Small businesses, which have been bearing the lion's share of job creation in the economic recovery, are picking up the pace. Image: CC Nonsequiterlass/Flickr

Small business hiring has markedly increased in the past three months. The turnaround in small businesses hiring, which creates a majority of U.S. jobs, is seen as a possible turning point for the weak labor market. While hiring in large companies has been relatively flat, a three-month surge in small business hiring is being credited for lowering the U.S. unemployment rate nearly an entire percentage point.

Small business hiring statistics

Hiring at companies with less than 50 employees has been increasing over the past 12 months. From December through February, small business hiring has increased by more than 100,000 jobs per month. In that time period, the U.S. unemployment rate has dropped from 9.8 percent in November to 8.9 percent in February, according to the Department of Labor Statistics. Of the 217,000 jobs created in the U.S. in February, 46 percent of the hires were by small businesses. Payrolls at large companies have only grown by about 10,000 in each of the past three months, just 5 percent of the total jobs created for an employment sector that accounts for 16 percent of non-government jobs.

A turning point in the labor market?

Small business hiring has been increasing, but it still has a long way to go to fix the devastation wrought by the recession. Between April 2008 and February 2010, the small business sector cut 2.7 million jobs. Until December, small business hiring was lackluster. In the past year, 607,000 jobs have been created by small businesses. But the recent surge has analysts optimistic that the trend will continue. Over the past five months, employers have consistently reported that they plan on hiring more employees, according to the National Independent Business Association. A turning point in labor demand was also indicated by a survey conducted by Discover Financial Services, which reported that 11 percent of small businesses planned to hire in February, up from 6 percent in August. Only 20 percent of businesses in the survey planned layoffs, down from 20 percent in August.

Offsetting public sector layoffs

The labor market has improved so slowly up until now because the U.S. economy actually generates greater output currently than it did in 2007, before 7.2 million jobs were lost. The surge in productivity has lessened the need to hire more workers. Small business owners appear to be more confident, but despite the recent significant gains, small business hiring will have to pick up the pace if government budget cuts trigger massive layoffs at the federal and state level. A survey conducted by outplacement firm Challenger, Gray & Christmas found that planned layoffs increased by 32 percent from January to February, largely because of job losses in state and local governments and the U.S. Postal Service.

Sources

MarketWatch

CNNMoney.com

BNET

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

Tax reform proposed by the deficit commission would raise taxes from more sources so everyone could pay a lower tax rate. Image: CC Wikipedia

The tax cut deal that has dominated the news this week has brought the issue of tax reform to the forefront of the political agenda. Tax reform would involve simplifying the complex maze of deductions, credits and exemptions in the tax code. In theory, tax reform would allow the government to collect more taxes while lowering tax rates.

Tax reform and the deficit commission

Tax reform is a key element of a report submitted Dec.3 by the Obama administration’s bi-partisan deficit commission. In searching for ways to reduce the federal deficit, the deficit commission laid out a radical idea. Instead of raising tax rates on individuals and businesses to raise more revenue, the deficit commission suggests reducing or getting rid of myriad tax breaks that end up costing the government $1 trillion every year. To compensate for less generous deductions, the tax rates paid by everyone would fall significantly. This would be affordable, in theory, because eliminating a majority of tax breaks would create a broader tax base.

How tax reform could work

Economists agree that tax reform would make the U.S. economy more efficient. The complexity of the current tax system directs the country’s resources based on tax breaks, instead of what is most productive. The deficit commission plan would eliminate tax breaks except for those applying to children, families, charities, health insurance and home mortgage interest. In return, the top tax rate would drop from 35 percent to 29 percent. The cost of filing federal tax returns, about $140 billion a year, would also drop and that money — about 1 percent of the U.S. economy — could be spent in better ways.

Why tax reform won’t happen

The hardest part of tax reform for the political system would be figuring out how much money needs to come in. Democrats and Republicans have agreed with the deficit commission about a broader tax base and reduced tax rates. However,they have never been able to agree on the size of government. While Democrats could be expected to use the tax code to pay for government, Republicans can be counted on to use tax reform as a scheme to shrink government. With special interests marshaling forces ahead of the 2012 election, a reasonable person would expect no meaningful tax reform to happen in the near future.

