Houston Democrats: Economy Archives

June 04, 2006

Bonddad Bearish

Check out the BOR for Bonddad's post. Here is the reality for 95% of America:

1.) Job growth is weak.
2.) The jobs created don't pay as well as jobs lost.

3.) Incomes are stagnant after inflation.

4.) People have charged the last 4 years of growth on their respective credit cards.

Posted by Jon Boyd at 11:33 AM | Permalink | Comments (0) | TrackBack

November 07, 2005

US Consumer: Sick As a Dog

Consumer spending comprises about 70% of the US economy. It’s continued health is vital to US economic expansion. However, the US consumer’s health – and his ability to drive economic growth -- is becoming an item of concern for more economists.

You aren't buying as many cars as you used to — October auto sales were the weakest for any month since mid-1998.

US car companies employee’ discount pricing strategy was hugely successful, bolstering car sales. However, this promotion is now officially over. Third quarter GDP was 3.8%. Car sales represented .62 of this increase, or 16%. This surge in sales volume won’t be available for the 4th quarter numbers.

Your interest in home buying has hit its lowest level since 1991.

The housing market is clearly slowing. Interest rates are increasing. Inventories have increased for 6 of the last 7 months and are almost 20% than last year. Median and mean home prices both dropped last month. Rental vacancies are near 10-year highs.

"Here we are, officially celebrating the fourth anniversary of this economic expansion, and the wage income share of the national income pie is south of 46 percent," fumed a research note by Merrill Lynch North American economist David A. Rosenberg. "At no point in the past 50 years has this ratio been so low so far into a business cycle." Historically, the ratio has been 3.5 percentage points higher.
The ratio is important because it looks at wages — your paycheck — instead of other sources of income, like the stellar Wall Street bonuses we saw last year and are almost certain to see again this year. Wage gains haven't kept pace with inflation, but total income continues to look good, thanks to those hefty bonuses.

Since January 2001, total hourly earnings of production workers increased from $14.27 to $16.27, or an increase of 14%. Over the same time, the inflation gage increased from 175.1 to 198.8 or an increase of 13.5%. This makes the real income increase .5% over 5 years. And this assumes CPI is a valid measure of inflation. (Considering home price appreciation is not included in CPI and health insurance represents .366% of the measure, CPI is a questionable measure of the inflation people really experience.)

Your debt has increased. Outstanding balances on credit cards have risen to more than $800 billion, or $7,200 per U.S. household. The United States debt-to-income ratio rose as much in the past five years as it did in the previous 15 years, according to Merrill Lynch.

Total consumer debt outstanding increased from 7.6 trillion in 2001 to 10.2 trillion in the second quarter of 2005. In other words, total consumer debt now nearly equals total US GDP.

At some point, the US consumer will be tapped out. His wages aren’t increasing, he already has a large amount of debt, and he faces escalating energy and medical costs. While there is no bright-line for consumer health, it appears that wherever the line is the US consumer is far below it.
Link

Posted by Hale Stewart at 09:47 AM | Permalink | Comments (0) | TrackBack

November 02, 2005

Housing Slowdown Continues

Housing is the engine of the current US economy. A conservative reading of the last 4 years of job gains indicates it is responsible for roughly 40% of job creation. Last year, housing was responsible for 44% of the increase in individual net worth. Mortgages outstanding have increased as well, replacing income gains as the primary driver of consumer spending. As a result, any slowdown in housing could have serious ramifications for the economy as a whole. Recent statistics indicate housing is slowing. While there are not signs of a “bursting”, a slowdown of this asset’s appreciation could lead to trouble in 2006.

The internal numbers of last month’s existing home sales report indicates a possible slowdown. The West (+.8%), Midwest (-3%) and Northeast(-4.1%) regions showed slight gains or losses in number of units sold. The only region to show a gain was the South (+3.7%). This gain is largely due to Katrina’s effect. However, inventory of homes available for sale remained at 4.7 months. This number has increased for 6 of the last 7 months. In addition, available inventory increased 19.6% from last year’s level. This increase in inventory is likely responsible for the drop in both median ($220,000 – $212,000) and average sales price ($269,000 - $260,000). This increase in inventory is also probably responsible for the high level of rental vacancies.

Monday, the Census Department issued its report on housing vacancies. While the actual homeownership news was very good – a record number of Americans own their home – there was a very bad side as well. The home rental vacancy rates are near 10-year highs.

The report stated that 9.9% of all houses available for rent were vacant. This number has slowly crept up for the last 5 years. The number is coming down from 10.1% earlier this year. However, the number is still very high in comparison to the last 10-years.

If people can’t sell a second property, they will be more inclined to rent in order to make-up some of the costs. However, this increase in rental vacancies indicates rentals are harder for owners to secure. In addition, a high vacancy rate depresses rental rates, making it more difficult for owners to recoup expenses.

The high level of inventory available for sale combined with the high level of rental vacancies may indicate a housing inventory glut may exist. If this is true, price will continue to drop as sellers become more interested in closing a deal than getting top dollar.

The Census Department’s housing starts showed a similar regional skew to the existing home numbers. The West (0% gain), Midwest (+1.9%) and Northeast (0%)all showed slight gains or stagnation. The South increased 6.8%, again, largely because of Katrina.

The recent declines in consumer confidence add to real estate’s problems. People are less inclined to make a major purchase. As the Conference Board reported a few weeks ago:

The Conference Board Consumer Confidence Index, which had plummeted in September, declined again in October. The Index now stands at 85.0 (1985=100), down from 87.5 in September. The Present Situation Index declined to 108.2 from 110.4. The Expectations Index decreased to 69.5 from 72.3 last month.

Many pundits blamed the drop on Katrina and high gas prices. While the effects of these two events may be waning, we are entering the winter season. Energy prices are projected to increase 50-90% due to the spike in natural gas prices. This will continue to negatively impact consumer confidence for the next few months.

Consumers already have a large amount of debt, making additional financing less probable. In 2001, consumers borrowed a total of 464.5 billion in mortgages. By the second quarter of 2004, that number was 892 billion – an increase of 80%. Total outstanding household debt has increased from 7.6 trillion in 2001 to 10 trillion in 2004 – a 63% increase and over 90% of total US GDP. At some point, the consumer will be tapped out in terms of borrowing, unable to add more debt until he pays down existing obligations.

Finally, we have the Fed’s policy of interest rate increases. Yesterday, they raised the discount rate to 4%. There is strong speculation they will continue their 25 basis point increases through the end of Greenspan’s tenure. In addition, the 10-year Treasury has broken though the technically important 4.5% trading level, closing yesterday at 4.57%. As interest rates increase, home mortgages become more expensive making borrowing more unattractive.

In summation,

1.) Sales of existing and new homes are slowing

2.) Inventories available for sale are increasing,

3.) Rental vacancies are high,

4.) The median and average home prices dropped last month,

5.) Consumer’s confidence is lower and their debt level is high, and

6.) The Federal Reserve is raising interest rates.

It appears all the pieces are now in place for a continued slowdown in housing.

Posted by Hale Stewart at 08:05 AM | Permalink | Comments (0) | TrackBack

October 30, 2005

The US Savings Crisis

My father is a saver. He had a lucrative career as a corporate lawyer. But, he didn’t spend like it. Although I never wanted for anything, we were certainly not awash in things. My mom and dad have had the same washing machine for 20 years. It works fine, so there is no need to replace it or upgrade to the newest model. My parents conspicuously saved for their retirement. And now, they are fine. I often joke with my dad that he should get the crowbar out, open his wallet and spend some money on himself. The point is my dad is a saver. And I am damn proud of his actions.

My dad is also in the distinct minority of Americans. Collectively, we don’t save anymore. We spend everything we make. And it is a problem that is now an epidemic.

Why is savings important? There are two very important reasons. First, at the macro-economic level savings is the engine of future growth. Individuals deposit their savings into the financial intermediaries such as banks, stock brokers, life insurance etc…. The intermediaries in turn lend the money in larger amounts to businesses that in turn invest in assets to increase their profits. The more money available, the lower the interest rates charged for loans. A key concept to remember is savings flow-through the economy from households to financial intermediaries to business. Secondly, and more practically, savings is vital in case of an economic downturn. If a person loses his job and has enough savings to still pay his bills for an extended length of time, that person has the ability to manage his affairs more prudently.

