Party Pooper

Every party has one (you know who you are).  It’s that guy who has way too much to drink, or that girl who is so easy she makes pressing “The Easy Button” look hard (Campus PD also falls in the “party pooper” category).  What’s wrong with wanting to have some fun?  It is the middle of summer after all.  Why not live a little?  

One reason: money.  It’s always about the Benjamins and apparently they aren’t free (nor do they grow on trees).  Not even banks are giving them out anymore.   Does this mean we will be stuck to our couches (literally) for the rest of the summer, forced to watch reruns of NCIS and The Office?  

Hopefully not.  According to data on income and spending released yesterday, there may just be beach weeks for everyone this summer (even you, if you haven’t left already).  In June, the amount of spending money we had after taxes and after adjusting for price increases (“real personal disposable income”) increased by 0.3% over May.  This is the largest monthly gain so far this year, due largely to the summer break gas prices also appear to have taken.  And our recent spending restraint gives us some wiggle room to take that beach week if we so choose:  “real” spending (after adjusting for prices) was flat in June, and May and April saw 0.1% declines.  Given the hiatus in gas prices that has given us more in our wallets may end as quickly as the summer sun, we might want to get on that plane/train/automobile before it leaves the station.

 

As if we needed more motivation to take that last minute summer trip, economic data released last week shows consumer confidence is up slightly in July (to 59.5 from 58.5 in June – anything above “50” is positive, although “80” is the threshold for strong optimism), thanks again to the summer vacation taken by gas prices and people seeing the money available for summer spending on the rise (jobs are another story).  In other words, what are we waiting for?  Even if you’ve already taken that summer vacation, go ahead and take that sick day and head to the beach!

While you’re at the beach, getting your suntan on, we can also be productive, responsible citizens.  Data released Monday shows the economy needs our help, even while we are away from our desks.   A monthly measure of how the manufacturing sector is doing (“ISM Manufacturing Index”) came in at a 2 year low in July (at 50.9 the sector is barely growing), well below expectations and the lowest since the economic recovery began.  New orders and backlog orders actually decreased in July over June, not a good sign for the economy for future months.  Perhaps we can make sandcastles, and sell them to unknowing foreign tourists, would that help?  Maybe.  We could also set up more beach vendors to sell US made beach stuff (or not even beach stuff, like cigars or “I Love USA” goodies).  If other countries can do this on their beaches, why can’t we?  Our wallets will thank us later, just in time for next year’s beach week!  No party poopers left behind.

(Bureau of Economic Analysis, The Conference Board, Institute for Supply Management)

Wedding Crashers

It was big news in all the major headlines this week:  Justin Bieber and Selena Gomez crashed someone’s wedding over the weekend.  He heard them karaoke-ing one of his songs as he drove by and stopped the car.  Who does that?  What a fairytale wedding surprise (especially for the groom, surely).  Why doesn’t stuff like this ever happen to us?  The national promotion this couple got was incredible.  They have set themselves up for a big future – we might just see them again soon on Dancing With The Stars!

The promotion of stuff – advertising – is a huge industry.  And the companies behind the advertising wouldn’t keep doing it if it didn’t work.  As we know, celebrities can have a big influence on us and our spending patterns.  50 Cent tells us to try Vitamin Water (“try it!”), we do.  Kim K implies sketchers are what allow her workouts to be so productive, so we buy them.  Oprah opens her mouth and we do whatever she asks of us.  Stephen Colbert even has a sizable influence on Wikipedia (Bell!).  The Colbert “bump” should not be taken lightly.

The National Association of Realtors (NAR) should take a cue.  An industry that could surely use the benefit of a celebrity blessing has yet to go for the gold.  Data released today shows the number of existing home sales in June continued to fall – by 0.8% over May and by 8.8% over last June.  Overall, existing home sales have been on a downslide in 2011 (not good).  Further, home starts (the number of new homes being built) have been stuck at an annual rate of around 600,000 since November 2008, compared to an average annual rate of over 1,700,000 during 2000-2007.  In fact, since data was first collected in 1959, the average annual rate of home starts was over 1,000,000 until 2008.  So although data released yesterday shows June home starts increased to 629,000, it is still well below the historical average and it will take a few months to see whether this is a one time increase or the start of an upward trend.   

The number of home starts is important because of the value building stuff creates throughout all sectors of the economy: a “multiplier effect” spending boost from the wages and salaries of everyone involved in the process.  Certainly the real estate market was overheated in the mid-2000’s and home values were unsustainably high.  Still, with the lack of a rebound in home sales over the last 2 years it is clear the real estate market has a long road ahead.  For many of us, our wealth is dependent on the value of our homes, and our jobs are dependent on construction so this is important.  Perhaps multiple celebrities should be involved.