Sources

New York Times

Washington Post

CNNMoney.com

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

The October jobs report shows the 10th straight month of private sector job growth, but the unemployment rate remains stubbornly unaffected. Image: CC TheTruthAbout/Flickr

The October jobs report released Friday by the Labor Department said that the U.S. economy created 151,000 jobs last month. The job creation numbers were more than expected, but barely enough to keep up with U.S. population growth. As a result, the unemployment rate remained stuck at 9.6 percent despite the job gains.

October jobs report numbers

The October jobs report was a somewhat pleasant surprise for economic forecasters that expected a net increase of about 60,000 jobs. The Labor Department report was a major improvement over September’s numbers, which showed a net loss of 41,000 jobs. After hemorrhaging jobs for two straight years, the private sector has shown job growth for 10 months in a row. The October numbers were the best since May. U.S. companies hired an additional 159,000 people in October, exceeding the 92,000 jobs predicted by economists. The government cut 8,000 jobs in October, which resulted in the 151,000 total.

Industries that are hiring

According to the October jobs report, industries that are hiring include health care, retail, temp workers, mining and small businesses. Health care providers hired 24,000 workers. Food service hired another 24,000 and retailers added 28,000. The temporary work force grew by 35,000. A weaker dollar boosted mining to the tune of 8,000 jobs. Because it takes small businesses longer to report their hiring activity to the Labor Department, job creation numbers from August and September were revised upward by 110,000.

A long, hard road ahead

Despite the October job creation, the U.S. has a long way to go. Economic growth is still too weak to affect the 9.6 percent unemployment rate. At least 15 million people are looking for work. Taking into account part-time workers who can’t find full-time jobs and people who have given up looking, the unemployment rate is 17 percent. According to the Brookings Institution, even if job creation grows to the highest levels of the past decade–208,000 jobs a month–it will take 12 years to close the gap between the growing labor force and available jobs.

Sources

CNN

Christian Science Monitor

New York Times

Keynesian economics lie at the center of the political debate over government spending, deficit reduction and economic recovery. Image: CC Ivy Dawned/Flickr

Keynesian economics advocates using government spending in hard times to stimulate consumption and economic growth. A wave of austerity measures sweeping through Britain signals that Keynesian economics are being abandoned in the birthplace of John Maynard Keynes. American conservatives are using the example of Britain and the struggling U.S. economy to declare Keynesian economics dead.

Keynesian economics 101

Keynesian economics is based on the cycle of money. Spending by one person creates earnings for another in a healthy economy. During the Great Depression people stopped spending, the cycle of money stopped, and the economy tanked. Keynes argued that the government must spend to revive the cycle of money. He was ridiculed by proponents of laissez-faire capitalism, the most popular economic theory of the time. Keynes’ ideas were taken to heart by the Roosevelt administration, which spent to build roads, dams and other public works projects. Then World War II came along with massive government defense spending and the U.S. economy boomed for 50 years.

Europe rejects Keynesian economics

The global financial crisis exposed massive government deficits in Europe as the continent’s economy crashed. U.S. Treasury Secretary Timothy Geithner recommended Keynesian economics to European governments. Instead, Europe is heading the other way with austerity measures. Britain is cutting $130 billion in spending that will erase 500,000 jobs and affect the military, pensioners, the middle class and the poor. Nobel Prize winner Joseph E. Stigliz told The Guardian that the British government’s plan will result in less growth, less tax revenue and higher national debt.

Keynesian economics and the midterm election

A U.S. economy that remains sluggish despite billions in government stimulus has conservatives arguing that the Obama administration should follow Britain’s example. Right wing pundits eagerly anticipating Republican gains in Congress are trumpeting the 2010 midterm election as the official declaration that Keynesian economics have failed. The White House cautions that an abrupt end to government economic stimulus will extend the downturn. Conservatives argue that the economy has stabilized, and it’s time to wean the country from deficit spending.

