News What is wrong with the US economy?

[mheslep]

...The Bush adiminstration is on a binge of deficient spending with the current federal expenditures about $400 billion above revenue - not including nearly $200 billion in supplemental spending for military action overseas...

Why do you attribute that to the Bush administration and not Rep Pelosi, Sen Reid, etc, especially in light of several Presidential spending vetos?

 

[Astronuc]

Why do you attribute that to the Bush administration and not Rep Pelosi, Sen Reid, etc, especially in light of several Presidential spending vetos?

The Budget of the United States Government is a federal document that the President submits to the U.S. Congress. The President's budget submission outlines funding recommendations for the next fiscal year, . . . .

http://en.wikipedia.org/wiki/United_States_federal_budget

http://en.wikipedia.org/wiki/United_States_budget_process

 

[quadraphonics]

It's great that gasoline demand is down, which means price of gasoline and oil should decrease. But the price of oil doesn't seem to be following the traditional supply/demand theory, mainly because speculators are bidding up the price on the commodities exchanges.

It's only US demand that's down: China and India are still putting cars onto the road at a staggering pace. Oil being a fungible commodity, then, a dip in US demand is not guaranteed to translate into a dip in price. But prices are surely lower than they would have been.

Maybe we will see an influx of foreigners spending their vacation (and money) in the US.

That's been happening for over a year, as it is driven by the low dollar. And, yeah, they tend to not only vacation here, but go on shopping sprees. It's as if the entire country were having a half-off sale for Europeans. And then there's the reports of Canadian car dealerships going out of business because everyone is crossing the border to buy cars at a steep discount.

 

[quadraphonics]

Obviously, although there have been many stories of big layoffs, there must have been a lot of hiring that didn't make the news. That's why I am reluctant to pay attention to all of the gloomy anecdotes, while the averages continue to paint a less gloomy picture.

Would that be these averages?

http://www.nytimes.com/2008/06/07/business/07jobs.html?hp

"The unemployment rate surged to 5.5 percent in May from 5 percent, the largest monthly spike in more than two decades, as the economy shed 49,000 jobs for a fifth month of decline, the Labor Department reported on Friday.

[...]

“It’s unambiguously ugly,” said Robert Barbera, chief economist at the research and trading firm ITG. “The average American already knows that gas prices are up a ton and its really hard to find a job. Sally and Sam on Main Street are already well aware of this, and that’s why sentiment surveys are lower than they were in each of the last two recessions.”"

 

[loseyourname]

I lost my own job two months ago and had almost no luck at all finding something else until last week. Something like 30,000 people in the mortgage industry were laid off in the last year here in Orange County and it's flooded the labor market with people seeking middle-class work, which has made it damn near impossible to get a decent job if you don't already have one or you don't specialize in an obscure field most people are not qualified to work in. I was finally able to get two teaching jobs, one as a math teacher, and one as a GRE teacher, that both pay high hourly rates, but I was only able to get those because they require 95th percentile or higher test scores, which eliminates most of the competition. If you're not a great test taker and you don't have arcane skills, I don't what you'd be doing right now as someone unemployed. Real estate was probably one of the biggest sectors of employment in both Orange and Los Angeles Counties and it's just contracted like crazy.

Even if you were a laborer, there were always good construction and residential maintenance jobs available, and those are disappearing now, too. The good news is that the weakening dollar is creating a huge boost in the export industry, and with the western hemisphere's busiest port right here in Long Beach, that industry should absorb some of the people lost from others, but it'll take a while for all of these people to learn new skills. There's a huge demand for rentals now, too, as everyone loses their homes, and you figure that sector of the real estate industry will start picking up at some point, but right now, the financing just isn't there.

 

[turbo]

The little towns of Millinocket and East Millinocket Maine are getting nailed again. A weak paper market forced the closure of their paper mills years back and the loss of 1100 jobs. Brascan bought the two mills in 2003 and have been running at far less than capacity with 208 workers at the Millinocket mill and 350 workers at the sister mill. The mills are 100% dependent on oil to produce steam with which to make paper and the price of oil has more than doubled in the past year. The East Millinocket mill will have to undergo curtailment (probably in both production and work force) and the Millinocket mill will be shut down completely. The #11 paper machine at that mill is fully booked, and should be running 24/7 but the company cannot afford the huge losses due the price of oil, so it appears the mill will be shut down entirely.

http://bangornews.com/news/t/news.aspx?articleid=164991&zoneid=500

We have already lost all but one of the state's largest sawmills to closure in the past year or so, and are poised to lose even more forest-products jobs as the economy contracts.