To this end, the NAR should take action.  If Jennifer Lopez can sing private weddings, certainly appearing at a house closing ceremony isn’t outside of the realm of possibility.  The NAR should consider offering such a prize as part of a contest for all homebuyers.   They could even make a reality show around it (hey, we can’t get enough of that type of stuff).  It shouldn’t be that hard; many celebrities donate their time to great causes, like the Make a Wish Foundation.  Without action, the real estate industry may turn into just an important a cause!

(National Association of Realtors, Census Bureau)

Margaritaville

Hello, Monday.  Hello, office.  There may be somewhere else you’d rather be right about now than sitting at your computer reading this blog (no offense taken).  Maybe it is on whatever planet Jimmy Buffet is actually on (drinking margaritas), or just at the pool (doesn’t have to be a fancy pool, just one with a view of the Caribbean ocean and a swim-up bar) drinking margaritas.  Maybe it’s traveling around the world (hello, Italian villa) or even simpler than that, you wish you were at the movies checking out the new Harry Potter film (the last one!).

What if we just quit our jobs, and had the freedom to do whatever we pleased whenever we pleased.  This sounds like a reasonable goal in life.  What would we need to have to be able to achieve this?  Obviously, money.  How much?  Depends on how you would want to celebrate this newfound freedom.  Not only would we need to consider how much the stuff we want costs now, but we would also need to plan for what the same stuff will cost over time (we don’t ever want to give up this freedom, do we?).   As prices for stuff go up, our saved money is essentially worth less.  As we spend to celebrate freedom, and as the value of our funds decreases over time, we certainly need to take this into account.  What we don’t want is to wake up one day and realize we have to go back to work.   Goodbye, Margaritaville.

Price increases (“inflation”) are not to be swept under the rug or dreamt away.  Data released Friday shows inflation for the stuff we buy every day is back to 2009 levels (after being quite low in 2010).  There are several measures of inflation we should stay aware of in our financial planning.  The most immediately relevant measure, the consumer price index (CPI) registers price changes on the stuff we buy (consumer goods).  In June prices (“core CPI” excluding food and energy) went up by 0.3% over May, and by 1.6% percent over last year.  The Government likes inflation in the 2% range, so an annual rate of 1.6% is good.  But this annual rate has been slowly creeping up since March, and likely we will need to adjust our freedom spending to account for annual consumer inflation in the 2-3% range.

Another measure of inflation relates to the prices the companies who produce the stuff we buy pay to make the stuff.  This measure can be seen as a foreshadowing of prices consumers will face in the coming months – if producers are paying more to make the goods we buy, very likely those price increases will be passed along to us.  Data released Thursday shows the prices producers pay (“Producer Price Index excluding food and energy” or “Core PPI”) have been increasing by an average 0.3% each month this year.  At this rate producers will have prices go up by over 3% in 2011. 

The reality of inflation means we would need more money over time just to maintain our current level of spending, let alone additional freedom spending.  A regular stream of income to replenish our deteriorating freedom funds without having to do any work be very helpful.   Sure no problem, see you in Margaritaville.

 (Bureau of Labor Statistics)

Some Things are Certain

Like having to wait (in line, in traffic) when you have the least amount of time to do so.  One thing that is said to be certain for everyone, regardless of age, race, gender, and income bracket: Taxes.  Few people can say they like taxes with complete sincerity.  It’s hard to say goodbye to 25-33% of your hard earned salary before you ever really had it.  And everyone wants a piece: we pay Federal, State, and Local taxes.  We get taxed upfront in our salaries and taxed on the backend through sales taxes and property taxes.   There’s a tax for everything.  Try booking an airline ticket and see how taxes impact the final price.  Or how much your bonus check would have been if it weren’t for our friend, Tax.  Imagine if you won the jackpot lottery, how much you would lose to the Tax?

Taxes follow us wherever we go – you can run but you can’t hide.  Just as we have to individually pay taxes on our earnings, so do corporations on their earnings (profits).  As you could imagine, just as we strive to pay the minimum amount of taxes we required of us, so do companies.  When a company is so big it’s global this becomes a bit easier.  Because of differences in countries’ tax policies, other countries have cheaper tax requirements than the U.S.  Other countries may also have cheaper operating costs or cheaper access to required inputs, like energy.  These potential financial benefits could encourage global companies to shift production abroad, to foreign affiliates.  The potential tax benefits to shifting production abroad and claiming profits in a more “tax friendly” country can be quite significant.

How might this affect other aspects of our country's financial well-being?  Consider our trade deficit (below, on a monthly basis).  

 

Like our own bank statements, this is not a pretty picture.  Not even the “great recession” gave us a reprieve on having a trade deficit (the amount we export relative to the amount we import).  And while a good part of this deficit is due to oil, not all of it is.  Data released Tuesday indicates that in May our trade deficit was just over $50 billion, with the crude oil & petroleum products deficit at over $30 billion.  The non-petroleum goods deficit was over $33 billion, and services had a trade surplus of almost $15 billion.  In May exports decreased by $1 billion over April while imports gained by $5.6 billion, not great, and prices aren’t helping: data released yesterday shows that thanks largely to oil, import prices are increasing at their fastest rate since 2008 (up by 13.6% in the last year).

