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Kimberly Amadeo

US Economy


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March .2% Price Increase Hides Surprising Weaknesses

Tuesday April 15, 2014

$20 bill with bandaid

Now that the worst of the winter storms have passed, energy prices fell .1%, thus keeping the lid on inflation. In March, fuel oil costs were 2.9% lower, after rising 4.1% in February. This offset a 7.5% increase in natural gas prices, which drove electricity costs up 1.1%. Gas prices fell  a welcome 1.7%, as they did in February.

The prices of most other things rose moderately: Grocery prices were up .5%, while restaurant menu items rose .3%.  Used vehicles prices rose .4%, while new cars cost the same. Average service prices (including health care) rose .3%, as did the cost of shelter. However, the cost of medical equipment fell .3%.

On balance, inflation was .2%, according to the latest Consumer Price Index report. This is better than February's .1% increase, especially since it rose despite lower fuel costs.

The Federal Reserve looks at the core inflation rate because it take out monthly changes in gas and food prices. The Fed is more interested in price comparisons to last year which further removes seasonal variability. This critical rate remained at 1.7%, well below the Fed's 2% target. (Source: Bureau of Labor Statistics, Consumer Price Index, April 15, 2014)

How It Affects You

Once again, there is no threat of inflation. That means demand is still too sluggish to drive up prices. That's good for you, but economists would be happier with a little more inflation. That's because expectations drive demand in this way -- once people realize prices are going up in the future, they are more likely to buy things now to avoid paying the higher costs. This increases demand now, which drives business growth and ultimately jobs.

Anyway, that's how it's supposed to work in theory. In reality, businesses haven't been hiring full-time workers like they did in previous recoveries. As a result, there are far too many people working part-time that would prefer full-time, too many temporary workers, and too many who have been unemployed for too long.


Why March 1.1% Retail Sales Growth Is Good, Not Great

Tuesday April 15, 2014


Investors were relieved when retail sales rose a healthy 1.1% in March. Sales only rose a paltry .7% in February and fell .6% in January, thanks to brutal winter storms throughout much of the country. The improvement in March sales signals that shoppers are returning to stores as the weather improves.

Sales were boosted by a 3.1% increase in automobile and parts receipts. Growth in all other sectors a still-positive .7%.  The biggest gainers were : general merchandise (1.9%), building materials (1.8%), and online (1.7%). These offset big losses in electronics (-1.6%), gas stations (-1.3%) and general merchandise (-1.3%). (Source: U.S. Census Department, U.S. Retail Sales, April 14, 2014)

How It Affects You

Like everything else in the economic picture, retail sales is good not great. Yes, March was upbeat -- but it wasn't the huge rebound you'd expect once storms let up. Furthermore, much of it was auto sales, which are dependent on low interest-rate loans.

A true boost in consumer spending would also show up in sales dependent on credit cards and cash, as well. In other words, most families' incomes haven't rebounded enough to let them feel they can buy whatever they want. That will continue to put downward pressure on measures of economic growth, such as GDP.


3 Ways Ukraine's Crisis Affects You

Monday April 14, 2014

ukraine soldier

Russia extended its grip over Ukraine this weekend, as camouflaged troops and local rebels took over city halls and police stations throughout the east. That area is home ethnic Russians who don't want to be part of the European Union. However, those Russians were moved there by Joseph Stalin 50 years ago to strengthen the Soviet Republic's hold on the area. (Source: BBC, Ukraine Crisis: What Is Happening Where?, April 14, 2014)

President Vladimir Putin denies his involvement. However, many small countries bordering Russia are now in fear of annexation. The EU is unlikely to defend them, since it depends on Russia for half of its gas. Many European businesses have profitable operations in Russia. Others sympathize with Putin, who is defending Russia's borders from encroachment by NATO.