 

[turbo]

My buddy somehow got lucky and landed a job on the highway crew of a town some distance from his home. He had been a real-estate agent, but sales of existing homes has collapsed - lots of for-sale signs, and no takers. He has been looking for work for over 6 months and with so many the wood-products people out of work (many with lots of heavy-equipment experience) he had a ton of competition. Travel costs are going to beat him up some, but at least he'll have a weekly check and some health insurance.

 

[Jimmy Snyder]

The unemployment rate surged to 5.5 percent in May from 5 percent, the largest monthly spike in more than two decades, as the economy shed 49,000 jobs for a fifth month of decline, the Labor Department reported on Friday.

To be clear, that is not a quadraphonics quote, he was quoting the New York Times.

While the delta is unusual, 5.5% unemployment is not particularly high from a historical perspective.

 

[mheslep]

http://en.wikipedia.org/wiki/United_States_federal_budget

http://en.wikipedia.org/wiki/United_States_budget_process

The President's budget has exactly zero legal ability to pull money from the Treasure because of this:
Article 1, Section 1:

All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.

 

[mheslep]

I lost my own job two months ago and had almost no luck at all finding something else until last week. Something like 30,000 people in the mortgage industry were laid off in the last year here in Orange County and it's flooded the labor market with people seeking middle-class work, which has made it damn near impossible to get a decent job if you don't already have one or you don't specialize in an obscure field most people are not qualified to work in. I was finally able to get two teaching jobs, one as a math teacher, and one as a GRE teacher, that both pay high hourly rates, but I was only able to get those because they require 95th percentile or higher test scores, which eliminates most of the competition. If you're not a great test taker and you don't have arcane skills, I don't what you'd be doing right now as someone unemployed. Real estate was probably one of the biggest sectors of employment in both Orange and Los Angeles Counties and it's just contracted like crazy.

Even if you were a laborer, there were always good construction and residential maintenance jobs available, and those are disappearing now, too. The good news is that the weakening dollar is creating a huge boost in the export industry, and with the western hemisphere's busiest port right here in Long Beach, that industry should absorb some of the people lost from others, but it'll take a while for all of these people to learn new skills. There's a huge demand for rentals now, too, as everyone loses their homes, and you figure that sector of the real estate industry will start picking up at some point, but right now, the financing just isn't there.

These periods are often ideal times to kickstart that back burner good idea and start a small business. Office space going for zip, Ebay supplies the rest for zip, and you can get some talented help that might forgo the usual big compensation.

 

[DrClapeyron]

The President's budget has exactly zero legal ability to pull money from the Treasure because of this:
Article 1, Section 1:

I am not certain about your quote, it seems misleading. The Executive Branch is the Administer of these receipts and the President certainly plays a role in this. Social Security Budget is written and administered by the Executive Branch. State, Environmental, Defense and other spending goes through the various agencies of the Executive Branch which then make up the cabinet.

Hopefully all these people do not just sit on their butts all day.

 

[quadraphonics]

While the delta is unusual, 5.5% unemployment is not particularly high from a historical perspective.

It's certainly not a Great Depression (or 70's/early 80's) level of unemployment, no. I'd call 5.5% the high end of the "normal" range. I.e., if it gets much higher, it's going to start setting off alarm bells. So, given that we're now on the threshold of trouble territory, and that the uptick was so large, it's somewhat ominous. If the Fed stops having to dump money into the financial sector, then there might be grounds for optimism that unemployment will turn around, but as things stand now...

 

[Astronuc]

And oil, which was falling, reversed direction and is now over $139/bbl.

The Wall Street Journal reported American International Group is under inquiry as the Securities and Exchange Commission examines the blue-chip insurance giant's involvement in credit default swaps. Various banks are being scrutinized for shady book-keeping.


The jump in unemployment was expected to be 0.1% to 5.1% instead of 5.5%. If the experts had predicted 5.7% or 6%, then the market would have sighed relief instead.

Last month, the civil engineering (land development) company next door to us layed off 3 people unexpectedly. The demand for their work is down, as are the real estate prices. Just about every neighborhood in our area has at lease one house for sale, and many have been on the market for weeks.

We also note a large number of big cars and SUVs for sale, and dealers are apparently turning away shipments of new SUVs, trucks and vans.

 

[Astronuc]

Why do you attribute that to the Bush administration and not Rep Pelosi, Sen Reid, etc, especially in light of several Presidential spending vetos?

Certainly Reid and Pelosi bear their share of responsibility, as do Delay and Hastert.

The vetos were for political reasons, not because of fiscal responsibility.

The government either needs to raise taxes, or cut expenses. They could cut SS by 50%.