At the national level, the US savings levels are pathetic.

The only organizations actually putting aside money are corporations. The amount of money they put aside was 174.9 billion in 2000, which increased to 397.3 billion in 2004.

The Republicans are in charge at the federal level. This means borrow and spend is in full force. The federal budget deficit has ballooned under the fiscally conservative party again.

At the household level, the numbers are poor. First, economists define “savings” as disposable income (personal income – taxes) minus consumption expenditures. A non-ecogeek way to say this is savings is what is left over after you pay your taxes, bills and general expenses. Essentially, we are trying to isolate money households don’t spend today that they can readily access tomorrow with no financial strings attached (such as interest) should they need it.

In 2000, savings was 2% of personal income and 1.7% of GDP. In 2004, the numbers were 1.5% of personal income and 1.26% of GDP. The latest personal income numbers indicate that number is nearing 0%. In words, at the macro level, people are spending more and more of their income every month and putting less and less away for future consumption.

Over the same period that people were not putting money away, they were increasing their debt levels. Total household borrowing was 5.5 trillion in 2000 and a little over 10 trillion in 2004. Explosive growth in mortgages is the primary reason. Total mortgage debt increased from 3.36 trillion in 2000 to 8.78 trillion in 2004. People aren’t saving from their paychecks. Instead, they are borrowing against future earnings and anticipated asset appreciation.

The above examples illustrate a fundamental US economic problem: we are too dependant on consumer spending for economic growth. We are slowing moving away from the concept of making things to the concept of consuming things. A primary argument used by this administration in trade talks is other countries have insufficient demand. What they fail to recognize is the US has too much demand and is too dependant on demand for economic growth.

More importantly, savings allows the US consumer to weather financial storms and enjoy retirement. The less we save as a country, the more vulnerable we are to economic downturns. A lack of savings is essentially a huge problem that is waiting to cause serious damage.

Link

Posted by Hale Stewart at 08:20 AM | Permalink | Comments (0) | TrackBack

October 24, 2005

Trade Deficit: Still Here and Why It Matters

The trade deficit has lost power to grab headlines. Every month, the BEA announces the figure, the markets react to the number for a few days, then everybody goes back to their regularly scheduled program until next month. In addition, the primary mechanism that brings the trade deficit into the public spotlight – a deterioration of the dollar’s value – hasn’t happened since the first of the year. Starting in January, dollar has rallied versus other currencies because US interest rates are high relative to other countries.

So, everything must be OK, right? Wrong. The trade deficit will probably set another record this year with little sign of correction in the near future. It still endangers the US economy in a fundamental way, threatening our economic security.

Last week, NY Fed President Timothy F. Geithner spoke to the Asia Society’s CEO forum. He used the speech to discuss the trade deficit and why it is so important to deal with it now before it deals with us later. His comments outline the problem’s causes and implications for US policy.

What caused the problem?

In the United States, public savings and household savings fell, while investment spending stayed reasonably strong and housing investment very strong, even during the latest recession.
The second feature of this dynamic has been an increase in the willingness of the rest of the world to invest its savings in the United States.

An economy must have a savings base to expand. Savers place their excess funds into various financial intermediaries – banks, the stock market etc…. These financial intermediaries then lend the money to business who in turn use the money to invest in new productive capital to expand their respective businesses.

The problem is the US savings rate has declined for the last 20+ years, and now stands at 0. Yes, you read that correctly. We have a 0 savings rate. This doesn’t mean what you probably think it means. For economists, “savings” is what is left over after monthly consumption expenditures. So, for the last 20 years, Americans have slowly decreased the amount of money they set aside after they are paid wages, pay taxes and purchase items. At the macro level, Americans now set aside nothing. They immediately spend everything they make.

So, domestic funds for the national financial intermediaries has been decreasing. But, the US economy is still expanding. Where does the money come from?

Overseas. Foreign investors take their excess money and invest it in the US because they perceive the US as the best and safest place to invest. The Republicans have now framed this issue as a sign of American strength – we’re so great, people want to invest their excess cash in the US!!!! The US is strong!!! No need to worry about the trade deficit!!!!

Well, we need to worry about the deficit. Why? Well, according to the same speech, here are some of the reasons:

It matters because of the size of the U.S. imbalance. Our current account deficit is now running at a rate of above 6 percent of GDP, a level without precedent for a major economy.

Just to give you an idea, 5% is considered really bad by most economists. 6% is, well, really, really bad. Usually this would spell disaster for a currency. In fact, it did for the dollar last year when the dollar was ready to fall through important levels. However, the US also has the highest interest rates in the first world, which is currently bolstering the dollar in the forex markets. In fact, it’s pretty much the only thing holding the dollar up right now.

It matters because of the trajectory of the U.S. imbalance. On reasonable assumptions about its likely near term path, this deficit will produce a very large net deterioration in our net external liabilities relative to national income, with progressively larger net transfers of income to the rest of the world

Simply put, if the trade deficit continues on its current course, the US will have to pay more and more money to overseas investors. This money going overseas will continue to increase relative to US national income, meaning more and more of our GDP will go overseas instead of into domestic business.

It should concern us because of how the imbalance has been financed. A substantial portion of the capital inflows that finance our current account deficit has come from foreign central banks—which have been accumulating dollar reserves to preserve exchange rate arrangements that are unlikely to be sustainable and are already in the process of change. The impact of a reduction in the scale of official accumulation of dollar assets could be fully offset by increases in purchases by private investors. But even in the context of a continued high degree of confidence in the relative return on claims on the United States, it is hard to know with confidence how the preferences of private savers might respond to the process of gradual evolution in their nation’s exchange rate regimes now underway.

Right now, foreign central banks are the big purchasers of US debt. If that starts to drop off, foreign private investors could pick-up the slack. However, if foreign central banks are no longer investing in the US, why should their citizens? Wouldn’t a drop-off by foreign central banks mean the US was no longer a great place to invest? If their governments won’t invest, why should their citizens?

This pattern should concern us because it is not simply the result of the savings and investment decisions of the private sector. The fact that we are using a substantial part of the savings we are borrowing from the rest of the world to finance an unsustainable level of public borrowing leaves us more vulnerable than if those savings were being used for productive private investment. Large structural fiscal deficits limit the size of the sustainable external imbalance for any country, even the United States, and they necessarily increase concern about the terms on which we are likely to finance the present imbalance.

The federal deficit – (again) created by those fiscally responsible Republicans -- is soaking up foreign central banks investments in the US instead of going to US industry (like out deteriorating manufacturing and information technology sector). As a result, the US isn’t investing in productive assets that could help grow the US out of the trade imbalance. Looking at the trade figures, imports are still growing at a faster rate than exports.

And most importantly, perhaps, these imbalances matter because at some point they will have to reverse. Market forces will at some point induce an adjustment. And that inevitable process of adjustment will bring with it the risk of large movements in relative prices, greater volatility in asset prices and slower growth in the United States and in the rest of the world.

The magnitude of this risk is difficult to measure with any confidence. Past episodes of external adjustment offer some reassurance, but the present circumstances seem sufficiently different from historical precedent that history may not be a particularly useful guide.

This situation can’t last forever. And as market forces take over and start to correct the situation, the US could experience some serious pain:

The risks associated with this adjustment process may be magnified by changes in the household balance sheet in the United States. The average household in the United States today has a higher level of debt to income and is somewhat more exposed to interest rate risk than in the past. The sustained rise in housing prices and the scale of borrowing against housing assets raises the possibility that a rise in risk premia could have a greater impact on household spending that would have been true in the past

Paul Volcker puts it far more succinctly:

I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

Posted by Hale Stewart at 08:06 AM | Permalink | Comments (0) | TrackBack

October 21, 2005

More Signs of a Housing Slowdown

I know – there is no housing bubble; it’s all a liberal fantasy to scare people. At least, this is what people on the political right say. According to one pundit on Fox news, there are a few markets that are slightly overpriced but nothing to worry about. (The FDIC has contradicted this assessment.) Well, the reality is there is a housing bubble and it is very dangerous for many reasons.

Consumers – whose wages have been near stagnant after inflation for the last 5 years – have financed their spending with home equity loans.

Instead of playing the stock market, people are now entering the world of flipping real estate – buying and selling property quickly hoping to make a profit. This is great if it works. However, it is conceivable a buyer could be stuck with a home that he can’t afford long-term.

