. In an effort regarded as bold, risky and unconventional, the Fed will start printing money to buy $600 billion in Treasurys. In theory, the second round of a fiscal stimulus called quantitative easing, or QE2, will lower interest rates on long-term loans, stimulate consumer spending and reinvigorate hiring. The total QE2 package could add up to $900 billion as the Fed buys even more Treasurys with $300 billion it plans to make from mortgage portfolio investments.

Markets react strangely to QE2

QE2 was no secret, but the Fed’s move, in its depth and breadth, was bolder than most analysts had anticipated. Even so, in the financial markets, which had been pricing in an even bigger Fed bond purchase, interest rates surprisingly rose following the QE2 announcement. The yield on 30-year Treasury bonds was up 0.17 points to 4.09 percent. Ten-year Treasury bonds rose 0.04 points to 2.6 percent. The stock market also favored the news. The Standard & Poor’s 500 index was up 0.2 percent.

Fed has no faith in Congress

A few months ago the Fed considered a return to normal monetary policy, which has been customary following a recession. That would include raising interest rates and tightening credit. However, the possibility of continued political gridlock based on the outcome of the midterm elections convinced Fed chairman Ben Bernanke to act. Because the Fed can’t count on Congress to do anything to stimulate the economy, Bernanke has said, he will use all the tools at his disposal to stimulate employment and get the economy back on track.

Sources

New York Times

Washington Post

USA Today

A low average return on savings could make debt reduction pay off more, but people can't ignore their emergency fund. Image: Thinkstock

In these uncertain economic times, should a person try saving money or reducing credit card debt? With the average return on savings in the U.S. so low, many financial experts say that consumers will come out ahead in the long run with debt reduction. Basically, the cost of carrying credit card debt outweighs the benefits of saving money. Americans as a whole agree, as consumer credit is experiencing its deepest decline in history. This is good for individuals trying to regain their financial footing. But massive cutbacks in consumer spending are hurting the economy as a whole. The result is an environment that makes saving for an emergency fund in lieu of debt reduction a good idea.

Low interest rates favor debt reduction

Record-low interest rates could mean that debt reduction will pay off bigger for the time being than bolstering an emergency fund. Peak Personal Finance reports that low rates mean cash saved in an emergency fund yield less. It is likely people  will benefit more by paying down high interest debt than putting money into a so-called “high yield” savings account. According to Money-Rates.com, the average return on savings accounts under 10,000 as of July 24 was 0.80 percent. Plus, there’s a good chance credit card companies will raise rates significantly when the economy improves. The present environment could be the best time to make meaningful headway with credit card debt reduction.

The debt reduction trend

The flagging economic recovery in the U.S. apparently has consumers following that advice. Financial-Planning.com reports that middle class savings tumbled to an eight-month low in June, according to a report by First Command Financial Behaviors. It was the lowest rate of savings since October 2009. At the same time Americans have stepped up reducing their debt. But the debt consumers paid off wasn’t enough to offset the savings reduction. Those with a positive savings-to-debt ratio, which is total savings compared to total debt, dropped 39 percent in June, down five points from a record-high of 44 percent in the first quarter.

Emergency fund can’t be ignored

Although the numbers dictate that debt reduction may offer more financial benefits that debt reduction right now, Peak said that people still can’t ignore their emergency fund. Everyone should have a monthly savings goal. How much of that cash goes either to debt reduction or savings depends on a person’s situation. If job security is an issue, the emergency fund should get priority. People who feel secure in their jobs could do better by aggressively pursuing credit card debt reduction.

The Great Recession ended in June 2009, a government panel said, but economic growth is too weak to reduce the unemployment rate. Image: CC Ed Yourdon/Flickr

Recession is a technical term that technically doesn’t apply to what the U.S. is currently going through. Economic misery as a real-life condition persists, but a government panel announced Monday that the recession officially ended in June 2009. The economic downturn started in December 2007 and lasted for 18 months — the longest slide since World War II. The economy’s prolonged freefall had earned it the title of “Great Recession” long before it was officially declared over. The panel said that even though the economy resumed growth, it is far from returning to normal capacity. Meanwhile, the Federal Reserve is seeking to avoid a “growth recession” in which economic expansion is too slow to stem rising unemployment.