It would also help for the government to collect taxes for those who are evading taxes, but perhaps the current administration is not interested in cutting into its political base.

 

[mheslep]

I am not certain about your quote, it seems misleading.

In the US the power to appropriate money rests soly with the Congress.
www.usconstitution.net/const.html

The Executive Branch is the Administer of these receipts and the President certainly plays a role in this.

Yes the Exec. branch administers. It can not take a dime from the Treasury receipts without authorization from Congress. The recent big cuts by Congress of spending on high energy physics, despite ample funds proposed in the Exec. budget, is a clear example.

Social Security Budget is written

No, the law comes from the Congress with input/budget from the Exec.

and administered by the Executive Branch. State, Environmental, Defense and other spending goes through the various agencies of the Executive Branch which then make up the cabinet.

Yes Exec branch administers.

 

[russ_watters]

It's certainly not a Great Depression (or 70's/early 80's) level of unemployment, no. I'd call 5.5% the high end of the "normal" range. I.e., if it gets much higher, it's going to start setting off alarm bells. So, given that we're now on the threshold of trouble territory, and that the uptick was so large, it's somewhat ominous. If the Fed stops having to dump money into the financial sector, then there might be grounds for optimism that unemployment will turn around, but as things stand now...

Historically, I don't know why you would think 5.5% is the high end of the "normal" range. Could you explain that?

In any case, since unemployment is a lagging indicator (businesses wait until the economy starts improving before hiring people back), the unemployment rate is near certain to keep rising at least until the end of the year.

Regarding the 0.5% rise. Anyone have any comment on the magnitude of that rise and what it actually means? There is a hidden issue behind it-- well, not that hidden, except that some commentators are ignoring it and saying factually untrue things about what it means.

 

[Jimmy Snyder]

It's certainly not a Great Depression (or 70's/early 80's) level of unemployment, no. I'd call 5.5% the high end of the "normal" range. I.e., if it gets much higher, it's going to start setting off alarm bells. So, given that we're now on the threshold of trouble territory, and that the uptick was so large, it's somewhat ominous. If the Fed stops having to dump money into the financial sector, then there might be grounds for optimism that unemployment will turn around, but as things stand now...

I see many grounds for optimism. In fact, I propose the following bet. If the unemployment rate is at or above 5.3% next month, I lose and must drink a glass of Merlot, Chateau Pavie Macquin 2004 with my steak dinner. If it's below 5.3%, you lose and must drink a beer, Rolling Rock, 2008 with a hot dog, condiments of your choice.

 

[quadraphonics]

Historically, I don't know why you would think 5.5% is the high end of the "normal" range. Could you explain that.

Well, economists and policy-makers have many different opinions on what unemployment rate is desirable (look up NAIRU for example), but they tend to range between 1-5%, with most of the mainstream favoring something around 3-4%. So anything above 5% is in territory that nobody seriously thinks is a healthy level. More specifically, if you look at a plot of unemployment over the years, sustained unemployment of 5.5% or higher coincides very nicely with the various recessions:

http://www.miseryindex.us/URbyyear.asp

In any case, since unemployment is a lagging indicator (businesses wait until the economy starts improving before hiring people back), the unemployment rate is near certain to keep rising at least until the end of the year.

Indeed. It's interesting to consider how different indicators lead/lag the economy as a whole. For example, much of the current downturn has probably already been priced into the stock market, so unless some new problems arise, I expect to see stocks hold steady (or maybe even improve somewhat).

 

[quadraphonics]

I see many grounds for optimism. In fact, I propose the following bet. If the unemployment rate is at or above 5.3% next month, I lose and must drink a glass of Merlot, Chateau Pavie Macquin 2004 with my steak dinner. If it's below 5.3%, you lose and must drink a beer, Rolling Rock, 2008 with a hot dog, condiments of your choice.

I'd prefer to just hear your reasons for expecting unemployment to fall. Besides which the terms of the bet don't seem particularly equitable...

 

[russ_watters]

Well, economists and policy-makers have many different opinions on what unemployment rate is desirable (look up NAIRU for example), but they tend to range between 1-5%, with most of the mainstream favoring something around 3-4%. So anything above 5% is in territory that nobody seriously thinks is a healthy level. More specifically, if you look at a plot of unemployment over the years, sustained unemployment of 5.5% or higher coincides very nicely with the various recessions:

http://www.miseryindex.us/URbyyear.asp

Ok, that makes more sense. The word you used before was "normal". Clearly, 5.5% is quite within the "normal" range for the current economic condition. In fact, given the unemployment rate during the last several downturns, it would be quite "normal" for the unemployment rate to reach 6-7%. The last barely-a-recession was in 2000-2002, and unemploment peaked at 6%, so I'd expect the current almost-a-recession to include a peak near there.