Almost 40% of the paltry few jobs created in this expansion are tied to housing, meaning a slowdown in the market could significantly lower job growth.

In short, the housing market is the engine of this expansion.

Now there are increased signs of it’s slowing.

In Orange County, sellers are lowering prices and inventory is increasing

The frustration experienced by sellers like Hong reflects a cooling in the market for higher-priced homes in Los Angeles and Orange counties, according to recent price and sales data. Faced with reduced buyer demand and rising inventories of unsold properties, many sellers of homes worth more than $750,000 are dropping asking prices.

Many also are taking weeks before landing buyers.

The slowdown in pricier homes is typical of the latter stages of a housing boom, analysts say, as expensive properties were the first to rise sharply at the beginning of the current cycle.

In some of the ritziest areas, such as the 90210 ZIP Code of Beverly Hills where the average home price is $3 million, sellers have cut asking prices by an average of at least 10%.

In the first half of 2004, by contrast, sellers of pricier homes typically got 5% to 10% above their asking prices.

Sales are slowing in New York:

Until recently, apartments in prime locations sold fast. Often bidding wars broke out, and the most aggressive buyer won by paying more than the asking price.

But now flats sit for an average of four-and-a-half months before a sale contract is signed. While that's well within the normal range for a healthy, balanced market - one in which supply and demand are in sync - that's a month longer than the process took last spring.

Mortgage rates are rising

Rates on 30-year mortgages rose this week to the highest level in 15 months while one-year adjustable rate mortgages climbed to the highest level in 4 1/2 years. Analysts expect rising mortgage rates to cool the booming housing market in coming months.

The mortgage company Freddie Mac reported Thursday that the nationwide average for 30-year, fixed-rate mortgages rose this week to 6.10 percent, the highest level since 30-year mortgages were at 6.21 percent in late July 2004.

Last week the 30-year mortgage had risen to 6.03 percent, marking the first time it had been above 6 percent since the last two weeks in March.

There is other fragmentary evidence:

The Federal Reserve's latest beige book contained 10 references to cooling markets, up from three in the prior beige book and zero before that.

The unsold inventory of existing homes rose to 4.7 months' supply in August, the highest since November 2003 and a marked gain from January's 3.8 months.

Condo inventories are climbing to even higher highs – to a 5 months' supply from a low of 3.1 months in July 2004.

The unsold inventory of new homes, after 2-plus million in housing starts for five months running, has jumped to a five-year high of 4.7 months' supply from 4.1 months in July.

New-home price appreciation has slowed to a 1 percent annualized rate from the peak of 18 percent in October 2004.

The National Association of Home Builders index fell for a third straight month in September to the lowest level since July 2003.

Homebuyer traffic is at its lowest level since February 2004
and has been flat to down for three months in a row.

This winter could be the rally killer. As energy prices escalate a projected 50-90%, consumers will find their thin budgets stretched further. The Federal Reserve has spoken with a unified voice regarding inflation, implying interest rate hikes will continue through 2005 and possibly into 2006. Consumer sentiment is low, implying fewer people will take the plunge into home ownership. In short, there are a lot of factors indicating the slowdown will continue.

Will housing pop or simply slow? I don’t know. The reality is it doesn’t really matter. While a slowdown would be preferable, it will still have strong negative ramifications for the economy.

Posted by Hale Stewart at 08:49 AM | Permalink | Comments (0) | TrackBack

October 20, 2005

2006 Health Expense 3 Times Higher Than Pay Increase

Workers, however, will receive an average base salary increase of just 3.6 percent next year, according to Hewitt Associates' 29th annual survey of more than 1,000 organizations. That's the same that workers received nationwide this year.

Employees are expected to spend an average of $3,136 next year in premiums, deductibles and co-pays, a 12 percent increase from this year, according to Hewitt.

"So that means our entire raise — plus a little extra — is going to pay for those higher health care costs," said Ken Abosch, business leader in the talent consulting group for the Lincolnshire, Ill.-based firm. "Plus, we're paying more for energy."

Let’s review the above numbers. Employers are planning a national average wage increase of 3.6%. But, employees premiums, deductibles, and co-pays increased 12% -- or 3 times their pay increase. Thanks, boss.

But, it gets better. Let's look at this year. According to the Bureau of Labor Statistics, the average hourly wage of non-supervisory workers rose from $15.90 to $16.18 this year, and increase of 1.76%. At the same time, the inflation index increased from 190.7 to 198.8%, an a 4.24% increase – almost 2.5 times the increase in base salary.

So, the average wage increase is going to necessities like health insurance and oil increases, leaving the average person little room for personal expenditures.

The plight of the middle class continues.

Link

Posted by Hale Stewart at 09:11 AM | Permalink | Comments (0) | TrackBack

October 17, 2005

Serious Problems With Inflation Index Understate Inflation

I have serious problems with several popular government economic numbers. The first of these is the unemployment rate, which several studies have clearly demonstrated under-report the degree of US unemployment. The second of these is the inflation number. My own experience simply buying and selling goods over the last few years combined with evidence from the financial press adds up to suspicion. After doing some digging on the internet, I realize my concerns are well-founded. The core CPI number has serious flaws that understate inflation, largely because it does not include health insurance premiums and the appreciation of house prices.

Housing

Prior to 1982, the housing cost numbers were based upon what you actually spent for the house and the related mortgage. After 1982, the Bureau of Labor Statistics (BLS) began to use an imputed number. They now use what is known as "owners' equivalent rent of primary residence" for the housing portion of the CPI. This is based on an economic theory that says that homeowners are essentially leasing the houses from themselves and paying implied rent for that service.

In theory, they are trying to figure out what it would cost you to rent your home. There's actually a rational reason for doing this and we will talk about that in a minute, but first let's look at the numbers.

Why are these imputed rents so low? Dean Baker tells us, "The main factor holding down shelter costs is the overbuilding associated with the housing bubble. This has led to record nationwide rental vacancy rates, which is putting downward pressure on rental prices in many of the areas with the biggest bubbles in housing prices. For example, rents in the New York City area rose by just 1.9 percent over the last year. They rose by 1.8 percent in Tampa, Florida and by just 0.3 percent in both Boston and San Francisco. (This is the inflation rate for the owners' equivalent rent index, which strips out utility prices.)"

How much does using imputed rent affect the CPI? Bill King wrote a few months ago, "In the Q1 GDP data, the US government has housing prices up only 1.1%, yet industry data shows double digit gains. And this week the June existing home sales data shows a 14.7% increase in the median house price. The BLS has 'owners' equivalent rent of primary residence' up only 2.2%.

Since 1982, the housing component of CPI has not included the actual cost of houses. Simply eyeballing this chart from Prudent Bear indicates the average price of homes sold increased from $180,000 in January 2002 to just below $260,000 in mid-year 2005. That’s a hefty increase to not include in a price index.

Also of particular interest is the housing bubble’s effect on the CPI numbers. Because of overbuilding, rents are not escalating nearly as much as the actual price of the underlying property. In other words, the housing bubble is helping to understate CPI.

Health Insurance

According to the BLS’ website:

The CPI does not publish a health insurance index, although BLS is testing its feasibility with an experimental index. The weights in the CPI do not include employer-paid health insurance premiums or tax-funded health care such as Medicare Part A and Medicaid. Currently, the index employs an indirect method for measuring price changes for health insurance premiums. Under this indirect method, the medical care index will not be affected by changes in policy characteristics, such as modifications to policy benefits and utilization changes. The approach implicitly assumes that the level of service from individual carriers is strictly a function of benefits paid. While other components may affect the index, such as more convenient claims handling or a 24-hour nurse line, their effects are probably small. This indirect approach factors medical insurance premiums into two parts:

Changes in the prices of medical care items covered by health insurance policies

Changes in the cost of administering policies, maintaining reserves and, as appropriate, profits.

Most expenditure for health insurance goes to the first item above, and reflects insurers' payments for medical treatments. The CPI allocates this portion to the indexes that account for medical care items (i.e. physicians' services). Thus, the weights for most of MCS indexes reflect out-of-pocket expenditures plus allocated health insurance benefit payments. (It is for this reason that provider's reimbursements from insurance companies are valid prices for the CPI's MCS indexes.)

Let’s backtrack through the above paragraph.