The U.S. has already frozen assets and blocked visa for everyone who has "impeded democracy, contributed to violence or engaged in corruption in Ukraine." In addition, the U.S. Department of Energy is considering whether to lift bans on exports of natural gas to Europe. The U.S. will allow exports if Putin shuts off Russia's supplies to Europe and Ukraine.  Congress put together $1 billion in loan guarantees, further sanctions, and support for loans from the International Monetary Fund.(Source: CNN)

This follows Russia's annexation of the Crimean peninsula in March, which protects Russia's port access to the Black Sea. In addition, Crimea contains natural gas reserves, which Ukraine planned to develop in two years in a partnership with U.S. companies. If Ukraine did this, Russia lost one of its largest customers. However, annexation worries 260,000 Muslim Tatars in Crimea, who were subjected to ethnic cleansing during the Soviets rule. They were forced to move to Central Asia, where half of them died. Crimean Tatars peacefully supported Ukraine's Orange Revolution. ( Source: WSJ, Crimea's Tatars Try to Keep Their Resistance Peaceful, March 11, 2013; Fox Business News, Interview with former Georgia President Saakashvili, March 4, 2014)

Putin responded to the February 23 overthrow of Viktor Yanukovych, who was an ally. The pro-West faction of Ukraine's Parliament took over the government, setting up new elections for May 25, and installing Oleksandr Turchynov as the country's temporary leader.

The crisis occurred because Yanukovych mismanaged the budget, forcing Ukraine to ask for financial help. First, it appealed to the EU, then Russia. The political unrest occurred at this point, because those who want to be closer to the EU objected when that solution was abandoned. Russia's military strike support Yanukovych's return to Kiev and closer ties to Russia.

President Putin rejected a U.S. proposal to join a tri-partitie discussion between Russia, Ukraine and the EU. If Putin doesn't remove troops, Obama wants to impose the same economic sanctions that weakened Iran. Germany is not too keen on sanctions, since Europe imports much of its natural gas and oil from Russia. Secretary Kerry also mentioned ousting Russia from the Group of Eight.

Russia is one of the emerging markets that suffered a currency meltdown earlier this year. Forex traders abandoned these markets when the Federal Reserve began tapering its Quantitative Easing program, reducing credit around the world.

Russia waged wars in the past in Chechnya in the early 2000s. Putin annexed Ossetia in Georgia in 2008, and the Western world didn't really intervene. He also successfully launched a cyber-attack on Estonia. However, Ukraine is larger and borders the EU directly. (CNN, Interview with Chairman of House Intelligence Committee Mike Rogers (R-Mich.)

3 Ways It Affects You

  1. Gas prices rise -- Further volatility will drive up gas prices over the next few weeks.  Commodities traders are using this uncertainty as an excuse to boost oil prices, which they do every year at this time.
  2. Stock prices drop --The ongoing crisis will keep the selling pressure on Wall Street.  The stock market is already struggling with a 10% market correction.
  3. Inflation remains mild -- Investors will stick close to safe-haven assets like the U.S. dollar, Treasuries and gold.  The 10-year Treasury note yield will hover around 2.6%. That keeps interest rates low, and the dollar stable. Surprisingly, the euro is also becoming a safe-haven investment. As the dollar strengthens, it makes the prices of many imports lower. This may slow economic growth for this quarter, as a stronger dollar makes it more expensive for U.S. exporters.


Why Is April 15 Tax Day?

Sunday April 13, 2014

income taxes

A reader asked why April 15 was chosen as tax day. Originally, back  in 1913, the deadline was March 1. That's because Congress passed the 16th Amendment, which created the income tax  on February 3, 1913. Congress gave everyone a year plus six weeks as the first deadline. The Revenue Act of 1918 moved the date forward to March 15. In 1955 some tax-code revisions pushed the date a month further, to April 15.

Why? The IRS said it "spread out the peak workload." It could also be because, as the middle class grew, the IRS had to issue more refunds. Pushing back the deadline allowed the Federal government to hold onto your money just a wee bit longer.  (Source: Jessica Sung, "Why Is April 15 Tax Day?" Fortune Magazine, April 15, 2002)

How It Affects You

Roughly half (48 million) of all 2013 tax filers didn't wait for the deadline. They filed early, and have received their refunds already. On average, they received more than $3,000, higher than the $2,800 average received last year.

Early filers are also more likely to file electronically (98% vs 80%) and use popular tax preparation software (45% vs 33%). They can even find discounts on tax prep software at sites such as AnyCodes.com.

