Credit card debt rose a surprising 6.1% in October. Americans now owe $856.8 billion on their credit cards. This is bad news for consumers, but good news for retailers buffeted by lackluster sales on Halloween and Black Friday.
Consumers added 7.5% to their holdings of low-interest loans. They owe a record $2.2 trillion for autos, furniture and education loans. Combined, total consumer debt is now $3.07 trillion, exceeding the record-high $2.65 trillion owed in 2008. That's a 7.1% increase in just one month. (Source: Federal Reserve, G.19 Release, December 9, 2013)
How It Affects YouDebt boosts economic growth by allowing people to buy more than they can afford. The stuff they buy makes businesses produce more. In an ideal scenario, it will be enough to create new jobs that will allow people to pay off their debt.
Debt can also allow people to buy education and get a better job, buy a car to get to that job more easily, and buy computers and TVs so they know what's going on in the world.
However, if debt isn't used wisely, it can devastate the financial health of borrowers. It can create false economic growth, that becomes an asset bubble that will eventually burst.
The Bureau of Labor Statistics reported that 203,000 jobs were added in November, driving the Dow above 16,000 again. This was better than the 200,000 jobs added in October (revised down from 204,000 jobs), and much better than the 163,000 jobs created in September. Jobs were added in every industry, with strong boosts from transportation (30,000 jobs), health care (29,600 jobs) and manufacturing (27,000 jobs).
I often get asked how many jobs were lost during the month. This report tells you that, when you add up all the jobs added and lost, you wind up with an additional 203,000 jobs. The BLS doesn't break it out any further.
However, you can get a rough idea with the Job Openings and Labor Turnover Summary, which comes out six weeks later. For example, the most recent report was released on November 22, but it's for September. There were 1.7 million layoffs, compared to 3.9 million job openings.
This month's jobs report gives you another idea of jobs lost. It tells you that 53% of the unemployed either lost their jobs, or completed temp jobs. That means 5,800 people who were counted as unemployed lost their jobs. It doesn't tell you how many found another one that same month, nor how many jobs were lost. FYI - another 8% of the unemployed voluntarily quit their jobs. There were 28% who had returned to the labor force, which means they had quit looking for work but were now back pounding the pavement, while 10.7% were started to look for work for the very first time.
More jobs were added than the 150,000 minimum needed for healthy economic growth. That helped drive the unemployment rate down to 7%, and the number of unemployed fell from 11.2 million to 10.9 million. (Source: BLS, Employment Situation Summary, December 6, 2013)
How It Affects You
There's more of a chance that the Federal Reserve will vote to begin tapering its Quantitative Easing purchases when it next meets on December 18th. This means interest rates will probably rise. Fortunately, it appears investors are now looking at this as a sign of economic confidence.
The Bureau of Economic Analysis revised its estimate for economic growth upwards, to 3.6%, for the third quarter (July-September). On the surface, this is much, much better than the second quarter's 2.5% growth rate. It's also well above the 2-3% ideal growth rate.
The GDP growth rate tells you how much more Gross Domestic Product (GDP) is being produced this quarter vs the last. Since the growth rate is much higher than the 1.1% growth rate in the first quarter, and the 2.5% growth in Q2, it would normally signal a strengthening trend.
However, this top-line number was driven primarily by stores stocking up for the holiday shopping season, adding $16.5 billion, more than $98.8 billion added in the first half of the year.
Additions to inventory helped boost business spending, which was up 9.5%. Again, a very strong number, but some of the growth was driven by real estate. New home construction rose 14.6%., while commercial construction (mostly apartment buildings) increased 12.3%. Business spending on other equipment was actually down 3.7%, signaling low confidence. This is one of
Here's the hidden weakness in the report -- the other three components of GDP weren't nearly as strong. The biggest concern is the softness in consumer spending, because it drives 70% of the economy. Household spending on everyday goods and services rose just 1.4%, the lowest in five years. Coupled with disappointing Halloween and Black Friday retail sales, it shows a dropoff in demand -- at the same time businesses are adding to supply.