 

[russ_watters]

I'd prefer to just hear your reasons for expecting unemployment to fall. Besides which the terms of the bet don't seem particularly equitable...

If unemployment falls next month, it will fall because the condition that caused the current blip up reverses. I alluded to it in an earlier post, but no one has actually commented on it: the unemployment rate jumped up this month almost entirely because of a huge increase in the amount of people in the workforce. The rise in both was much more than anticipated and may indicate a statistical blip. Unemployment went up last May as well (only slightly), despite adding 88,000 jobs. I suspect the reason is the same for both: May means a surge of new college graduates suddenly enter the workforce.

http://www.jobbankusa.com/News/Unemployment/unemployment_up_slightly.html

Personally, I think unemployment will probably be flat or tick up slightly for June.

 

[Jimmy Snyder]

I'd prefer to just hear your reasons for expecting unemployment to fall. Besides which the terms of the bet don't seem particularly equitable...

I'm not complaining, I can afford a square meal. Anyone who takes me up on this wager is talking poor. I don't want to drain their pocketbooks. As for my reasons, Russ gave it away.

 

[loseyourname]

These periods are often ideal times to kickstart that back burner good idea and start a small business. Office space going for zip, Ebay supplies the rest for zip, and you can get some talented help that might forgo the usual big compensation.

I thought about starting up a college admissions consulting service, but I'm already going back to grad school this fall and it would be a lot to do that and try to start up a business at the same time. I'd rather not sacrifice one for the other. It looks to me like lack of investor confidence is going to cause an artificially high drop across all sectors of the stock market, though, so I probably will start pouring what little money I have into solid companies that are dropping for no good reason just because everything else is. One of the advantages of being a student again is I can borrow money and pay no interest on it for a few years, so any return whatsoever that I can make is pure profit.

Plus, the combined pressure of people needing to sell cheap, the oversupply of market-price housing here, and the coming boom in the rental market is going to make these next two years a great time to buy rental properties. My girlfriend is pretty good at calling the housing markets, too. We need more assets to borrow against, though. Even with good income, no one is willing to lend much to people that already carry a debt burden from having advanced degrees right now. Most of it is hers, though, and it's looking like her father is going to assume some of, if not most of, her student loans. Plus, you figure the bank to bank and securities markets will become liquid again at some point and lenders will reach a happy medium between the lax practices they had that led to this and their current reticence right now to lend at all. The money is still there. Institutions are just less willing to let go of it right now because they fear not having the capital to survive a margin call and ending up like Bear Stearns.

 

[Astronuc]

June 9, 2008
Rural U.S. Takes Worst Hit as Gas Tops $4 Average
http://www.nytimes.com/2008/06/09/business/09gas.html
By CLIFFORD KRAUSS

TCHULA, Miss. — Gasoline prices reached a national average of $4 a gallon for the first time over the weekend, adding more strain to motorists across the country.

But the pain is not being felt uniformly. Across broad swaths of the South, Southwest and the upper Great Plains, the combination of low incomes, high gas prices and heavy dependence on pickup trucks and vans is putting an even tighter squeeze on family budgets.

Here in the Mississippi Delta, some farm workers are borrowing money from their bosses so they can fill their tanks and get to work. Some are switching jobs for shorter commutes.

People are giving up meat so they can buy fuel. Gasoline theft is rising. And drivers are running out of gas more often, leaving their cars by the side of the road until they can scrape together gas money.

The disparity between rural America and the rest of the country is a matter of simple home economics. Nationwide, Americans are now spending about 4 percent of their take-home income on gasoline. By contrast, in some counties in the Mississippi Delta, that figure has surpassed 13 percent.

4% is no big deal, in fact the cost of gasoline is less than 2% of my income. But 13%?!

 

[Gokul43201]

A historic look at the Dow Jones Industrial Average from the Great Depression:

Period (mm/yyyy)  Annualized Increase*   President**

06/1929 - 06/1933      -33%               Hoover
06/1933 - 06/1945       07%               Roosevelt
06/1945 - 06/1953       08%               Truman
06/1953 - 06/1961       11%               Eisenhower
06/1961 - 06/1963       02%               Kennedy
06/1963 - 06/1969       05%               Johnson
06/1969 - 06/1974       00%               Nixon
06/1974 - 06/1977       01%               Ford 
06/1977 - 06/1981      -01%               Carter           
06/1981 - 06/1989       11%               Reagan
06/1989 - 06/1993       11%               Bush Sr.
06/1993 - 06/2001       16%               Clinton
06/2001 - 06/2008       03%               Bush Jr.