Recession runner up to Depression

The longest recession since the Great Depression ended when the economy resumed growth last summer, according to the National Bureau of Economic Research. The Los Angeles Times reports that a relapse, or double-dip, would be a new recession. The 18-month Great Recession is the official runner up to the 43-month Great Depression that lasted from 1929 to 1933. The most recent economic collapse eclipsed 16-month recessions in 1973-75 and 1981-82. More than 8 million people lost their jobs, and the labor market could take years to recover. The NBER said the most damaging factor in this recession was rapid productivity growth, which deleted jobs as output was marginally sustained.

Recession ended on paper, but not on the street

The NBER warned last spring that what appears to be an expansion could be a blip in a long-term contraction. The Washington Post reports that the NEBR defines a recession as “a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales.” According to the panel, GDP and industrial production bottomed out in June 2009. Employment, however, did not begin expanding until December 2009. The NEBR said that by declaring a specific date for the end of the recession it was not saying that economic conditions have been favorable since then.

Anatomy of a growth recession

While the economy is expanding, it has been too weak to lower the unemployment rate; this is called a growth recession. Bloomberg reports that economic growth slowed in 2010 to a 1.6 percent annual rate in the second quarter from 3.7 percent in the first quarter. A 5 percent rate of growth in the fourth quarter of 2009 raised hopes that economic recovery was gathering steam. An unemployment rate stuck at 9.5 percent and above is stifling the consumer spending the economy needs to grow. Fed chairman Ben Bernake said the agency has the tools to aid the economy. With interest rates near zero, some think the next step for the Fed is to buy more Treasuries, or government debt. Others believe severe unemployment is the result of Americans lacking the skills to fill available jobs — a problem monetary policies can’t fix.

Credit card debt has been declining nearly two years running. The trend drags on economic growth, but helps credit card companies stabilize earnings and losses. Image: Thinkstock

American consumers are steadily paying off their credit card debt. The Federal Reserve reported that U.S. families cut back on credit card use for the 23rd month in a row. Overall consumer borrowing, which includes credit cards and auto loans but not home mortgages, fell at an annual rate of $3.6 billion in July — the 17th decline in the last 18 months. Paying off credit card debt is helping stabilize a lending industry suffering from an epidemic of credit card delinquency. But a prolonged slide in consumer borrowing is a drag on the U.S. economy as it struggles to recover from the Great Recession.

Credit card debt drops with consumer spending

Consumer borrowing on credit cards fell 6.3 percent in July, following a 7.5 percent drop in June. The Associated Press reports that credit card debt has declined for 23 consecutive months — a record run. As American households struggle to repair their finances, economists expect they will keep cutting back on credit card use as long as incomes and employment don’t improve and banks struggling with high loan losses maintain tight lending standards. By borrowing less and saving more, families are helping themselves but hurting the overall U.S. economy, which depends on consumer spending to expand.

Consumers held in check by banks

To minimize their losses during the economic downturn, banks have made credit cards hard to get. However, The Street reports that consumer demand for credit cards remains strong. According to a quarterly FICO survey, new credit card accounts dropped by 17.7 percent during the 12 months that ended last April compared with the previous 12 months. In the same period, credit card applications fell only 3 percent. The Street said the numbers show consumers weren’t allowed access to all the credit they sought. During that time, the total amount of credit available on all U.S. consumer credit cards fell by 12.2 percent.

Credit card companies hire more lobbyists

The decline of consumer borrowing on credit cards is actually helping credit card companies. Debtmerica Relief reports that despite new credit card rules that limit interest rate hikes and penalty fees, credit card companies are becoming more stable as consumers reign in their spending. Credit card companies such as Capital One Financial and Discover Financial Services have seen earnings and losses stabilize. As consumers pay off more credit card debt, lenders are charging off fewer delinquent accounts. This allows them to spend money that was held in reserve to counterbalance losses. They are spending 25 percent more on increased lobbying efforts to influence future changes in federal laws.