Sequestration spending cuts caused a 1.4% decline in Federal government spending that will only worsen if a budget isn't agreed upon by January 15, 2014. This was offset by a 1.7% increase in state and local spending.
Exports only rose 3.7%, down from an 8% rise in the second quarter , while imports rose just 2.7%. Exports contribute to GDP, while imports subtract from it. (Source: BEA, GDP Advance Estimate, December 5, 2013)
How It Affects You
Stores will probably offer deeper discounts this month and next to clear the inventory. While this is good for your shopping cart, it will have negative longer-term effects. First, most stores receive 20%-40% of their annual revenue this time of year, so poor revenue means lower earnings and stock prices in the future. Many retailers are already revising their earnings forecasts down.
Second, it means they will be less likely to hire, and may even lay people off. Since low-wage retail and food service jobs have been driving employment growth, expect worsening jobs reports in January and February -- and worsening jobs prospects.
Photo: Growth in the third quarter was driven by stores stocking up for the holidays. Credit: Sandy Huffaker/Getty Images
The stock market has been hitting all-time records. Analysts keep forecasting that 2014 will be even better. Why? The Fed's Quantitative Easing program is doing all it can to stimulate economic growth. It's making cash easy to get for businesses.
However, it's like pushing a string. Companies aren't spending the money in business investment because they don't see the demand from consumers. This means they aren't buying plants, equipment and most important, aren't creating jobs.
Instead, they're buying other companies, sending cash to stockholders in the form of dividends, or buying back their stocks to boost prices. Furthermore, businesses are making their earnings reports look good (not great, though) by cutting costs. Some, like consumer goods giant Kellogg's, are even cutting jobs -- a whopping 7% of their workforce.
This all looks good to Wall Street, even though it's not good for the economy.
Since lots of great jobs aren't being created, household incomes aren't rising as fast as they should, limiting demand. It's looking more and more like a vicious, downward cycle.
What could reverse the trend? It would be simple, quick but not easy. The Congressional Conference Committee should put their differences aside and agree on a FY 2014 budget. It doesn't really matter, just sending a signal that Washington is working again would boost confidence. They have lots of choices. They could agree to adopt the President's FY 2014 budget proposal, or the House Republican proposal. They could agree to adopt the Simpson-Bowles plan. The could even agree to keep taxes and spending exactly where they are, thus avoiding further cuts from sequestration.
The important thing is that they agree before the December 15 deadline. However, I don't think that will happen. The tea party Republicans can't seem to replace their political strategy of threatening to default on the nation's debt, even though they agreed that shutting down the government was not a good idea.
How It Affects You
Consumers are now holding their breath, waiting for the next shoe to drop. You're seeing soft retail sales this holiday season. The stock market will keep inching up until the end of the year, as fund managers try to boost their annual figures just a bit more.
If the government threatens default and shutdown again in December and January, I'm afraid investors will sell off stocks, driving prices down 10% or so. The market is long overdue for a correction. It won't harm the average person who's not in the market. It just means stock prices will more accurately reflect what's going on in the real economy.
China's economy has been slowing. After 30 years of double-digit growth, it was just 9.3% in 2011, and only 7.8% in 2012. In November, China's new President Xi Jinping released measures to reform its economy.
You've probably heard that the one-child rule was relaxed, and that labor camps have been abolished. These reforms help civil liberties, but were actually designed to boost economic growth.
China's plans center around encouraging more people to live and work in its cities. China is making things easier for small businesses to be innovative, profitable and create better jobs. This allows the country to be less dependent on manufacturing and exports.
The most important changes are to the state-owned companies, which control energy, banking and utilities. The government will relax price controls, allowing them to become more competitive. In return, they must pay higher dividends to the government to finance more public services. This will create a social safety net, allowing Chinese people to save less and spend more.
The concern is that China's new leaders can't manage all these changes at once. If they take too long, the economy could slump even further. The state and local government officials may try to block the changes. If they overshoot, that could also throw the country into recession. Even if they are successful, change of this magnitude is risky. Other countries, like Norway, Argentina and Thailand, have liberalized their financial sectors only to suffer banking crises within a few years.