Sources

Wisegeek.com

New York Times

National Review

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.

Employers are protecting bottom lines in a bad economy by shifting a greater percentage of health care costs to workers. Library of Congress photo.

Health care costs are falling … for employers. A study released Thursday shows that employers are shifting a greater portion of total health care costs to workers. While the premiums employees pay for employer-sponsored health insurance rose significantly, the amount their employers contribute declined slightly. Analysts say the shift in health care costs is a corporate survival strategy as the U.S. economy continues to falter. A persistently high unemployment rate that shows no sign of decreasing leaves workers with little leverage to negotiate a better deal.

Employee premiums outpace wages

Health insurance premiums employees pay for employer-sponsored family coverage rose an average of 13.7 percent this year, according to a survey conducted by the Kaiser Family Foundation and the Health Research & Educational Trust. The amount that employers contribute fell by 0.9 percent. In coverage of the survey, the Washington Post reports that employees are paying an average of 30 percent of the premium for family coverage and 19 percent for single coverage. The workers’ share of health care costs is the highest in 12 years of the surveys. Since 2005, the employees’ share of premium payments have gone up 47 percent while overall health insurance costs have risen 27 percent. Over the same period, wages have increased 18 percent and the consumer price index, a measure of inflation, has risen 12 percent.

Job market gives employers the advantage

The recession and a difficult job market are the primary factors responsible for the rising cost of employee-paid premiums according to Deborah Chollet, an economist with a Washington research firm. Chollet told CNNMoney that companies cutting staffs to the bone are looking for other ways to save money in the face of low consumer demand. One of the remaining options available is to pass on more health care costs to workers. She said that in a strong job market, higher turnover helps companies contain health care costs. These days, people who still have jobs are holding on to them tenaciously. They also use their health benefits more.

Employees pay more, get less

Workers are paying a greater share of their health care costs and getting fewer health benefits in return. The Miami Herald’s coverage of the survey reports that 30 percent of employers cut benefits or increased out-of-pocket costs for employees. Employers are also raising annual deductibles and 23 percent raised employee premiums. Employer-sponsored insurance covers approximately 157 million Americans, down from 159 million in 2009. A greater percentage of companies provide health benefits this year–up to 69 percent from 60 percent in 2009. However, the survey report suggests that many companies that did not offer coverage did not survive the downturn, leaving a higher percentage of survivors that provide health benefits.

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.

The video game industry has proven to be a stalwart cavalry unit as the U.S. economy faces its greatest need. (Photo Credit: CC BY-SA/xploitme/Flickr)

Video games have come a long way since Pong, Pac Man and Space Invaders. According to a recent study conducted by Economists Incorporated for the trade association Entertainment Software Association entitled “Video Games in the 21^st Century: The 2010 Report,” the video game industry contributed a robust $5 billion to the U.S. economy in 2009 alone. From 2005 to 2009, the video game industry’s annual growth has exceeded 10 percent, which is more than seven times the growth of the entire U.S. economy.

Video game industry creates jobs

ESA CEO Michael Gallagher said in a press release that job creation in the video game industry has continued at a “rapid pace,” while making “an important contribution to our nation’s economy while stimulating technological innovations and expanding the impact of games on our daily lives.” The video gaming industry regularly employs more than 32,000, and their average annual salary is $89,781, according to the survey. Directly or indirectly, the video game industry employs more than 120,000 people in the United States.

California is the golden state for the industry

California is the largest employer of video game industry workers. It provided more than$2.6 billion in direct and indirect compensation to its employees in 2009. That translated into $2.1 billion in revenue for the state.

In other states, Texas ranked second with 13,613 employees, followed by Washington (11,225). Virginia also showed tremendous growth from 2005 to 2009, expanding its video game industry presence by a whopping 77 percent.