First, they don’t have a health insurance index. Here’s a big problem. If this was a small expense, there wouldn’t be a problem. However, health insurance is a large expense for most Americans. According to the most recent Kaiser Health survey, the average family yearly premium $2713. This is one of the largest expenses facing the average American family. And it’s cost has increased dramatically over the last 5 years.

Secondly, The weights in the CPI do not include employer-paid health insurance premiums. Here lies another problem. According to this Kaiser Health survey, health insurance premiums increased 10.9%, 12.9%, 13,9% and 11.2% and 9.2% in 2000-2005, respectively. Additionally, the average annual premiums for covered workers in 2005 was $10,880. In other words, this is a large expense the CPI does not consider.

So, two large expense are not included in the national CPI numbers. What does this mean?

Remember that real GDP is calculated after inflation. You subtract the inflation rate from nominal GDP to get real GDP, which is the number everyone focuses on. So if inflation is higher than the BLS statistics show, which means GDP is not as high. The numbers have not changed all that much since the first quarter, so that would mean that GDP growth is almost non-existent if we used the old method of figuring housing costs.

A higher CPI number = lower overall national growth.

So, what is the actual CPI? I don’t know. But I feel comfortable in saying it’s higher than reported by the BLS in their CPI numbers.

Posted by Hale Stewart at 04:43 PM | Permalink | Comments (0) | TrackBack

October 06, 2005

North Texas Utility Bills Increasing 60%-90% This Winter

Atmos Energy Corp. hiked its forecast for natural gas utility bills in North Texas on Wednesday, predicting customers will pay 60 percent to 90 percent more this winter compared with last year after hurricanes boosted natural gas prices.

That means the average Texas household will probably pay $690 for heat from October to March, up from $367 last year, the utility said.

For the peak month of January, the average customer last year used 13,000 cubic feet of gas and paid $145. For the same amount of gas this year, the customer will probably pay between $200 and $270. About three-quarters of a January bill goes toward natural gas costs.

In addition, in a month-long unanimous chorus, the Federal Reserve is warning about inflation. 7 Federal Reserve Presidents have all warned about inflation since early September.

Dallas Morning News

Posted by Hale Stewart at 02:05 PM | Permalink | Comments (0) | TrackBack

October 03, 2005

Bush Still Destroying the Middle Class

There are all sorts of great issues on the political scene now. There is the “Culture of Corruption” thanks to Delay, Frist and a whole host of other Republicans. The Iraq War also comes to mind. Both of these issues are strong issues for the Democrats. However, there are other issues that are just as important that lack the visceral nature of corruption and war. These issues center around economic issues, or as I like to think of them “kitchen table issues.” If a family can’t afford health insurance or tuition, if they aren’t making more money than they were 4 years ago, then the other issues don’t matter. People have to survive before they can think about grander themes. Right now, Bush’s policies have hurt the middle class in numerous ways that II will document below. These have to be part of our themes in the 2006 election.

Below, I will use statistics from January 2001 when Bush was sworn in as president. Some Republicans use 9/11 and the recession as mitigating factors to explain Bush’s poor performance. These are mitigating factors. However, Bush got the job. He gets credit for the whole enchilada – not just the part that looks good.

Wages

According to the Bureau of Labor Services, the average hourly earnings of production workers was $14.27 in January 2001 and was $16.16 in August 2005 for an increase of 13.24%. Over the same period of time, the overall inflation index for all items increased from 175.1 to 196.4 for an increase of 12.16%. That means after inflation, the average production wage increased 1.08% in 4 and a half years. This is why the average American feels so much richer under Republican economic leadership.

Jobs

According to the Bureau of Labor Services, total nonfarm employment was 132,454,000 in January 2001 and 133,999,000 in August 2005 for a net 4.5 year gain of 1,545,000. This breaks down to approximately 28,600 jobs/month over the period. This is important because the economy must create 150,000 jobs/month to deal with natural attrition, people looking for new jobs, people entering the workforce etc…. In other words, Bush’s economy has not created enough jobs to deal with the natural expansion of the population or generally economic conditions. The next question to answer is “why is the unemployment rate so low?” The unemployment numbers do not count people who have not looked for work in the last 4 weeks. This is better documented by the labor participation rate which was dropped from 67.2% in January 2001 to 66.2% in August 2005.

In addition, the Bush economy is heavily skewed towards housing. Over the same time, the net gain in construction employment was 418,000, or 27% of total employment growth. In addition, financial services jobs increased by 487,000 over the same period. All of the financial jobs are not related to real estate. I have not seen any statistics that break this number down into a real estate and non-real estate portion. So let’s make a simple conservative assumption and say that 20% of the financial services jobs are related to real estate activities. That would mean 6.2% of the jobs created in the financial services area are related to real estate, bringing the total number of housing related jobs to 33.2% of total ob creation during the recovery. Finally, business and professional services increased employment by a little over 100,000. Assuming 10% of these are real estate related, an additional .5% of job growth is real estate related, bringing the grand total of housing based employment to 33.7% of all jobs created in the last 5 years. So, when housing slows so will the job market.

Of particularly scary significance is the loss in high paying technology and goods producing jobs. January 2001, the US economy has lost 2.8 million manufacturing jobs and 560,000 information jobs. These numbers alone should concern anybody who is concerned with the US’ mammoth international trade deficit.

Health Care

Actually, it would be better to title any description of Bush’s efforts on heath care as lack of health care. Kaiser Health recently issued its annual survey of health care. Here are some of the high points:

Premiums increased an average of 9.2% in 2005, down from the 11.2% average found in 2004. The 2005 increase ended four consecutive years of double-digit increases, but the rate of growth is still more than three times the growth in workers’ earnings (2.7%) and two-and-a-half times the rate of inflation (3.5%). Since 2000, premiums have gone up 73%.

The annual premiums for family coverage reached $10,880 in 2005, eclipsing the gross earnings for a full-time minimum-wage worker ($10,712). The average worker paid $2,713 toward premiums for family coverage in 2005 or 26% of the total health premium. While workers’ share of their premium has been relatively stable over the past few years, they are now paying on average $1,094 more in premiums for family coverage than they did in 2000.

For those who want the hard numbers, annual premium increases for 2001-2004 were 10.9%, 12.9%, 13.9%, and 11.2%. Read the rest of the report to get an idea for how poorly Bush’s ideas have not solved the problem. This is a crisis that has only grown in size and magnitude since Bush came into office. He has done nothing to address the problem.

College Tuition

I have an idea: let’s educate people so they can get better jobs. Call me a revolutionary. Or a fool. The last 4 years have seen large increases in public college education costs. Annual increases in the cost of public education from 2001-2005 were 7.1%, 9.1%, 13.9% and 10.6% respectively. The average cost of 452 state school tuition costs was $5153 in 2005, with the average for room and board expense coming in at $6058. This brings the 4-year total to $40,764 for an education and room and board.

Tuition and fees have increased 51% since the 1994-1995 school year. In addition, tuition has increased faster than inflation since the early 1980s.

But wait! A student can get a grant! This situation isn’t so bad! Well, the problem is the state and local grants aren’t keeping pace with the tuition increases. Therefore, the grants are now paying for less of the education than before. The bottom line is college is slowly becoming more and more a luxury people are having a more difficult time affording.

One of these days, I will figure out a way to make these issues really exciting and visceral so people actually start talking about them. Until that happens, these issues will probably continue to fall through the cracks of US political dialog -- along with the middle class.

Posted by Hale Stewart at 08:07 AM | Permalink | Comments (0) | TrackBack

September 28, 2005

The Coming Fuel Crunch

These evacuations are equivalent to 72.40% of 819 manned platforms and 47.76% of 134 rigs currently operating in the Gulf of Mexico (GOM).
Today’s shut-in oil production is 1,511,715 BOPD. This shut-in oil production is equivalent to 100% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD.

Today’s shut-in gas production is 8.027 BCFPD. This shut-in gas production is equivalent to 80.27% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.

The cumulative shut-in oil production for the period 8/26/05-9/28/05 is 37,881,777 bbls, which is equivalent to 6.919 % of the yearly production of oil in the GOM (approximately 547.5 million barrels).

The cumulative shut-in gas production 8/26/05-9/28/05 is 180.560 BCF, which is equivalent to 4.947% of the yearly production of gas in the GOM (approximately 3.65 TCF).