* From 6-month moving averages
** Approximate Presidential term coinciding with selected period

All numbers generated from MSN Money.

Note: Mean post-depression annual increase = 6%

 

[Astronuc]

UPS slashes its profit outlook due to fuel, economy

It marks the second straight quarter that the company has warned it would not meet prior profit expectations. Its stock fell 4% in late trading.

The package-delivery giant cut its second-quarter profit forecast to a range of 83 cents to 88 cents a share. In late April, UPS had expected to earn between 97 cents and $1.04 a share. Since then, crude prices have surged from $110 to $136 a barrel.

Meanwhile the financial sector is shedding people.

SAN FRANCISCO (MarketWatch) -- Goldman Sachs is cutting 10% of its investment banking staff this year, the Financial Times newspaper reported on Monday.

NEW YORK (MarketWatch) -- Citigroup plans to lay off as much as 10% of the 65,000 workers in its investment-banking division, with the first round of dismissal notices to be issued as early as Monday, The Wall Street Journal reported.

Layoff notices are about to hit hundreds of investment bankers at Citigroup.

SAN FRANCISCO (MarketWatch) -- UAL Corp. announced Monday that it is laying off 950 United Airlines pilots, or about 14% of the company's total pilot workforce, to better align capacity to shrinking demand in the face of soaring fuel costs.

 

[Astronuc]

Bonfire of the Vanities Redux

Here's an interesting perspective about Wall Street and the financial markets -

“Nobody understands where the actual value is — and they don’t care anymore,” he exclaimed.

Of course, Mr. Wolfe’s 1980s Wall Street — of privileged WASPs (and Jewish Anglophiles), the sons of Harvard and Stanford and Princeton braying for money on the bond market — is pretty much gone now. It was replaced, in part, by the world of private equity and hedge funds, by hypernumerate quants and bankers who think proprietary trading is more important than serving clients.

And now that world is crumbling, too.

http://www.nytimes.com/2008/06/24/business/24sorkin.html

This portends of serious problems in the financial sector of the US and global economies.


Meanwhile two of the biggest producers of iron ore, BHP Billiton and Rio Tinto, just announced a doubling of the price of iron ore.

Japan steel firms agree to doubling of iron-ore price

HONG KONG (MarketWatch) -- Shares of Japanese steelmakers ended broadly lower Tuesday, playing off reports that Nippon Steel Corp. and others are poised to accept a doubling of iron-ore prices -- as demanded by Rio Tinto -- for the current fiscal year.

By agreeing to the increase, Nippon Steel (NISTY) is likely to experience an increase in its annual procurement costs for the key steelmaking ingredient of 100 billion yen ($925.7 million), the Nikkei newspaper reported, citing company sources. . . . .

The move comes after Baosteel Group Corp., China's largest steelmaker, agreed to an average 85% increase in the benchmark price for iron ore supplied by mining giants Rio Tinto (AU:RIO) and BHP Billiton (AU:BHP) this year, according to The Wall Street Journal. The increase will mean contract prices for iron ord range around $140 a metric ton.

So not only the cost of energy has gone way, but the cost of raw materials that go into many durable goods and infrastructure just jump significantly.

 

[Gokul43201]

Exports help Q1 growth beat last revised estimate:

WASHINGTON: The economy turned in a better — but still subpar — performance in the first three months of this year, mostly spurred by stronger sales of U.S. products overseas.

The 1 percent annualized increase in gross domestic product, announced by the Commerce Department on Thursday, marked a slight improvement from the government's previous estimate of 0.9 percent growth for the January-to-March quarter. And, it showed the economy logging stronger growth than the feeble 0.6 percent pace registered in the final three months of last year.

http://www.iht.com/articles/ap/2008/06/26/america/Economy.php

 

[turbo]

4% is no big deal, in fact the cost of gasoline is less than 2% of my income. But 13%?!

People in rural Maine are getting hit hard, because the population is thin and widely-spread and jobs often require long commutes. My wife has a high-skill manufacturing job, but with stagnant wages, soaring gas, and a commute that once was reasonable, 10% or more of her take-home pay now goes in the tank so she can get back and forth to work.

 

[Astronuc]

In our area, people are abandoning their SUV's and large vehicles in favor of smaller ones like the Honda Civic (conventional and hybrid) and Toyota Prius. We see a lot of For Sales signs on large vehicles, but nobody wants them.


Also there has a been an upswing in the theft of copper wiring and plumbing from homes in our area.