Thinking about entertainment value

During a recession, entertainment expenses are among the first things to be downsized in a family’s budget. Video gaming may seem expensive on the surface – consoles cost from $200 to $500, and PCs cost even more. Games range from $20 to $60, depending upon their popularity, age, format, etc. But if a consumer can derive somewhere between 40 and 100 hours of playtime from a well-constructed game, the price seems much more reasonable, particularly when compared with more passive forms of entertainment like movies, the price of which has skyrocketed in recent years. Video games have been proven to promote hand-eye coordination and even have therapeutic and developmental uses. Plus the video game industry has had positive effects on the U.S. economy.

Sources:

“Video Games in the 21st Century: The 2010 Report“

Washington State Lt. Gov. Brad Owen knows ‘Pong’

The latest jobs report shows a continued high U.S. unemployment rate stuck in limbo between job gains and job losses. Nick Hewett/Flickr photo.

The latest jobs report detailing the U.S. unemployment rate for July reflects the ongoing battle between the bad news and the good news. The unemployment rate held steady at 9.5 percent. But the U.S. economy had more job loss than economists expected. The U.S. economy added 71,000 jobs in July, but lost 131,000. Manufacturing added 36,000 jobs, but those gains are the lowest of the year as orders and production decline. Average hourly earnings increased, average hours worked rose and productivity increased. But increasing productivity is another factor holding back hiring.

U.S. unemployment rate stuck in limbo

Companies in the U.S. added workers in July for a seventh straight month. However, The Wall Street Journal reports that taking into account revisions to prior months this year, the U.S. economy added an average of less than 100,000 jobs a month in the first seven months, a level that’s not strong enough to offset the job loss that would bring unemployment down. Jobs report data for June was also revised downward. Jobs fell 221,000 that month, more than the 125,000 job loss previously reported. Only 31,000 jobs were added to the private sector in June. The 131,000 job loss in July far exceeded the 60,000 economists polled by Dow Jones Newswires were expecting.

U.S. economy: work is  good if you got it

July’s jobs report did contain a few bright spots. Daily Finance reports that the average workweek increased by 0.1 hour to 34.2 hours. Average hourly earnings increased 4 cents to $22.59 per hour. U.S. productivity continues to increase at a robust rate — 3 percent in the last 12 months and 4 percent in the first quarter of 2010. Higher U.S. productivity is boosting corporate earnings. Companies are sitting on huge piles of cash. High productivity and more efficient business models are good for stock prices, but that means many companies don’t feel they have to hire more workers.

Fed ponders what to do about unemployment

The jobs report could determine what the Federal Reserve does next to influence the unemployment rate. Bloomberg reports that options outlined by Fed chairman Ben Bernanke last month include further reducing the 0.25 percent rate the Fed pays on banks’ reserve deposits.  Expanding the amount of assets on the Fed’s near-record $2.3 trillion balance sheet — a broad gauge of Fed lending to the financial system to hold down borrowing costs, is also an option.

Americans at odds with themselves about unemployment

Meanwhile, much like the good news/bad news in the jobs report, the conflicting opinions of the public cancel each other out. More than seven in 10 Americans say the U.S. economy is still mired in recession, according to a Bloomberg National Poll. Seven of 10 Americans also said reducing unemployment is the government’s top priority. But more than half are skeptical of the stimulus program and wary of more spending.

More Americans with low credit scores face tougher prospects for finding jobs, getting loans and participating in U.S. economic recovery. Franco Folini/Flickr photo.

Credit plays a central role in the U.S. economy. Economic recovery and the credit scores for a big chunk of the U.S. population are mired in the same pit of quicksand. Millions of Americans have reneged on their debts in the past couple of years. Some who lost their jobs had no choice. Others, like strategic mortgage defaulters, walked away rather than losing more money even though they could pay. Either way, these people face the challenge of living with bad credit. After the immediate relief of defaulting on debt, a long-term financial obstacle course lies ahead for them. And U.S. economic recovery will have to limp along without their help.