From the Minerals Management Service

The last sentence from the Minerals Management Service should send shivers up anyone’s spine. The total shut-in oil production is almost 7% of yearly totals.

For the last 6 months or so, the oil market has rallied whenever there was news of a refinery problem. US refineries are operating near 100% capacity, and have been for about the last 6 months. As a result, the oil refiners cannot simply shift production to a plant that has extra producing capacity because that plant does not exist.

And the problem won’t go away soon, as Reuter’s reports:

Oil prices jumped more than $1 on Wednesday after the U.S. government said up to 15 percent of the nation's storm-battered refining capacity could stay shut for weeks, rekindling fears of fuel shortages.

Strikes in France, a leading U.S. gasoline supplier, could worsen the problem by hurting Europe's ability to send shipments across the Atlantic, with the biggest French refinery already shut down by a work stoppage.

"The longer these refineries remain shut down, the more serious the situation becomes, particularly with the heart of the winter season just a few months away," the U.S. Energy Information Administration said in a report about the storm-struck U.S. petroleum infrastructure.

As a result of lost production, a winter heating spike is now in the cards. The only question is if the projections of a 30-70% increase were too low.

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Housing Slowdown Approaching

Housing is the current engine of the US economy. It is responsible for over 40% of recent job creation. Equity extraction is one of the primary ways for consumers to maintain their level of consumption. Therefore, a fall in housing could have a serious detrimental national effect. There is a great deal of speculation about when the housing bubble will end and whether it will end with a slowdown in price escalation or a crash. Regardless of the form, it appears more and more factors are lining up, signaling the beginning of a slowdown.

First, the good news for housing: last month sales of existing homes increased 2%. However, this number is very volatile. It dropped 2.7% the preceding month, and has exhibited a fairly high volatility over the past 12 months. This makes it a fairly poor gage of the overall housing picture.

More importantly is the increase in inventories from the same report. In March, total national inventory was 2,297,000. This number was 2,856,000 last month – a 24% increase in 6 months. It has incrementally increased each month as well, making it appear as though an increasing number of people are looking to sell their houses. The month’s supply of houses has also incrementally increased over the same time from a 4 month’s supply in March to a 4.7 month’s supply last month. The inventory situation does not bode well for the continued price appreciation consumers have come to expect from homes.

More importantly are two factors outside the housing sector. The first was the recent large drop in consumer confidence:

U.S. consumer confidence fell to the lowest since 1992 after Hurricane Katrina devastated the Gulf Coast and pushed gasoline prices to a record high.

The University of Michigan's preliminary index of consumer sentiment fell to 76.9 from 89.1 in August. The reading compares with the median forecast of 85 in a Bloomberg News survey of 53 economists.

The current conditions index, which reflects Americans' perception of their financial situation and whether it's a good time to buy big-ticket items, fell to 97.7 from 108.2 in August. The expectations index, based on optimism about the next one to five years, fell to 63.6 from 76.9 last month.

This drop could be a simple one-month drop related to Katrina. However, the size of the drop is very disconcerting. Consumers would have to have a sharp rebound confidence to return to previous levels. This type of sharp turnaround is unlikely. More importantly is the drop in the expectations index, as this has a direct effect on housing. A house is usually the largest purchase consumers make; they are not going to purchase a house if they think the future is bleak. The drop in the future expectations index indicates a larger percentage of people will most likely put-off buying a house for the next month.

This leads to the second external factor that will negatively impact the housing market: energy prices. Katrina seriously crimped US refining capacity. As a result, the price of fuel derivatives is increasing. Heating oil is 35% higher this October than last October. Natural gas is 44% higher. Unleaded fuel is 50% more expensive. Newspapers across the entire northern US from California to Massachusetts have warned about sharp price increases in heating expenses over the winter. Derivatives prices are likely to remain high over the winter as repairs from Katrina related damage to refineries could take through the end of the year.

High energy prices will harm the economy in two inter-connected ways. First, higher prices will lower consumer confidence or keep it at its current depressed level as consumers feel more and more burdened by this necessary expense. In correlation, the longer energy prices remain high, the more consumers will trim their other expenses and investments – namely housing.

In summation, more people are looking to sell their homes. This will slow price appreciation, probably driving more people to sell their homes, creating an escalating spiral of dumping while prices are still high. Katrina sharply knocked consumer confidence, lowering the possibility that people will be willing to make their largest lifetime purchase. And finally, energy price increases will further crimp already constrained consumer budgets, further lowering housing demand. In short, various elements are lining up to slow the housing market. The main question that only time will answer is the degree of the slowdown.

Posted by Hale Stewart at 10:22 AM | Permalink | Comments (0) | TrackBack

September 27, 2005

Bonddad versus Tom Delay

Yesterday, Tom Delay wrote an editorial for the Washington Times. He essentially stated he is fiscally responsible and will continue to promote the cause of fiscal responsibility. He argued he and his party are still the party of fiscal responsibility. Let’s see how he stands up to his own arguments.

Having compiled a long record as a conscientious fiscal conservative in the House of Representatives, it is clear that the recent political discussion focusing on the government's spending priorities and overall economic platform in the wake of Hurricane Katrina and Hurricane Rita has introduced a valuable forum to promote the triumph of our ideas and solutions for government over the crumbling and outdated policies of the Democrat-controlled Congresses of past decades.

Tom, you’re Speaker of the House. That means you are at least partly responsible for the last 5 years of spending. Let’s look at the record, courtesy of the Congressional budget Office. According to the CBO’s historical budget table 1, federal revenues deceased 5% since 2001 – this despite two and a half years of economic expansion that started in the first quarter of 2003. Over the same period of time, federal outlays increased 23% from 1.863 trillion to 2.292 trillion. Decreasing revenues and increased spending appears to be your record, Tom. That doesn’t look conservative to me.

But I’m not the only person who has noticed. The Cato Institute noted:

President Bush has presided over the largest overall increase in inflation-adjusted federal spending since Lyndon B. Johnson. Even after excluding spending on defense and homeland security, Bush is still the biggest-spending president in 30 years. His 2006 budget doesn’t cut enough spending to change his place in history, either.

I’m sure you are thrilled by the LBJ comparison, Tom. David Brooks made the same observation in a recent NY Times editorial.

The federal government spends too much, taxes too much and has yet to develop a more perfect sense of bureaucratic reform. But the evidence shows -- as I have publicly maintained--that progress, though frustratingly slow as it is, is being made because of a determined and cohesive effort by House Republicans to always do better.

Tom, your leadership is now responsible for the government spending too much. The Republicans have been in control of Congress and the Presidency for the last 5 years and all we got was a 2 billion increase in total debt outstanding. You can no longer argue that tax and spend liberals are responsible for bloated government, especially when your party has created the now bloated government.

This has brought about an important level of debate on the vital need to promote fiscally responsible policies in Congress. And I agree that an essential point has achieved consensus in this debate: The current political dialogue on political spending is one that requires a clear declaration of principles from House Republicans. We will continue to display an earnest devotion to the ideals of a smaller, more efficient, better-prioritized government. Flaunting rhetoric on the issue of fiscal discipline will not be enough. The conservative ideals of fiscal discipline and leaner, smarter government require a legislative agenda that can be put into action and enacted into law.

requires a clear declaration of principles from House Republicans.: Tom, your actions clearly indicate your principles: give money to rich people who fund your campaigns. Cut government programs such as FEMA that benefit all people. Borrow money to burden future generations so you, Jack and all your buddies can live high on the hog now.

We will continue to display an earnest devotion to the ideals of a smaller, more efficient, better-prioritized government The fact that President Bush and the Republican controlled Congress have increased domestic spending as fast as that other icon of fiscal conservatism LBJ kind of makes that statement a bit hard to defend.

Our positioning on this issue -- as a party that is strongly identified with the American people as sensible and determined protectors of the hard-working taxpayer -- demands a unified and clear opposition to those whose policies and agendas are hostile to the taxpayer's best interests: Capitol Hill Democrats intent on raising taxes, free-spending special interest groups intent on curing the ills of society by advocating federal dollars as the only solution and a bevy of bureaucrats more interested in an expansion of federal programs than the reduction of ineffective ones.