Consumer confidence posted a modest gain in August -- data that bumped stocks and eased concerns that anemic consumer spending will derail economic recovery. Charlie Brewer/Flickr photo.

The Conference Board’s monthly report on its consumer confidence index showed that the metric used to gauge economic outlook actually bumped up a couple of points in August. The modest gain gave the stock market a jolt into positive territory Tuesday morning.

Consumer confidence index beats forecast

Consumer confidence rose in August to beat predictions. Bloomberg reports that the increase in the consumer confidence index to 53.5 from a five-month low of 51 in July could be a sign the biggest part of the economy may avoid a further slide that could effectively end a stalled economic recovery. But even with the increase, an economist told Bloomberg that the August consumer confidence figure is at a “stunningly low level.” Even so, higher confidence brings a ray of hope that consumer spending — 70 percent of the U.S. economy — will recover. To do that, companies need to start hiring more. Yet according to the Labor Department, companies created an average of 51,000 jobs from May through July — down from 200,000 the previous two months.

Consumer confidence report details

In addition to the consumer confidence index, the Conference Board report contains other details. MarketWatch reports that more consumers are pessimistic about the present situation of the economy, yet optimistic that conditions will improve. The Conference Board’s present-situation index — a measure of attitudes about business climate and job opportunities — dropped to 24.9 in August from 26.4 in July. The expectations index — a measure of expectations for a better business climate and more job creation — rose to 72.5 in August from 67.5 in July. Consumers planning to buy a home within six months moved to 2 percent from 1.9 percent. People planning to buy a car rose to 5 percent from 4.7 percent. An economist told MarketWatch that despite the August gains, consumer confidence is at “incredibly depressed levels,” compared with previous economic recoveries.

Bump in index doesn’t guarantee consumer spending

A consumer confidence index above 90 indicates a healthy economy, according to the Associated Press. Yet the August bump put the brakes on a sliding stock market Tuesday morning. About two stocks rose for every one that fell on the New York Stock Exchange. Like all recent market rallies, this one is expected to be short-lived. Most economic reports show economic growth is slowing, and the slight uptick in consumer confidence doesn’t guarantee an increase in consumer spending. A high unemployment rate continues to motivate consumer saving and debt reduction — behavior considered virtuous from a personal finance standpoint. But until the job market recovers and people open their wallets, the late-summer slump could continue for the rest of the year and drag the U.S. economy into a double-dip recession.

Income disparity like plutonomies lead to things like the storming of the Bastille. Image from Wikimedia Commons.

The question has been raised many times over whether the United States is becoming or already is a “plutonomy.” The word plutonomy is a portmanteau of “plutocracy” and “economy,” meaning an economy based on a plutocracy,  which means the wealthiest few control the economy. Some people insist the U.S. economy was that way to begin with. Recently released figures indicate that recent booms in the economy had almost everything to do with the wealthiest few.

Plutonomy does not involve a cartoon dog

What the term plutonomy implies is the economy is driven by and depends on a small number of the wealthiest people. There is reason to think any “improvements” during the recession have everything to do with the spending habits of the richest few. According to the Wall Street Journal, Moody’s has kept track of consumer spending habits, including the richest 20 percent of the population.  Over the past 20 years, the richest 5 percent alone contributed 37 percent of consumer spending. The bottom 80 percent (i.e. the rest of us) contributed less than 40 percent.  The richest 10 percent make about half the income of the U.S.

The math works

According to a study released in 2006 by the Federal Reserve, economist Arthur Kennickell found that the wealthiest 10 percent of the nation held almost 70 percent of the wealth. That means for every dollar of value in the sum total of all non-public assets of the United States, 90 percent of the population owns only 30 cents worth. It seems Reagan’s trickle went upward, and it was no mere trickle; it was a tidal wave.