More people have low credit scores

In the past few years the recession has rendered millions of Americans no longer able to qualify for a mortgage, a car loan or a credit card. The Christian Science Monitor reports that in normal times, about 15 percent of consumers fall into the poor credit category with a FICO score under 600. In April, that figure stood at 25.5 percent, according to a recent FICO report. The continuing high rate of foreclosures and unemployment and a looming second dip in housing prices suggest the credit picture could worsen before it improves.

Low credit scores left out of lending

With 25 percent of Americans with credit scores below 600, one in four won’t be able to borrow money for a major purchase for quite a while. The Wall Street Journal reports that some may be able to get mortgage loans through Federal Housing Administration programs, which allow for credit scores as low as 580. But none will qualify for loans guaranteed by Fannie Mae  or Freddie Mac, which account for the lion’s share of the market and typically require credit scores of at least 650. Getting auto loans or credit cards will also be tough.

Job credit checks increasing

For people who reneged on their debts because they lost their jobs, finding a new job will be tougher with a low credit score. CNN reports that an increasing number of employers are using credit checks to screen potential job applicants. Missed payments on a mortgage, car loan or credit card could keep them from getting hired. According to a survey by the Society for Human Resource Management, 60 percent of employers are using job credit checks when filling at least some of their openings. Only 35 percent reported checking credit in a 2003 survey, and only about 13 percent did so 1996.

Rebuilding a credit score can take years

Millions of cash-strapped Americans have gotten immediate financial relief from defaulting on debt. But people thinking about following suit should know that the short term gain will have long-term consequences. The Journal article said that rebuilding a credit rating can take anywhere from three to seven years. Bad credit brought on by the recession will make it more difficult for many Americans to work their way out of it.

A Federeal Reserve member said Japanese-style deflation in the U.S. economy is a possibility if the Fed holds benchmark interest rates at record lows indefinitely. Robbophoto/Flickr photo.

A warning that deflation could set in as U.S. economic recovery weakens was sounded by James Bullard, the president of the Federal Reserve Bank of St. Louis, Thursday. Preventing inflation has been the focus of Federal Reserve as it formulates policies to guide the U.S. economy out of the recession. But Bullard cautioned that Fed’s current policies to stimulate growth are putting the U.S. economy at risk of falling into a Japanese-style deflationary cycle that could keep the economy weak for several years.

Deflation could result from preventing inflation

Deflation is a widespread and prolonged drop in the price of goods, services, homes, stocks and wages. The New York Times reports that the Fed has been focused on preventing inflation. Starting in 2007, the Fed lowered the benchmark interest rate all the way to zero and pumped some $2 trillion into the economy with an array of emergency loans and purchases of government debts and mortgage bonds. To buy all those assets, the Fed essentially printed money — the $1 trillion in reserves. If the reserves were withdrawn and lent out quickly, the supply of money in the economy could increase rapidly, thus triggering inflation.

A recipe for deflation

The Fed quit buying government debt in March. Since then, the U.S. economic recovery has faltered and the threat of inflation is low. Bank lending is contracting. Big companies are sitting on piles of cash. Small businesses can’t get loans. The Fed’s reserves won’t be entering the money supply anytime soon. Unemployment is high. Home sales are at record lows and home prices are falling. The big picture has people like Bullard thinking ahead to the possibility of deflation.

Japanese deflation

Deflation started in Japan in the early 1990s. A 1980s real estate bubble burst, banks took a bath on real estate loans, restricted lending and asset prices fell. Cheap imports further lowered prices. The Bank of Japan and the government tried to eliminate it by reducing benchmark interest rates. The bubble’s collapse lasted for more than a decade with stock prices bottoming in 2003. Stocks went even even lower when the global economy collapsed in 2008. In November 2009 Japan returned to deflation, according to the Wall Street Journal. Consumer prices fell in October 2009 by a near record 2.2 percent.