Tax Freedom Day is April 18 this year. It is the first day in each year that Americans are not working just to pay taxes. It was five days later than last year. That's because Americans are paying more taxes thanks to an improving economy. Stronger growth generates higher incomes, and therefore higher income tax receipts.


Where Are We in the Business Cycle and Why Should You Care?

Friday April 11, 2014

better economy

Do you share this reader's concern?

I don't recognize the business cycle well and consequently, I did not get out of the stock market early before the contraction hit. I feared putting too much money into the stock market in the beginning of the expansion cycle. I wonder whether you have articles that give clear indication of where we are now in terms of the business cycle,  and suggested stock picks (or mutual funds/ETFs) for the current moment?

Although you can't time the market, you can improve your returns by knowing where we are in the business cycle, and adjusting your investments to take advantage of the phases.

The business cycle has four phases:

  1. Contraction - Economic growth slows, and stocks enter a bear market.
  2. Trough - The economy contracts, signaling a recession. Talking heads announce it will continue for years.
  3. Expansion - The economy grows, and stocks enter a bull market.
  4. Peak - Economic growth bubbles, and inflation usually sends prices up. The stock market is in a state of "irrational exuberance." Talking heads announce we are in a "new normal." Authors publish books entitled "Dow 30,000."

Right now, we are in the expansion phase, and have been since June 2009. That's a long time. Historically, they've lasted five years or so.

We don't appear to be at a peak because we don't have inflation. BUT, the stock market rose nearly 30% last year, which could be asset inflation. That's happened in the last recession with housing prices. So, it is possible to enter a contraction without experiencing the signs of a traditional peak.

To answer the second part of the question, I'm not qualified to suggest specific funds or stocks. You need to consult with a financial planner to do that. However, I will give generally-accepted guidelines for what tends to do better in each phase of the business cycle:

  1. Contraction - Switch to a higher proportion of cash and bonds.
  2. Trough - Slowly start to add stocks and commodities , whose prices fall when the economy contracts.
  3. Expansion - Keep switching from cash/bonds to stocks/commodities.
  4. Peak - Start selling stocks/commodities and increasing the proportion of cash.

As you can imagine, it's incredibly difficult to sell stocks when everyone else is bragging about how much they're making. That's why timing the market is impossible for most people. Instead, be conservative. Never have 100% of your investments be in either stocks, bonds, cash or commodities. Just gradually shift the proportion to stay in tune with the business cycle. Always work with a financial planner to make sure the allocation also matches your personal goals.


Secrets of the Federal Budget Revealed

Thursday April 10, 2014


Federal spending is so out-of-control that it seems a secret conspiracy must be behind it. However, the truth is even more frightening.

First, even though the Constitution grants Congress the sole right to spend the nation's money, two-thirds of the $3.9 trillion being spent in FY 2015 is not under their control. Nearly $2.5 trillion must be spent to fulfill previous Acts of Congress. These are the so-called "Entitlement" Programs, such as Social Security ($896 billion), Medicare ($526 billion),  and Medicaid ($336 billion). That means $2.5 trillion is just an estimate fulfill these mandates. Those who want to cut this spending don't tell you it would literally take another Act of Congress to do so.  As the American population ages, this will only cost more. By ten years, it will be $3.6 trillion alone. For more, see Mandatory Budget.

Second, Congress really has no control over whether to pay the $252 billion interest on the $17 trillion debt, although it tried in 2011 and 2013.  However, if the U.S. did default on its debt, it would increase interest rates (at the least) or create economic collapse (at the very worst).

Third, that means there's only $1.186 trillion to run the Federal government. This so-called Discretionary budget is the only spending the current Congress has control over. And it's full of hidden surprises.

Nearly half ($495.6 billion) is allocated just to maintain the Department of Defense. That's six times larger than the next biggest department, Health and Human Services ($73.7 billion).

But that's not all. Funds to run any wars come from a completely different budget for Overseas Contingency Operations. Even as the War in Afghanistan is ending, there's an additional $85.4 billion in the budget. Again, more than any other agency.