How It Affects You
Even if China were to go into a recession, it shouldn't directly affect the U.S. because we don't export a lot of goods to China. Second, U.S. demand for Chinese products will help keep China out of a recession. For more, see U.S. China Trade Deficit.
In fact, a Chinese recession might benefit the U.S. with lower prices. Chinese leaders would devalue their currency to make exports more competitive. They might step up purchases of U.S. Treasuries, making the dollar stronger. This would lower U.S. interest rates and inflation at the same time.
However, let's remember a little country called Greece, which was supposedly too small to hurt the world's economy. A recession in China would have unexpected negative consequences, at the very least. In a worst case scenario, it could destroy confidence in global trade and growth, dragging the world into recession. Read More...
The stakes are high for Congress' Conference committee. They must agree on a new budget by December 13. If they don't, the second phase of sequestration will automatically kick in on January 15, 2014. This will lower spending by $20 billion, mostly from defense.
The Republicans, led by House Budget Committee Chairman Paul Ryan (R-WI), want to keep sequestration in place, but cut Medicare and Social Security instead of defense. Democrats, led by Senate Budget Chairwoman Patty Murray (D-WA), agree that defense shouldn't be cut. However, they want to add $70 billion in spending, and make up the difference by closing tax loopholes. Republicans agree that loopholes should be closed, but want to use the proceeds to lower tax rates.
As of the end of November, both sides have agreed on no new tax hikes, and no cuts to mandatory programs such as Medicare, Social Security and Medicaid. Both sides agree to replace the sequester with spending cuts in federal-employee retirement programs, and increases in airport security fees and broadband spectrum auction revenue. Best of all, the deal may replace sequestration for the rest of FY 2014 and all of FY 2015 (ending September 30, 2015). (Source: WSJ, Narrow Budget Agreement Comes Into View, November 29, 2013)
It's really up to Senator Murray and Congressman Ryan, who realizes that Republicans are between a rock and a hard place. Recent local elections showed that hard line, tea party Republican positions aren't popular with the majority of voters. However, House Republicans could still lose their seats in next year's elections if they seem too conciliatory. The political forces that created the sequester are still in place.
How It Affects You
Fortunately, the sequester provides an automatic budget solution. That means there isn't a risk of another government shutdown. However, another $20 billion cut will further slow economic growth. That means the employment picture won't brighten significantly. Fortunately, the possibility of a U.S. debt default has been postponed until mid-March. The U.S. Treasury has enough "extraordinary measures" to last until then. (Source: CNBC, Interview with Mohammed El-Erian, PIMCO Funds)
Orders for aircraft, machinery and equipment dropped a sickening 2% in October, to $230 billion, after rising a healthy 4.1% in September. As usual, most of the decline is thanks to Boeing, which lost orders from Japan Airlines and Mexican airline VivaAerobus to France's Airbus. (Source: Daily Finance, Boeing Loses Billions, and Two Loyal Airlines, to Airbus, November 10, 2013)
Since airplane orders are so large, they tend to rise and fall every month. However, even without the volatile transportation sector, durable goods orders fell .1% . Even worse, orders for capital goods fell 3.9%, reinforcing a declining trend that's been occurring all summer. This shows that companies are hesitant about buying equipment for the future. No doubt, the uncertainty surrounding the government shutdown and potential debt default caused them to cut back purchases. Since that threat could reemerge in December and January, expect orders to continue to be low. It doesn't help that expectations for the all-important holiday retail season is also low.
Shipments of durable goods orders placed earlier this year were up just .2%. Shipments are measured as part of the nation's economic growth. Weak October shipments translate directly into a lackluster Gross Domestic Product (GDP) report for the fourth quarter. (Source: Commerce Department, Advance Report on Durable Goods, November 27, 2013)
How It Affects You
The durable goods report is the most important leading economic indicator for economic growth. That's because businesses and consumers think twice before buying these big-ticket items. Since both shipments and orders are pretty slow, expect the growth rate for the economy to be between 1-2% for the rest of this year.
That's right, you read the headline correctly. Instead of inflation, we now have mild deflation thanks to a 2.9% drop in gas prices. Although deflation is worse for the economy than inflation, it's not a permanent threat. That's because gas prices normally decline in the fall, and rise in the spring. So, this effect is temporary.