Benchmark interest rate a ‘double edged sword’

Deflation warnings are being sounded by Bullard, a voting member on the Fed’s main policy-setting committee, as the Fed considers additional steps it should take to stimulate the economy if the weak recovery falls back into recession. The Associated Press reports that Bullard said the Fed’s pledge to hold rates at record lows for an “extended period” is a “double-edged sword.” The pledge could make investors, businesses and ordinary people think inflation could be heading lower, which could aggravate the risk of deflation. In addition to lifting the cap on the benchmark interest rate, Bullard said resuming the purchase of government debt should be considered to prevent deflation if their is a new shock to the weakened economy.

The recession may be on its way out, but personal finances remain in a shattered state, according to CFP survey respondents. (Photo: ThinkStock)

According to a recent survey by the Washington-based Certified Financial Planner Board of Standards Inc. (CFP), Americans anticipate that the national economy will be more likely to improve than decline during the next six months. However, as Bloomberg reports, the CFP study also shows that the majority of Americans do not have as much faith that their personal finances will improve. Developing a savings, financing college and preparing for retirement are all areas of great concern.

Personal finances don’t light up the headlines like recession busting

The CFP survey results indicate that 44 percent of respondents expect an upturn in the U.S. economy before their own personal finances, compared with 28 percent who believe a “double dip” recession will occur. CFP chair Robert Glovsky told Bloomberg that “Americans are generally hopeful, and much of the economic news leads us to conclude that we are out of the recession, and a double dip is unlikely.”

However, that hope largely does not extend into the arena of personal finance. Consumer confidence may be up while the declared unemployment rate was down .2 percentage points from May 2010 to June 2010 (it was 9.5 percent in June), but the CFP survey indicates that nearly two-thirds of Americans (65 percent) indicate that their worries over basic matters of long-term personal finance have grown significantly since the beginning of the recession. Many consumers believe they need cash now, but are frequently ineligible for a bank loan due to the still-tight credit market. Relying upon a bad credit personal loan is an alternative, but not one that has inspired consumers to view their financial futures in the most positive manner.

Worrying about the big three

The CFP survey, which was conducted via telephone by market research firm Penn Schoen Berland, found that the vast majority of the 1,000-member sample group of consumers ages 18 and older were afraid they wouldn’t be able to maintain sufficient savings, pay for college or have enough money put away for retirement. Adding to the worries surrounding their personal finances, 80 percent of respondents felt that Congress and federal regulators hadn’t taken an active enough role in pushing legislation to regulate financial markets. However, various media sources indicate a reform bill may pass through Congress soon.

Sources:

Bloomberg

CFP.net survey

How the Dodd-Frank bill would reform Wall Street:

Arthur Laffer, extremely rich person, fondly remembers the Reagan era and predicts economic collapse after the Bush tax cuts expire in 2010. Flickr photo.

Arthur Laffer is making news by predicting that the U.S. economy will collapse next year when George W. Bush tax cuts expire in 2010. His theory on the Obama tax plan is based on how the super-rich can choose when and how they collect their income to evade taxes. Laffer believes the economy is doing better this year than it should because these aristocrats are collecting more of their loot and spending more of their money before taxes rise. He says that when taxes go up, Americans who can will choose to make less money, thus reducing the government’s tax revenue anyway.

Bush tax cuts expire 2010

Arthur Laffer became famous when he influenced the Reagan administration to cut taxes. His Laffer Curve regarding taxes appears in economic textbooks. Laffer, in his Wall Street Journal column, said that Reagan tax cuts brought the economy out of what was the worst U.S. recession since the Depression — until the Mt. Everest recession we’re still trying to get out of now made that one look like a speed bump. He said when tax cuts went into effect on Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5 percent in 1983 and 5.5 percent in 1984. He doesn’t mention how Bush tax cuts in 2001 and 2003 in the face of two wars eventually ran the U.S. economy into the ground and destroyed a budget surplus he inherited from Bill Clinton.

The Arthur Laffer curveball

The Laffer Curve tax cut argument misleads his readers, according to Asha Bangalore at Northern Trust. As another recession set in after Laffer’s utopic Reaganonomic era, Bangalore wonders why the economy posted substantial growth after tax increases were implemented by Bill Clinton in 1993. A revival of bank lending after the Reagan hangover led to self-sustained growth despite the tax increases. Bangalore also points out that if the Laffer Curve theory about tax cuts is valid, the U.S. economy would have done better than record the weakest period of economic expansion in history following the Bush tax cuts of 2001 and 2003.