That’s right. When all else fails, blame Democrats. Sorry Tom. Republicans are now the party of fiscal irresponsibility. Democrats actually make the government work really well for all people, not just our rich donors. Remember Clinton? Whilst getting a blowjob from an aide he also managed to balance his last three budgets and pay down some of the Republican created debt. Republicans have yet to balance a budget in the last 25 years. I would like to state publicly I am very pro-blowjob, especially when it balances budgets and pays down debt.

As for calling Democrats free-spenders, Republicans’ record for the last 5 years clearly states otherwise. Republicans are now the party of free-spending.

While tailoring our focus on the task at hand, our party must also trumpet our accomplishments. So far this year, the House-passed appropriations bills have cut 98 low-priority programs, for a savings of $4 billion and the first real cut in domestic spending since 1987. And this fall, the House will pass mandatory spending savings of at least $35 billion, to bring next year's spending projections in line with the budget Congress passed this spring -- a budget saving plan that was put in place months before Hurricane Katrina brought this debate on spending to the forefront.

Tom, you’re forgetting some of your greatest works. How modest of you. Here, let me help. A war – whose oil revenues were supposed to pay for its prosecution -- that has already cost over 250 billion. An increase in total federal debt outstanding of 2 trillion. A squandering of a budget surplus and the reinstitution of deficit spending. Tom – Republicans have accomplished so much more than you give them credit for.

LINK

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September 18, 2005

The Bush Economy's Consumer Debt Explosion

The economy started expanding in the first quarter of 2003. Where is the money to pay for this expansion coming from? According to statistics from the Bureau of Labor Services, non-supervisory wages are near stagnant since 2000. US savings is at 0%, and have been decreasing since the early 1980s. So consumers’ increased spending isn’t from an increase in wages or money they put aside for a rainy day. That leaves one source: debt. Steve Church has done a great analysis from the Federal Reserve’s Statement of Financial Flows, which clearly demonstrates debt is the US consumer’s main source of new money for expenditures.

The analysis uses a corporate cash flow model. For those of you who are unfamiliar with this accounting format, it essentially states where money for a specific period comes from and goes to. Every year, money comes in from a variety of sources and is paid to a variety of activities. The cash flow statement shows where money comes from and where it goes.

For those of you who have detailed knowledge of a cash flow statement, you will notice that I am simplifying certain definitions for the lay-person. This is not supposed to be a presentation to a group of MBA’s, but a presentation to a group of non-MBA’s so more people can understand what is going on beneath the surface of the US economy.

I have summarized the cash flow statements for ease of reading purposes. If you want to see the spreadsheet, go here.

The figures below from the Federal Reserve’s Statement of Flows:

2003

Savings: Households net operating assets in 2003 were 357 billion dollars. This is the total of savings and depreciation additions.

This is where a cash flow statement starts. It presumes people will spend first from what they already have.

Investment: Households net financing activities in 2003 were 1.142 trillion dollars. This is the total of mortgage, savings and other investment activity.

This tells us what consumers spent their savings on. This is money the consumer spends during the year.

Financing: Households net debt acquisition in 2003 was 866.9 billion. This is the total new debt minus repaid debt.

Outside of savings, this tells us where consumers got the rest of the money they used during the year.

2004

Savings: Households net operating assets in 2004 were 365 billion dollars. This is the total of savings and depreciation additions.

Investing: Households net financing activities in 2004 were 1.341 trillion dollars. This is the total of mortgage, savings and other investment activity.

Financing: Households net debt acquisition in 2004 was 1.044 trillion. This is the total new debt minus repaid debt.

Let’s look at these numbers in a bit more depth.

First, before we get to the top line of the cash flow statement, we’re going to add another figure: wages. If wages increased significantly, than it is possible the wage increases were used to finance the national economic expansion. According to the Bureau of Labor Services, wages for non-supervisory employees have grown 4.35% from January 2003 to December 2004. Over the same time, inflation increased 4.67%%, making inflation adjusted wage growth a -.32% from January 2003 to December 2004. Because consumers aren’t making any more money, increases in wages are not responsible for consumer purchases during the period on the cash flow statement (2003-2004).

The top line of the statement is for savings. “In the strictest definition, savings are that part of your production that is in excess of your consumption.” In other words, savings is what is left over after you pay your bills and other expenses. Depreciation is added to operating expenses because depreciation is essentially an accounting method of allocating the cost for a capital over that good’s expected useful life. This allows a purchaser to allocate the cost of a capital good more effectively. While a depreciation deduction technically lowers your operating income for tax purposes, you don’t really pay the money allocated to depreciation. Therefore, from a cash flow perspective, depreciation is added back to monthly operating income to determine monthly operating income.

You’ll notice that cash flow from operating activities is positive. This means what you would think it means: that after savings and depreciation, consumers added money to their personal stash of money from savings and depreciation.

The next big area of the cash flow statement is from investing activities. Loosely defined and investing activity is one that will hopefully increase cash flow in the future. It shows there was a net cash outflow to investing activities greater than the cash inflow from operating activities. This means that after money from operating activities, (savings + depreciation) and money spent on investing activities, household’s cash balance is negative.

So, how do households make up this difference between investment activities and operating activities? They borrow heavily.

The third section of this annual household cash flow statement reveals a very important reality of the current expansion. After deducting annual totals for repayment of debt, households are borrowing between 2.5 (2003) and 2.85 (2004) greater than their income savings.

However, that is not the scariest conclusion the paper draws.

This paper analyzes the sources and uses of household cash flow. We use the basic corporate cash flow statement format to identify operating, investing, and financing cash flow. In order to meet current financing and investment requirements, we discover that households need to generate new cash equal to at least 13% of GDP every year.
Prior to 1993, the sources of household cash flow were split about 55% from income and 45% from new debt. Beginning in 1993, new debt increasingly became the source of cash flow. In 2005, new debt of about 12% of GDP should provide nearly 86% of household cash flow.

We are simply borrowing to create wealth.

Posted by Hale Stewart at 11:34 AM | Permalink | Comments (0) | TrackBack

September 16, 2005

Bush Proposed US' Fiscal Death Last Night

One my greatest concerns is the lack of attention most people pay to economics – especially national level economic policy. I realize it is not the sexiest of topics. It is dry, full of statistics and often talked about by people whose speaking style is less than dramatic. As an example of the last item, listen to Greenspan talk before Congress; he alone could help cure insomnia. More galling to me personally is the way the Republicans run national finances. Perhaps no one calls them on their ways because the topic is boring or too detailed to fall into convenient 30-second sound bites. Maybe it’s because it is difficult to connect the effects of national economic policy with day-to-day living. Or maybe it’s because it’s gotten so bad under Republican leadership that it’s simply easier to not deal with it.

Last night, Bush once again decided the best thing to do to gain popularity was to buy people’s affection without asking for any sacrifice. While I am sympathetic to the after-affects of Katrina and also believe something should be done, I also understand it will require sacrifice. The US cannot go through its fiscal life without recognizing it can’t afford everything it wants. It cannot give money away to the well off, fight a voluntary war, spend recklessly on non-prioritized domestic needs and rebuild an area destroyed by a hurricane. By believing it can, Bush has placed the United States – a country I love and hold very dear for all it stands for – in a position to fall into economic ruin.

Bush started his first term with a massive tax-curt for the rich, arguing that tax cuts in fact pay for themselves. While this didn’t work when Reagan tried it in 1981, Bush gave it a second try. First, tax cuts don’t increase receipts. In fact they decrease them. According to the Congressional Budget Office, in 2000 individual tax receipts (receipts from individual tax payers) totaled 1.004 trillion dollars. Many on the right will scream that I am using a boom year for comparison, so in 1997 and 1998 tax receipts were 737.5 billion and 828.6 billion respectively. For the years 2001-2004, individual receipts were 994 billion, 858 billion, 794 billion and 809 billion, respectively. When you cut taxes, revenues decrease, in this case by 18% from 2001 – 2004. Also note that Bush’s tax receipts for 2004 were lower than Clinton’s in 1998. As another comparison, individual income taxes as a percentage of GDP decreased over the same time from 9.9% to 7%.

At the same time, Bush decided to engage in a voluntary war. According to a report titled The Iraq Quagmire, Congress has already authorized total spending of 249.7 billion. According to the Congressional Budget Office, prosecuting the war at current levels would double the federal budget deficit in 10 years. At a time when revenue was decreasing, Bush increased spending on something he didn’t need to spend money on.