Second, the core inflation rate (without these volatile gas and food prices) was a positive 1.7%. This is below the Federal Reserve target of 2%, but still healthy. (Source: Bureau of Labor Statistics, Consumer Price Index, November 20, 2013)
How could inflation be healthy? When people expect prices to go up, they will buy now to take advantage of today's lower prices. This higher demand creates more profit for companies, who then hire workers to create more products.
That's why deflation harms economic growth more than inflation. If people know that prices will be lower in the future, they will wait as long as possible before buying anything. This lack of demand makes companies lower prices more, which cuts back their earnings. Who suffers? The workers, who must must harder and don't get raises. Needless to say, the companies aren't hiring, either.
How It Affects You
The Labor Department's Consumer Price Index report will encourage the FOMC decide to keep Quantitative Easing for the near future. However, here's the problem: the Fed's ongoing easy money policy could be creating inflation in the stock and bond market.
Since wealth measures, like stocks, bonds and home equity, aren't included in the CPI measurement, it can make it seem like there's no inflation when there is. This asset bubble in the financial markets could be ready to burst.
In October, retail sales rose .4%, after being basically flat in September. Most of the growth was from sorting goods/hobbies (+1.6%), automobiles (+1.4%), electronics/appliances (+1.4%), and clothing (+1.4%). For the most part, these are big-ticket items that are purchased with low-interest loans. Consumers are taking advantage of low interest rates while they last. Food services also rose 1%.
Otherwise, many categories of consumer goods are struggling. Building materials dropped 1.9%, while grocery stores were up just .1%, and drug stores were up .5%. Department stores, too, rose just .5% (although this is better than normal for department stores.) Online was only up .4%, which is unusually weak for this category.
The best news was a .6% drop in gas station sales. That's because gas prices have fallen this summer, and the Commerce Department doesn't adjust for inflation in its monthly retail report.
How It Affects You
It's good that the 15-day government shutdown didn't seem to affect sales as much as it could have. However, it still might. It's left a lingering sense of uncertainty among shoppers. Forecasts for Black Friday/holiday shopping seasons are just 3.9%, and usually come in lower than predicted. This alarms retailers because they receive 20% of their annual sales in the last six weeks of the year.
The good news for you is that this means deeper Black Friday sales and discounts. Unfortunately, this will probably lead to lower economic growth, since consumer spending drives 70% of national economic output. Lower retail sales were also predicted for Halloween.
November 22 is the 50th anniversary of the assassination of President John F. Kennedy. Expect to read (and reread) about his charisma, Camelot, and conspiracies. You'll also hear again about the tragic deaths of his son, wife and brother. I hate to sound cynical, but a lot of people will make a lot of money from films, books and speeches on the topic of JFK's death.
But isn't it more important to know what the man did while he was alive? Most of us have heard of the Bay of Pigs, the Cuban Missile Crisis, and the race to the moon. JFK is known more for his foreign policy than anything else. After all, he was the American President who stood at the Berlin Gate and said, "Today, in the world of freedom, the proudest boast is 'Ich bin ein Berliner'." The crowd went wild! West Germans felt his support for their city that had just been divided by the Communists who held East Berlin.
On the domestic front, we've all heard Kennedy's famous Inaugural speech, "Ask not what your country can do for you. Ask what you can do for your country." This was so powerful because he was creating a vision to lead the country out of the 1960 recession. He had just won a very close Presidential race. The TV pundits said JFK won because he looked good on the screen and was more media-savvy than his opponent. However, Vice-President Richard Nixon said years later that he lost because of unemployment.
Kennedy's inaugural speech created confidence in his leadership and direction. He cleverly moved forward a year's worth of Federal spending to jumpstart the economy without a fight from Congress. He promised to keep spending until businesses were hiring again. He publicly stated that he didn't care about the debt, which is how he got "the country moving again."
Kennedy's death is tragic. However, it's even more so if we don't understand and learn from his successes. To find out more, see President John F. Kennedy's Economic Policies