So what about U.S. companies shifting production abroad?  When companies source production abroad, and then ship the items back to the U.S. for final consumption by us, it gets counted in our balance of trade (the U.S. checkbook for export sales and import purchases) as an import.  This does not have to be a negative thing – to stay competitive companies are going global.  Having everything based in the U.S. may be prohibitively expensive if the company wants to grow profits and stay competitive.  However, the more negative our trade balance is, the more it drags down our country’s economic growth.  Technically, imports are money out the door to another country.  At least with taxes we receive some public goods, like education, social security, and a national defense.

The actual effect of globalization and offshore tax incentives on our trade deficit is hard to measure.  But the affect is certain.  Looking at the non-petroleum goods trade deficit, we see a stand-out in consumer goods (the stuff we buy).  In May we exported $14 billion in consumer goods and imported $43 billion.  We imported over $2 billion more than we exported in TV’s/VCR’s, toys and games, and pharmaceutical preparations (medication).  We sure do like our iPads and Nintendo Wii’s.  So while some things are certain (there’s no such thing as a free lunch), perhaps “certain” is up to interpretation. 

    

(Bureau of Economic Analysis, Census Bureau, Bureau of Labor Statistics)

When Life Gives You Lemons...

We know, make lemonade. How tired do we get of hearing that when we’re in (excuse the pun) a pickle. The idea of turning something unfortunate into something great is reminiscent of attempts to turn lead into gold (alchemy) or squeeze water from a rock. Sometimes the sugar we need is not in an obvious spot, though that’s probably part of the point. We have to be creative, think out of the box, like a puzzle or riddle. The sugar could be somewhere completely unexpected.

Take alchemy. Yes, they were unsuccessful at making gold.  But their work founded the entire modern science of chemistry (that’s pretty sweet in a sugar-y way).  Failure in the immediate objective was dwarfed by the unintended consequence of their research.  Sure, this benefit was not obvious (or likely fulfilling) at first but upon retrospect chemistry is kind of a big deal.  It helped bring us into the modern age.  Think where we would be if we didn’t understand the composition of compounds that go into the goods we use and consume on a daily basis!  What kind of world would we live in if there were no such thing as plastic (or Oreos, Doritos, etc.).

It is an ambitious task to find the sweet spot in seemingly sour things, but there is always some opportunity or lesson we can take with us and apply to something to make it better.  With the recent spate of economic indicators indicating a “soft patch” in the U.S. economy (and our wallets), we already needed to put our thinking caps on.  Now with yesterday’s employment numbers, we will need to put our alchemist hats on.  After adding just 25,000 jobs in May, the U.S. economy added a paltry 18,000 jobs in June (and knowing the data source, this 18,000 could easily be revised down to zero) with the private sector (non-government) adding just 57,000 jobs.  Revisions to the May and April jobs numbers took away 44,000 of the initially reported gains. 

For those of you looking for work, these numbers show some basic trends: construction = bad, government = bad, education = bad, finance = bad, everything else = not as bad.  (Job seekers: There are other jobs numbers you could look at that break it down further by region.)  It’s no secret that jobs have not come back as quickly as after other recessions.  We don’t need statisticians to tell us that even 2 years after the official recession jobs are hard to come by, with little to choose from (like the produce section at the grocery store on a Sunday afternoon).  Job vacancies seem to be in one of two buckets: low skill, low pay or too-high-skilled-for-you for good pay.  You finally (after searching hundreds of job postings and poorly designed job sites) find a job that would use your brain, and previous experience, and you meet the 15 posted requirements.  Only to find out that so did the other 5,000 people who applied.  It would appear these were just the de facto minimum requirements.  To actually get an interview you have to do much better (like speak 8 languages, develop a cure for cancer, unilaterally save the whales, or – more likely, know someone who works there already). 

The fact is the U.S. economy is not adding enough jobs to keep up with the number of workers entering the labor force (pool of eligible workers); indeed the numbers now reveal a trend of a decreasing labor force participation rate (not good).  Almost half of those counted as unemployed have been unemployed for over 27 weeks (that is a lot).  The longer someone is unemployed or too discouraged to be included in the labor force the less desirable they may become to employers.  (And we won’t get into the drain having no job imposes on entitlement programs paid for by us.)  This does not have to be a lost cause, we can and must take the failure of our economy to create jobs and make it into something better (find the sugar).  One option is to address the observation that our labor force is having a hard time matching the skills needed by those companies now hiring.  If companies are global, why should we assume their labor forces are not?  For the bucket of high skill, high pay jobs we are competing with people around the world; it’s a different ball game.  With our alchemist hats on, we need to create the new elixir of our labor force, find our next comparative advantage.  The opportunity, the sugar, is out there (we have a lot to offer!), and the potential is too sweet to waste.

(Bureau of Labor Statistics)