Obama tax plan lower than Reagan’s

Arther Laffer’s predictions of economic collapse when tax cuts expire in 2010 is also questioned by The Motely Fool. In his column Laffer says we’re all going to die when the highest federal personal income tax rate goes to 39.6 percent from 35 percent. The Fool says it’s worth noting that the 1983 cuts Laffer remembers so fondly lowered top rates from 69.13 percent to 50 percent. Top marginal tax rates under all but one year of Ronald Regan’s presidency were more than 50 percent. The Obama tax plan wants to revert the highest personal income tax rates to 39.6 percent, where they were in the ’90s when the economy boomed and the government collected more taxes than it spent.

Arther Laffer feels your pain

Arther Laffer, the chairman of an investment consulting firm and obviously very wealthy, is making predictions of economic collapse from a very narrow point of view. Bangalore goes further to point out that the obstacles the economy will face in 2011 have nothing to do with tax increases. A severe credit crunch, lackluster job growth, and housing market challenges are factors that will have far greater influence on the economy. Most people will keep their head up and try to survive. But when Arthur Laffer’s personal income tax rate goes up 5 percent, the millions he won’t pocket will seem like the end of the world indeed.

Why a healthy U.S. economy usually includes high levels of home ownership

As of the last full year of available numbers, which was in 2009, 67.3 percent of American adults are either paying off a mortgage or have reached their goal of full home ownership with a fully paid off mortgage contract (3). Why then are statistics such as home ownership rates so important in terms of the determining the health of the greater United States economy? That is because an increase or a decrease in home ownership rates indicates how banks are lending, not just for home loans, but also for small business, auto finance, home improvement loans and even short term loans for bad credit.

A healthy economy can be reflected by reasonable interest rates that reward savings and investment as well as a small number of citizen consumers that are unemployed. All this leads to more purchasing in the economy and more production, and the cycle continues from there. This then essentially leads to higher economic growth. If most of these positive factors are in play in the U.S. economy, then there is usually an increase in home ownership numbers. The more confident citizens are that their jobs are secure, the more willing they are to invest in home ownership.

The Home Buyer Tax Credit of 2009

In 2009 the U.S. House of Representatives, the Senate and the president passed and signed into law the “Worker, Home ownership and Business Assistance Act of 2009.” In this act, the “first time home buyer tax credit” of $8,000 was extended until April of 2010 (1).

The end of these important tax credits combined with the weak balance sheets of many of the nation’s banks, along with high unemployment, has caused most economic analysts to predict weakness in future home construction, after the tax credits ceased at the end of April of 2010. This, in fact, seems to have come true to everyone’s dismay.

New home construction peaks and valleys

The peak in new U.S. home construction came in January of 2006, and it has plummeted 70 percent since reaching that peak. But it is now more than 40 percent above the point when home construction was at its lowest in April of 2009 (2). Since 1969, the percentage of American citizens buying a home has averaged from 64 to more than 68 percent. During the decade of 1969-1979, home ownership levels reached a low of 64.25 percent in 1971, and a high of 65.55 percent in 1979. In 1980 that number grew to 65.57 percent. Eight years later, in 1988, home ownership reached a low of 63.8 percent during the aftermath of the 1987 stock market crash and the Savings & Loan banking disaster.

The decade of the 1990s saw a steady and continual climb in home ownership, without any decline in ownership rates. U.S. home ownership during that decade reached its low in 1990 at 63.95 percent, and a high of 66.8 percent in 1999. This steady climb continued into the first decade following the year 2000, with the peak for U.S. home ownership arriving in 2004 at 69 percent and the lowest point being reached in 2009 at 67.3 percent (3).

A Steady Increase in home ownership, but are there problems on the horizon?