Of, by, and for the rich

A few scholars, such as Howard Zinn, observed that the Founding Fathers of this country were the wealthiest of the wealthy. Their profits were affected more by British taxes than the commoners were. Thus, they revolted and established a nation in which they would enjoy an oligarchy of advantage. James Madison estimated only a third of Americans were actually for the American Revolution, the rest being either opposed or indifferent. Republics, by their nature, foster aristocracies. If there is one universal harbinger of doom for a society, it is a growing and vast disparity between the wealthiest few and the many poor.

Further Reading

Wall Street Journal

Federal Reserve study of Wealth Distribution (PDF; requires Adobe Reader)

Wikipedia on Wealth Inequality in the United States

Small business lending is adapting to the credit crisis at Sam's' Club, which announced a program for easy small business loans online to Sam's Club members. Flickr photo.

Small business lending is adapting to survive. Small business loans have been an endangered species during the credit crisis, a stubborn legacy of the financial meltdown, housing crisis and Great Recession. But small business credit is making a comeback in unconventional ways, even as a miserly banking industry holds back the U.S. economy as it tries to fight its way out of the recession. The latest innovator is Sam’s Club, which announced a pilot program to offer small business loans to its members.

Innovative small business lending

The credit crisis is holding back the growth, hiring and spending of businesses that Sam’s Club wants as customers. MarketWatch reports that Sam’s Club, a unit of Wal-Mart Stores Inc., is testing a program to offer qualified members small-business loans from $5,000 to $25,000 backed by the Small Business Administration. Small business loans will be offered online to Sam’s Club membership through a partnership with Superior Financial Group. Members who apply for a small business loan online from Sam’s Club get $100 off the application fee, a 20 percent discount and a 7.5 APR. Terms are locked in for 10 years.

Small business consumer spending stimulus

Sam’s Club decided to start offering small business loans online after a company survey of small business customers indicated that tight credit was cutting into Sam’s Club retail sales. The New York Times reports that just less than half of Sam’s Club membership is small business customers, accounting for just more than half of its revenue. So far about 200 people have applied for the SBA loans and about 45 percent have been approved. The company says it does not expect small business loans online to be a big moneymaker, though it earns $50 for each financed loan. The payoff is to get consumers spending more freely — Sam’s Club hopes.

Another small business loan innovator

Small business credit also is loosening at some banks. Last week JPMorgan Chase announced a program to stimulate small business growth and hiring. The JPMorgan Chase small business loan program isn’t as accessible as the pilot for Sam’s Club members, but it represents another oasis in the credit crisis desert. The offer includes lowering the interest rate by 0.5 percent on a new business line of credit for each new employee hired, for up to three employees, for the life of the loan. The offer is available for businesses that qualify for lines of credit up to $250,000.

Small business lending motives

The Sam’s Club small business loans online pilot is looked upon as an unusual move for parent company Wal-Mart. MarketWatch reports that Wal-Mart has been accused of harming small businesses with its aggressive pricing, scale and business methods. And a report at bnet said Wal-Mart chose Superior Financial, which is not a bank, as a partner because ongoing efforts to add banking to its resume makes the financial industry nervous.

Small business loan success story

But Sam’s Club small business loan customers like Michael Golata don’t care about the politics behind the program. Golata, a contractor in Louisville, Ky., for United Parcel Service, told the New York Times that he applied online for a $10,000 small business loan  at 7.5 APR and got the money in 24 hours. He bought a new truck, hired three drivers and went from billing UPS $3,000 a week to $8,000.

Money that isn't part of the consumer spending drive for which the U.S. government is calling. (Photo: Flickr)

United States financial numbers for May 2010 are in, and according to Bloomberg Business, individual incomes outpaced consumer spending. This reportedly made it possible for households to boost their savings and support the economic recovery, although how slower spending boosts the nation’s economic recovery is in question. It could be viewed as another instance of reporting sleight of hand, similar to the way U.S. unemployment numbers were being reported the past few months.

Consumer spending – Where the money needs to go

Reports indicate that the table is gradually being set for increases in consumer spending. Payroll numbers are up, Americans are working longer and salaries are trending upward. Then again, Bloomberg reports in another story that the large number of jobless in America actually lowers salaries as there are so many applicants (supply and demand), so perhaps one hand doesn’t know what the other is doing in Michael Bloomberg’s domain. Whatever the case, the Federal Reserve has kept interest rates steady, so fewer folks will have to dive into the nearest cheap personal loan bunker to make ends meet.