But wait, there's more. Many other departments also contribute to our nation's security: Homeland Security ($38.2 billion), the State Department ($42.6 billion) and of course the Veterans Administration ($65.3 billion).

Hidden away in other departments are more security-related functions: $17.6 billion for the FBI and Cybersecurity in the Department of Justice, and $11.7 billion for the National Nuclear Security Administration in the Department of Energy. When it's all added up, military spending is a whopping $756.4 billion, 10x more than any other department and almost as much as Social Security. For more, see Military Budget.

How It Affects You

You're working until April 21 this year to pay off these expenses. Is this how you want your money spent? Can you think of anything else you've worked so hard for and yet know so little about?


Why Credit Card Debt Fell 3.4% in February

Wednesday April 9, 2014

cut credit cards

Credit card debt fell 3.4% in February, after dropping .3% in January. Americans now owe $854.2 billion on their credit cards, down from the $856.6 billion owed at the end of last year, and way down than the $917.2 billion owed in 2009.

A recent survey by Bankrate.com explains why. Nearly 1/3 of Americans don't even have enough cash in their emergency accounts to pay off their credit card debt. That's the highest percent since 2011. Slightly more than half do have enough in savings to pay off this expensive debt, while the rest (17%) have neither credit card debt nor savings.

Instead of spending, families are taking advantage of record-low interest rates to go back to school, and finance cars.This so-called non-revolving debt rose a healthy 10.1% after increasing by 7.5% in January. We now owe $2.275 trillion, a new record.

Total consumer debt, which is the sum of both categories, is now also a record-setting $3.129 trillion. This beats the previous record of $2.65 trillion set in 2008. (Source: Federal Reserve, G.19 Release, April 9, 2014

How It Affects You

Falling credit card debt is one more reason why this recovery isn't as strong as investors on Wall Street think. Without a financial cushion, Americans aren't going to shop enough to drive the demand needed to boost economic growth much more than the anemic 1-2% range its in. Without more robust growth, businesses won't put their cash to work by hiring new full-time employees at a rate to get America spending again.


Why March Jobs Report Was Surprisingly Strong

Friday April 4, 2014

unemployed worker

A robust 192,000 jobs were created in March, well beyond the 150,000 minimum needed for healthy economic growth. This was welcome news, since economic reports have been lackluster throughout the month. This means businesses are bouncing back from the onslaught of fierce winter storms.

The Bureau of Labor Statistics revised many numbers up. Last month, it reported that information technology lost 16,000 jobs in February. Now it say that only 8,000 jobs were lost, and that the sector added 2,000 jobs in March. This is normal for the sector, but it's still a concern that so many jobs were lost in February. This sector is critical to American competitiveness. For more, see Silicon Valley

The sectors that did fairly well in February continued to add jobs in March: hotels and restaurants (29,000 jobs), health care (27,000 jobs), retail (21,300 jobs),  and construction (19,000 jobs).

Manufacturing lost 1,000 jobs, after gaining 19,000 jobs in February. Most of that is explained by a shift in auto manufacturing. The sector added exactly zero jobs in March after adding 11,600 jobs in  February.

As expected, the government added exactly zero jobs. It had added  9,000 jobs in February thanks to the end of sequestration.   (Source: BLS, Employment Situation Summary, April 4 2014)

How It Affects You

Investors are continuing to celebrate, driving both the Dow and the S&P 500 to new record highs. However, the unemployment rate remained at 6.7%. This is still higher than the natural 4% unemployment rate.

If so many jobs were added, why didn't the unemployment rate change? That's because they are taken from two different surveys, which don't always tie out. To find out more, see How the Unemployment Rate Is Measured.


Is the Stock Market Rigged?

Tuesday April 1, 2014

wall street in flames

On May 6, 2010, the stock market plummeted 10% within seconds. Most experts believe this "flash crash" was created by a computer glitch, although the exact cause was never found. However, the true cause was high frequency trading programs. These are run by computer algorithms that control 75-85% of stock market trades. When a world event, or a computer glitch, tells these programs that something unusual is happening, they automatically sell (or buy) according to their code. In any event, high frequency trading programs make any stock movement more intense, thus adding risk. (Source: WSJ, A Glimpse Inside the "Flash Crash", June 10, 2012)

This was pointed out by Michael Lewis, author of the recently released book "Flash Boys." He said that the presence of these sophisticated high frequency trading programs means that the individual investor actually cannot get ahead. The programs can take in massive amounts of data, and made split-second decisions and trades long before a human can. Companies who use them, like Goldman Sachs and JP Morgan, haven't lost on a trade in years. For the average investor, says Lewis, the stock market is rigged.