But the Iraq war was not the only item of spending on Bush’s table. Again, according to the CBO, total outlays in 2001 were 1,863.0 trillion. This number increased to 2,292.2 in 2004. Over the same period, total revenues decreased from 1,991.2 in 2001 to 1,880.1 in 2004. In other words, spending increased and revenue decreased. If we take the Iraq figures from above out of the total increases, we still get a net increase of 179.5 billion dollars.

As of this writing, the 2005 deficit is projected to be a little over 300 billion dollars. However, this was before Katrina. Although estimates of proposed government spending vary in size, one private estimate of total damage started at 100 billion and was later revised upward to 125 billion. Several news reports have placed final government spending between 150 – 200 billion dollars. This will once again place the budget deficit over 400 billion – deep in deficit with no end in sight.

At 400 billion, the US budget deficit is about 3.6% of total US GDP. And this is where the problem begins. At some time in the near future, the US will experience a recession. Why? Because all economies move in cycles. Typically, national governments increase spending during a recession to stimulate the economy, hoping to either limit the recession’s impact or bring the country out of the recession into expansion.

This is where the real problem comes. Assuming federal expenditures remain the same for the foreseeable future – tax cuts remain, Iraq continues and the Federal government spends opulently on rebuilding – there is little the Federal government can do to get the US out of the next recession. Assuming things stay the same, an increase in federal spending would increase the national debt to near 5% of GDP. At this level, the currency markets will notice the US is not taking care of its fiscal house and start to sell the dollar. To protect the dollar, the Federal Reserve will increase interest rates, further slowing the economy. You get the idea.

Currently, the US Congress lives in economic fantasy land, where they can be all things to all people. They can cut taxes, fight a war, spend lavishly on campaign contributors and rebuild an entire region devastated by natural disaster without asking for any sacrifice. This mentality is placing US fiscal matters near the cliff. We’re not over it yet. But we’re damn close.

Posted by Hale Stewart at 08:27 AM | Permalink | Comments (1) | TrackBack

September 14, 2005

Health Insurance Crisis Continues.....

The cost of health insurance for working Americans climbed 9.2 percent this year, the lowest rate of increase since 2000 but still far ahead of both general inflation and workers' pay increases, according to a nationwide survey by the Kaiser Family Foundation.
On average, health insurance for a family cost $10,880 this year, with the employer paying $8,167 and the worker $2,713, the survey found. The total cost almost exactly matches the total annual earnings of a person working full time at the minimum wage, the survey noted.

At the same time, the proportion of employers providing health insurance continued its steady decline, falling to 60 percent this year from 69 percent five years ago. Most of the decline was among very small companies, the survey found, noting that less than half -- 47 percent -- of firms with three to nine workers now offer medical coverage to their employees.

This year is the second in a row with a slower rise in premiums, slipping from 11.2 percent last year and 13.9 percent in 2003. That 2003 rise capped an unbroken string of progressively higher increases dating back to 1996.

The current "next big thing" is what has been dubbed "consumer-driven" health care, which combines high-deductible insurance with a fund that the individual can use to cover routine costs. In these arrangements, consumers are allowed to accumulate unspent money in the fund, giving them, theorists argue, an incentive to shop and eliminate unnecessary spending.

First, let’s place these premium increases in perspective. According to the Bureau of Labor Services, wages for non-supervisory employees have grown 13.24% from January 2001 to July 2005. Over the same time, inflation increased 11.59%, making inflation adjusted wage growth 1.6% over a five and a half year period.

So, health insurance increased 13.9% in 2003, 11.2% in 2004 and 9.2% this year. Over the same time, wages have been near stagnant after inflation. In other words, premiums are taking a larger percentage of a consumer budget that is essentially stagnant.

But that’s not the end of this situation. Employers are using higher deductible policies. So not only is the average American family paying more for insurance, they are also paying more in the form of deductible payments. This hidden cost further eats into the near stagnant wages.

More importantly, fewer small companies – which employ most Americans – are providing heath insurance. So, assuming a person has a job, it’s less likely they will be able to get insurance through their employer.

Is anybody listening? Americans are still losing out in this situation.

Link

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September 13, 2005

Katrina, Deficits, Fiscal Mismanagement and the Supply-Side Shell Game

For some reason, the Republicans still hold to the mantra they know how to deal with federal finances. However, the record clearly states otherwise. Starting with Reagan, the Republicans have engaged in a shell game. They cut taxes for the wealthy, replace revenues lost from the tax cuts with debt, increase spending on defense to appear hawkish, and pray the international currency markets won’t punish the dollar while the Republicans are in office. Katrina stands the possibility of throwing a wrench into a rigged fiscal game that could eventually punish the US because of this mismanagement.

All the figures are from the Congressional Budget Office and the Bureau of the Public Debt.

Reagan started this madness. He cut taxes in 1981. As a result, revenue from individual income taxes was stagnant from 1981-1893, with total revenue for 1981, 1981, and 1982 at 285 billion, 297 billion and 288 billion respectively. During the same years, the Republicans increased spending on their favorite department --- the Pentagon. From 1981-1983, spending increased from 158 billion to 209 billion. During the same time, general spending (which includes defense spending) increased from 678 billion to 808 billion. While the Democrats controlled Congress during these years, it should be noted that Reagan had veto power over these spending measures that he obviously didn’t use. As a result of this policy, the federal deficit ballooned from 73 billion to 207 billion. As a result of this policy, the total amount of public debt increased from 930 million in 1980 to 2.6 trillion in 1988.

20 years later, cutting taxes still does not increase revenue from individual taxpayers. In 2000, individual tax receipts (receipts from individual tax payers) totaled 1.004 trillion dollars. Many on the right will scream that I am using a boom year for comparison, so in 1997 and 1998 tax receipts were 737.5 billion and 828.6 billion respectively. For the years 2001-2004, individual receipts were 994 billion, 858 billion, 794 billion and 809 billion, respectively. Does anybody see a pattern here? When you cut taxes, revenues decrease, in this case by 18% from 2001 – 2004. Well, call me a liberal, but it looks like the laugher curve is wrong. Also note that Bush’s tax receipts for 2004 were lower than Clinton’s in 1998. As another comparison, individual income taxes as a percentage of GDP decreased over the same time from 9.9% to 7%.

Why bring this up now? A sane fiscal policy does not expose the country to the risks inherent from unforeseen disasters. While total federal spending on Katrina is still unknown, the figures are increasing:

Senate finance committee chairman Charles Grassley believes that federal spending after Katrina could hit 150 billion dollars. Republican Senator Jeff Sessions said a figure of 200 billion dollars was possible.

Merrill Lynch economist David Rosenberg bid "goodbye to the 2006 deficit projection" of 314 billion dollars, predicting it would shoot to a new record high to beat last year's figure of 412 billion dollars.

"Katrina has now become a great valve for Congress to spend gobs of dough, keep the economy alive and save their re-election prospects in November 2006," he said.

So, an unforeseen natural disaster – which in fact was foreseen for decades -- will place the US federal budget deficit on the path to financial ruin, AGAIN.

What would have happened if this happened during the Clinton presidency? Well, although he raised individual income taxes on the upper class, the economy grew for 8 years and created 22 million jobs. The federal deficit decreased from 340 billion to a surplus of 86 billion in 2000. In other words, if Katrina had hit during Clinton’s term, the federal government would have had the ability to increase spending (as it should in this situation) without creating a possible federal fiscal crisis.

As the federal situation currently stands, Katrina will place the US federal budget in the hole – again. The international forex markets will probably start to look at the US as incapable of handling its internal finances and start to sell the dollar -- again. And the threat of interest rate increases to prop-up to the dollar will become far more likely -- again.

Sound national fiscal management is the way we as a country plan for a rainy day. If we plan well (balance budgets), the disaster’s long-term fiscal effects are diminished. If we plan poorly (not balancing budgets), the disaster’s long-term fiscal impact runs far deeper causing far more problems.

Thanks to Republican fiscal mismanagement (again), Katrina’s overall fiscal effects will run deeper than they should.

Republicans – we can’t afford them anymore.

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September 10, 2005

How Katrina Can Cause a Recession

Katrina’s ripples will spread far and wide through the economy. While the initial damage phase is over, there are several Katrina caused major forces at play that could cause serious damage possibly leading to a recession. The worst part about this “perfect economic storm” is there is little the country can do for it from a policy perspective. In essence, the country made its bed and now may be forced to sleep in it.