From breaking down these statistics, it can be seen that there has been a steady increase in the percentage of Americans choosing home ownership. The average in the 1970s was 64.6 percent; in the 1980s it was 64.4 percent; it was 64.8 percent in the 1990s, and in the 2000s, it jumped to 68.1 percent of Americans choosing to buy single family homes (3).

One important issue to explore is whether Americans are able to buy single family housing, priced at a reasonable percentage of their income, or whether speculation in real estate from Wall Street will make home ownership a fading memory for most Americans.

Sources:

1. “Worker, Home ownership, and Business Assistance Act of 2009.”

   http://en.wikipedia.org/wiki/Home_buyers_tax_credit#New_tax_provisions_for_home_buyers_in_the_Act

2. “Housing may not aid upturn”. USA Today. May 19 2010. Pg 3B.
3. “Housing Vacancies and Home ownership (CPS/HVS) First Quarter 2010
   Table 5. Home ownership Rates for the United States: 1968 to 2010.”

   http://www.census.gov/hhes/www/housing/hvs/qtr110/q110tab5.html

Unemployment office image from Flickr.

During the month of April, nonfarm payroll employment rose by 290,000. Despite this increase in employment, the unemployment rate in the United States increased up to 9.9 percent. Sizable employment gains occurred in manufacturing, professional and business services, health care and in leisure and hospitality. Federal government employment increased due to hiring of temporary workers for Census 2010. Since December, nonfarm payroll employment has expanded by 573,000 with 483,000 jobs added in the private sector. The vast majority of job growth occurred during the last 2 months.

Unemployment categories

Percentages of unemployed workers:

• Less than 5 weeks, 18.3 percent
• 5 to 14 weeks, 20.4 percent
• 15 weeks or more, 61.3 percent
• 15 to 26 weeks, 15.4 percent
• 27 weeks or more, 45.9 percent

In April, the civilian labor force participation rate increased by 0.3 percent to 65.2 percent, as the size of the labor force rose by 805,000. Since December, the participation rate has increased by 0.6 percent. The percentage of the U.S. population that is emploued rose to 58.8 percent during April.

Manufacturing, construction, business and temporary

Manufacturing added 44,000 jobs in April. Since December, factory employment has gone up by 101,000. Over the month, gains occurred in several durable goods industries, including fabricated metals (9,000) and machinery (7,000). Employment also grew in nondurable goods manufacturing (14,000). In April, construction employment edged up 14,000, following an increase of 26,000 in March. Over the month, nonresidential building and heavy construction added 9,000 jobs each.

Employment in professional and business services rose by 80,000 in April. Temporary help services continued to add jobs (26,000). Employment in this industry has increased by 330,000 since September 2009. Employment also rose over the month in services to buildings and dwellings 23,000 and in computer systems design 7,000.

Health care, hospitality and government

In April, health care employment grew by 20,000, including a gain of 6,000 in hospitals. Over the past year, health care employment has increased by 244,000.

Employment rose by 45,000 in leisure and hospitality over the month. Much of this increase occurred in accommodation and food services, which added 29,000 jobs. Food services employment has risen by 84,000 over the past four months, while accommodations has added 18,000 jobs over the past three months.

Federal government employment was up in April, reflecting the hiring of 66,000 temporary workers for the decennial census.

Consumer credit for first quarter declines

However, it is the health of the banking system — which can be determined by the outstanding credit and loans taken out by U.S. consumers — that provides a clearer picture of the true state of the economy and its health or distress.

From its January 2010 high of $2.746 billion in outstanding U.S. consumer credit, which most likely is due to paying down 2009 purchases during the holiday season, outstanding consumer credit has declined every month since January. Consumer credit has fallen to $2.446 billion in February and $2.433 billion in March 2010.

Those statistics show that most Americans are either saving more or cutting back spending to pay outstanding bills, thus not using credit to make as many new purchases. Thus, because of less consumer spending for the month of April, there are fewer Americans employed.

Sources:

U.S. Bureau of Labor Statistics

U.S. Federal Reserve Survey of “Consumer Credit Outstanding”