Consumer spending won’t propel recovery

However, as RBS Securities economist Omar Sharif (not the bridge-playing actor) told Bloomberg, the level of consumer spending should be enough for sustained growth, but not enough to drive recovery efforts. Yet despite underwhelming growth in consumer spending, numbers still beat the median estimate of 61 economists surveyed by Bloomberg (0.1 percent gain). Wages were up 0.5 percent (1.3 percent since March), which was the largest increase over three months since December 2007 when the current recession is believed to have begun, and people looked to the easy loan more often than before. As a result, savings increased significantly: 4 percent from April into May ($454.3 billion). That’s the highest such increase in a single month since September 2009, reports Bloomberg.

It’s good news, for the most part

According to Sal Guatieri of BMO Capital Markets, American consumers have effectively rolled with the punches. “As long as jobs are coming back, people will continue to spend,” he told Bloomberg. Paying down debt such as from a fast personal loan and rebuilding savings are admirable financial goals that will continue to see improvement as positive economic factors continue to emerge.

Sources:

Bloomberg Business

Bloomberg (lower salaries)

Consumer spending from the Fox Business point of view:

http://www.youtube.com/watch?v=xmK9gC2nW0Y

New home sales plunged to a record low in May after the home buyer tax credit expired. Home prices and consumer spending are expected to follow, further hobbling a limping economic recovery. Flickr photo.

New home sales fell to a record low according to a report by the Commerce Department released June 23. A slide in new home sales statistics was expected after the home buyer tax credit expired at the end of April. But the 32.7 percent drop in May was more than expected. Existing home sales also dropped, surprising forecasters who expected them to rise. Unemployment is the main reason the housing market is flagging without the tax credit. Sharp declines in the housing market, a critical component of consumer spending, are threatening the fitful U.S. economic recovery.

New home sales: a new low

New home sales had surged in March and April as homebuyers hurried to buy homes before the April 30 deadline for the tax credit. Homebuyers have until June 30 to close the deals for the home tax credit, but the Senate may vote to push that deadline back to Sept. 30. CNNMoney.com reports that the May decline of 32.7 percent represents a drop to 300,000 homes from 446,000 in April. Sales year-over-year fell 18.3 percent.The Commerce Department said the May figures are the slowest sales pace since it began tracking home sales statistics in 1963. The prior record was set in September 1981, when new homes sold at an annual rate of 338,000.

Consumer spending takes a hit

The decline in new home sales, if it continues,  leads to a decline in housing prices, which leads to a decline consumer spending as well — the biggest threat to economic recovery. Business Week reports that the drop in residential construction will sap consumer spending that accounts for about 70 percent of the U.S. economy. There’s direct correlation between home sales and spending on furniture, appliances and building materials. On June 11 the Commerce Department reported that sales at U.S. retailers fell 1.2 percent in May, the first decline in eight months, led by a record 9.3 percent plunge at building-material stores.

Government wary of new home sales statistics

New home sales fell sharply across the U.S., with sales down more than 50 percent in the West. MarketWatch reports that housing market stats in May were dismal across the board. Housing starts fell 10 percent, building permits fell 5.9 percent, mortgage applications dropped and the home builders’ index fell by five points. The dark cloud’s silver lining was mortgage rates, which stayed very low.  Another glimmer of hope may be that government statisticians have low confidence in the monthly Commerce Department new home sales report, which is subject to major revisions,  sampling flaws and statistical errors. The government says it can take up to four months to establish a statistically significant trend in sales.

U.S. unemployment rate to blame

New home sales are being affected by the anemic U.S. job market. Edward Leamer, an economist at the University of California, Los Angeles, told MarketWatch that unemployment is the main reason housing is weakening without the tax credit to spur demand. The U.S. economy would have to grow at a 5 percent to 6 percent rate to create “significant reductions” in joblessness. “People won’t buy homes when they are worried about their jobs,” he said.