First, let’s start with a general, documented observation: Natural disasters are essentially an economiczero-sum game. The Bureau of Economic Analysis analyzed the sum total of all 2004 hurricanes. They did roughly 115 billion in total damage and created about 117 billion in benefits. Look at it this way: if natural disasters were so economically wonderful, we would try to duplicate their effects all the time.

Some people will attempt to argue the post reconstruction boom will be so large it will stimulate the economy, creating economic growth. However, the historical record is clear: the rebuilding process after a natural disaster simply replaces total losses.

Total Damage

The total damage estimates vary. I have seen figures from 25 billion to 125 billion. However, given the size of the area involved (three states) and 1 major US city underwater, I tend to think high estimates are more probable. The most widely sited source of damage assessments is from Risk Management Associates

Risk Management Solutions on Friday raised its estimate of total damages caused by the hurricane to $125 billion and said it expects insured losses of $40 billion to $60 billion.

Previous estimates of economic costs of Katrina by federal and state agencies had hovered around $100 billion, while expectations for the costs borne by private insurers had been in the range of $25 billion. Previously, the most expensive hurricane had been Andrew, with $21 billion of insured losses in 1992.

RMS, based in Newark, California, assesses disasters for more than 400 insurance firms, trading companies and financial institutions. It now has the highest estimate of any of the major catastrophe modeling firms. It had expected $20 billion to $35 billion of insured damages just last week.

"We did a lot of reconnaissance since then and the big variable is how bad it's been in Louisiana," said Brian Owens, a director with RMS.

However, there are some people within the government arguing the cost will be higher:

One storm could end up costing almost as much as two wars. Although estimates of Hurricane Katrina's staggering toll on the treasury are highly imprecise, costs are certain to climb to $200 billion in the coming weeks. The final accounting could approach the more than $300 billion spent in four years to fight in Afghanistan and Iraq.

Analysts inside and outside government agree that the $62 billion that Washington has spent so far was merely the first installment of perhaps an unparalleled sum.

As for the overall toll, G. William Hoagland, the top budget adviser to Senate Majority Leader Bill Frist, R-Tenn., said: "We're obviously over $100 billion. I just don't know how much over."

The cost projections are important because they will add to the Federal deficit which currently totals just under 8 trillion dollars. Katrina’s total cost will most likely send the total debt amount over 8 trillion. As some point, the total US debt will require interest rate increases to compensate borrowers for the increased risks inherent in lending to an already heavily indebted borrower. There is no guarantee increasing interest rates will happen as a result of the federal government’s spending on Katrina. However, it is a possibility.

In addition, the Republican’s reckless fiscal mismanagement will hamper the Federal governments ability to stimulate the economy through federal spending. If the economy needs a federal fiscal stimulus, the money simply won’t be there.

Oil, Gas and Energy

Let me tie together several economic threads.

First, wages haven’t increased in the last 5½ years. According to the Bureau of Labor Services, wages for non-supervisory employees have grown 13.24% from January 2001 to July 2005. Over the same time, inflation increased 11.59%, making inflation adjusted wage growth a paltry 1.6% over a five and a half year period. Therefore, US consumers are spending from a stagnant pool of money.

Secondly, consumer spending represents 2/3 of US GDP. For the economy to grow, the consumer has to spend. Therefore, if a necessary expenditure increases at a rapid rate, consumers will be forced to allocate their stagnant income to the necessary resource at the expense of other consumer items.

Third, retailers derive at least 50% of their total revenue from seasonal sales.

So far we have this equation: the US economy depends on consumer purchases to grow. Consumer purchases spike during the holiday season.

Enter energy prices.

As of this writing, the latest release from the Mineral’s Management Service notes at least a third of overall refining capacity is still off line:

Today’s shut-in oil production is 897,605 BOPD. This shut-in oil production is equivalent to 59.84% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD.

Today’s shut-in gas production is 3.821 BCFPD. This shut-in gas production is equivalent to 38.21% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.

The cumulative shut-in oil production for the period 8/26/05-9/10/05 is 17,121,430 bbls, which is equivalent to 3.127 % of the yearly production of oil in the GOM (approximately 547.5 million barrels).

The cumulative shut-in gas production 8/26/05-9/10/05 is 84.232 BCF, which is equivalent to 2.308% of the yearly production of gas in the GOM (approximately 3.65 TCF).

The lost production will continue through 2006 for some oil facilities.

Crude oil rose after Royal Dutch Shell Plc and the International Energy Agency said U.S. production will be slow to recover from damage Hurricane Katrina caused to rigs and refineries along the Gulf coast.

Shell said today output may not resume from its Mars field, which accounts for as much as 15 percent of Gulf output, until 2006. Production statistics show the industry will take longer to recover from the storm than from Hurricane Ivan a year ago, the IEA said today. About 30 percent of U.S. oil production comes from the Gulf of Mexico.

U.S. oil production in the Gulf of Mexico yesterday was 40 percent of pre-Katrina output of 1.5 million barrels a day, according to data from the Minerals Management Service. Four refineries may take three months or more to resume operations, Energy Secretary Samuel Bodman said yesterday.

Refineries are already operating near capacity. That means refiners cannot simply move operations to another refinery because all other refineries are already operating at peak production. Therefore, any lost production lowers overall refining operations. This limits energy supply. Lower supply = higher cost.

The U.S. economy will face a tough winter due to high energy prices caused partly by a disruption in oil and natural gas supplies from Hurricane Katrina, U.S. Energy Secretary Sam Bodman warned on Thursday.

"There is no doubt that this is going to be a very tough winter season for the American economy (and) for American homeowners," Bodman said in an interview on the "Fox & Friends" television news program.

The Energy Information Administration said on Wednesday Americans who warm their homes with natural gas could see their fuel costs jump by as much as 71 percent this winter in some parts of the country.

Consumers can’t simply borrow for Christmas. Consumer debt payments are already at record levels. Consumers won’t chose Christmas gifts over heating and transportation needs. As a result, consumers will cut back on Christmas purchases. If they cut back excessively, retailers profits will decline. This will lower GDP growth, decreasing consumer sentiment… you get the idea.

Let’s sum up:

1.) Natural disasters are a zero sum game. Communities essentially rebuild what was lost. Claims the rebuilding effort will help to grow the economy are counter to the historical record.

2.) The Federal government – which is already in a record amount of debt – will increase its total debt to pay for Katrina’s damage. At some point, lenders will demand a higher interest rate because of total US debt.

3.) An already tapped-out, heavily indebted consumer now faces spiking energy prices going into the economically important Christmas season.

Should all the events play out, Katrina will indeed be the perfect storm.

Posted by Hale Stewart at 07:58 PM | Permalink | Comments (0) | TrackBack

September 09, 2005

Winter Heating May Increase 71% in Some Areas

"There is no doubt that this is going to be a very tough winter season for the American economy (and) for American homeowners," Bodman said in an interview on the "Fox & Friends" television news program.
The Energy Information Administration said on Wednesday Americans who warm their homes with natural gas could see their fuel costs jump by as much as 71 percent this winter in some parts of the country.

Residential heating bills for heating oil will increase by 31 percent, and electricity users will see their costs rise by 17 percent, the Energy Department's analytical arm said in its latest monthly energy forecast.

Oil sold-off this week from its recent highs. There are several reasons. First, there is the psychological relief that Katrina did not bring a larger energy disaster. Secondly, The international community’s energy aid – albeit temporary – helped to ease the market’s concern of a supply crunch. And as the week progressed, news of various refineries coming back on-line demonstrated the refining industry will be able to recover.

However, Katrina did not alter the underlying fundamentals of the US energy situation. Supply is still constrained by a lack of refiner capacity. The fact that refineries were down for a few weeks makes the supply situation worse because refineries could not pump out fuel for a few weeks. This will exacerbate the supply situation.

Consumers are already reeling from gasoline prices, which have topped $3/gallon according to AAA. High winter prices will extend the energy price shock, possibly as long as six months.

Let’s put two facts together:

1.) Consumer spending represents 2/3 of the American economy
2.) Consumers may see an energy price spike as long as 6 months in some markets.
3.) Retailers make most of their profits during the holidays.

Retailers have every right to be worried right now.
LINK

Posted by Hale Stewart at 08:16 AM | Permalink | Comments (0) | TrackBack

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