On CNBC today, Lewis defended his research to the CEO of BATS, the second largest exchange behind the NYSE. Like the NASDAQ, it's an all-electronic exchange, only larger. Billionaire investor Mark Cuban said the risk of a bigger flash crash is far worse than any "market rigged scalping."

How It Affects You

If Wall Street isn't rigged, it may as well be. There is no way an individual stock picker can collect more information or trade ahead of these computer trading programs. That's why so many asset classes are moving in tandem. These programs aren't regulated, either.

However, the situation is not hopeless. Although it's impossible to out-think these programs on a day-to-day basis, you can generally tell where the market is headed by following the business cycle. Keep a well-diversified portfolio, and adjust your asset allocation each quarter to make a decent return. Remember, it's not how much you make, but how little you lose.


3 Reasons Why We Shouldn't Bring Back the Draft and 1 Reason Why We Should

Friday March 28, 2014

LBJ thanking soldier

I recently wrote that bringing back the draft would cut government spending by spreading the burden throughout society, instead of on just those who see the need to do their patriotic duty to defend our country.

However, would it really work? A reader wrote in to give three good reasons why it wouldn't:

  1. People would object to a draft if it includes females.  That while the present vote for one is split 50/50 pro & con, the pro side goes to about 40-45% if females are included.  Then, girls would deliberately get pregnant in order to avoid getting drafted.  This will increase social welfare costs as they go on welfare or some form of public assistance because they are unmarried with kids and have little support from others.
  2. More females in the service means more costs for equipment, uniforms, restroom facilities, and other expenses unique to females. I, for one, am not the type who says females cannot get the job done - on the contrary, I am a former sports coach and know they can do it and do it well.  But I also know that most (not all) girls would not be highly motivated to go into the service.   Therefore, morale & productivity would be quite low.  With low productivity the cost for implementing a female draft would not be profitable in any way.
  3. If only males were drafted, they would miss out on college while girls would be getting their degrees and summer work experience in fields requiring diplomas.  Thus, they would have a tremendous advantage in getting those jobs as boys would be having to make up four lost years while in the service and four years experience girls would be getting in summer internships (can you imagine trying to make up for a total of 8 years!).  Not a good thought for someone who works that long, especially if he gets injured in some way while in the military.  The courts would not likely overrule an all male draft as it can say the government has exclusive authority in implementing policy over military needs.  I strongly suspect it would completely sidestep any legal arguments against an all male draft.

Thus, a draft may appear to be a short term solution to high government costs.  But in the long run there would be many costs that may not be foreseen at the moment.  Imagine the protests it would cause, the number of people arrested, the number of people jailed, social morale lowered, job losses for draftees, injuries while in the military for those not suited for that type of work, loss of educational opportunity, loss of work opportunity while one is in the service as others get their education and summer work experience,  and other considerations.  The draft was highly divisive back in the 1960s.  It will likely be even worse today with costs to society that most of us would rather not  pay.

As the reader eloquently points out, most Americans would rather not pay the cost of war...either personally or economically. Most Americans did not pay the cost of the War in Iraq personally. However, the families of the 4,488 U.S. troops who were killed and the 32,226 who were wounded bear the cost every day.

The financial cost was not born at the time, because there was no tax. The $1.228 trillion spent was simply added to the debt. If the total cost to the economy is added in, it's more like $3 trillion in lost opportunities and slower economic growth. For more, see The True Cost of War.

That's why reinstating the draft would cut government spending. Most Americans would rather not pay those costs. As a result, we would seriously consider whether we wanted to start a war if we had skin in the game. Fewer wars means lower defense spending, which is now the largest single budget item after Social Security. Read More...

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