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Consumer Spending, Personal Income, Credit Card "Issues"

Friday, September 30, 2005 | 11:16 AM

I spend a lot of time discussing Consumer Spending; Its not because I am a shopaholic (although I do know where you can buy alot of cool stuff at good prices, as well as find decent eats).

I track this stuff 'cause the consumer is responsible for 70% of all the economic activity in the in the United States.

Therefore, if you want to have a clue about how the economy might be doing next year, you have to understand more than a few things about the U.S. Consumer. We most recently visited this issue in "Shopped Out?"

In my book, there are 5 key elements to watch:

1) Income:  Do they have a ready supply of spending dough? Is it going up, so they can maintain present spending levels?

2) Debt:  Have they spent too much? Can they service the debt they have already run up?

3) Deflation/Inflation:  Is inflation eating into their spending power? Is deflation encouraging them to hold off purchases until items get cheaper?

4) Pyschology:  Are they in a spending mood?  Is there anything weighing on that mood?

5) Spending: Too obvious to even discuss.

The idea is to have 5 quantifiable elements -- objective and measurable -- to guide our expectations for what is likely to happen next year. (No, there are no guarantees -- just higher and lower probability events).

Over the past 24 months, all five of these elements are in the process of decaying.

Personal Income has slid all year; Today's report shows  a continual drop;


• That Personal Income is actually worth somewhat less, given the significant increases in prices (inflation). In particular, oil and gasoline have had a big impact; I expect in the Winter, natural gas will also.

• Speaking of Inflation: Prices paid for commodities have doubvled over the past 4 years; This does not include health care, education, or other services.   


Sentiment continues to weaken. Its not just Gas prices and Iraq and the disappointing response to Katrina -- its a full spectrum of issues.


Debt:  The WSJ reports that "A record 4.81% of credit-card accounts were past due in the second quarter, up from 4.76% in the first quarter."  This number (past due credit-card bills) has risen to a record this year." (American Bankers Association). The ABA said that "Delinquency rates rose for nearly all of the eight types of consumer loans the ABA tracks." (The exceptions were Property improvement and Mobile home loans).

Spending:  Dropped a significant 0.5% this month -- thats the biggest drop in nearly 4 years, since November 2001.



I had said a few months ago -- long before Katrina and Rita -- that the potential for a recession was increasing. Its not too hard to imagine the scenarions how this can occur: Interest rates tick up, home refinancing fades, and a big source of spending cash disappears. Its also not to hard to imagine the Fed cutting rates if this scenario comes to pass.

Investors should be aware that Risk levels are on the rise . . .


Past Due Credit-Card Bills Reach Record in U.S.
September 29, 2005; Page D2


U.S. August Personal Spending Falls 0.5%; Incomes Drop 0.1%
Carlos Torres
Bloomberg, Sept. 30, 2005

Friday, September 30, 2005 | 11:16 AM | Permalink | Comments (4) | TrackBack (2)
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Why Write ?

Friday, September 30, 2005 | 09:50 AM

Terrific quote from Daniel Boorstin, who wrote 2 tomes that I really enjoyed -- The Discoverers, and The Creators -- over his years as Chief Librarian at the Library of Congress.

Here's the quote:

"Daniel Boorstin, the former librarian of Congress, used to rise at 5 each morning and write for two hours before going into the office.

"I write to discover what I think,"
he explained. "After all, the bars aren't open that early."

Mr. Boorstin's morning sessions were even more valuable than he realized. Writing not only clarifies what you already know; it is also an astonishingly effective way to learn something new."

Its so very true. When people ask me why I blog, the answer is that it helps me organize my thoughts, memorialize them, work them out.

In short, to discover what I think.



Students Discover Economics in Its Natural State
NYT, September 29, 2005

Friday, September 30, 2005 | 09:50 AM | Permalink | Comments (7) | TrackBack (4)
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Gulf of Mexico Rig Damage

Thursday, September 29, 2005 | 04:43 PM

Jeff Matthews notes that the rig damage in the Gulf of Mexico is far more extensive than many people believe:

"Rowan Drilling (RDC-NYSE) has its own planes and were thus one of the first on the scene to witness the impact. They say that the rig devastation is quite significant and the pilots reported that in an area where they previously would see about 15 jack-ups there were none visible." 

"None visible."

Jeff picked this up from Petrie Parkman, whom he called "The best energy industry research firm I know." Oil research veteran Tom Petrie runs it. The above quote is from their morning research notes regarding Rowan Companies, a large operator of jack-up drilling rigs in the Gulf of Mexico.

Jeff further observes:

"While Rowan was flying planes over the area where there were no rigs “visible,” the stock market had already decided the impact of Hurricane Rita was not too severe, based largely, I gather, on the fact that Fox and CNN TV reporters in rain gear were able to walk around parking lots in Galveston shortly after the storm passed and could see no visible damage to the infrastructure miles out in the Gulf of Mexico."

Go read the full discussion.

Thursday, September 29, 2005 | 04:43 PM | Permalink | Comments (1) | TrackBack (0)
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2Q GDP Unchanged (someone please explain how)

Thursday, September 29, 2005 | 09:34 AM

I already made it clear that I have strong reservations about the revised 1st Quarter GDP (as well as other data).

Today, we see 2Q GDP revisions came in unchanged from the original 3.3%.

Question: We know what aspects get measured, and what they were upon the initial and revised release. Let's compare :

· U.S. exports rose by 10.7%, instead of the earlier reported 13.2% increase.  (Source: Department of Commerce.

· 2Q Corporate profits (after taxes) rose 5.3% to $975 billion -- a smaller gain than the previously reported 6.9% rise. (DoC).

· Businesses inventories fell by $1.7 billion -- far less than the originally expected inventories raise of by $2.6 billion. (DoC).

· "Personal consumption was somewhat stronger due to higher spending on utilities, like electricity." (WSJ)

All these factors imply that GDP slowed significantly more than originally expected. Yet its unchanged, according to the Department of Commerce.

So by what accounting sleight of hand can inflation go up more than expected, while profits, exports, and business inventories go up less than expected?

Inflation. Remember, GDP tries to measure actual output, not price increases. The secret must be buried somewhere in the inflation data. If prices edged higher in the quarter than originally believed -- while data from exports, inventories and profits came in below prior expectations -- how can GDP remain unchanged? 

I suspect its in one of the PCE price gauges -- I'm tracking someone down in the Commerce Department to see if that also excludes food and energy in this measure.

If so, that would explain the steady GDP data in the face of all these other negative factors . . .


UPDATE I: September 29, 2005 10:29 am
Commerce tells me that GDP is not calculated ex-food and energy. Further, each individual component has its own price deflator.

Again, the emphasis is on measuring output, not price.

This requires more digging . . .

UPDATE II: September 30, 2005 6:29 am

I contacted John Williams of Shadow Government Statistics, He notes that "The small increase in the deflator was matched almost by a small upward revision to the nominal numbers.  The lack of real growth change was a function of rounding and an artifact of the way the real numbers are put together.  Real GDP components haven't totaled to the aggregate numbers in years, hence the "residual" factor.  Try dividing the nominal GDP by the published deflator and you don't come within $5 billion of the real number."

Interesting stuff.


GDP Growth in 2nd Quarter Is Unrevised at 3.3%
DOW JONES NEWSWIRES, September 29, 2005 8:42 a.m.

News Release: Gross Domestic Product and Corporate Profit  http://www.bea.gov/bea/newsrelarchive/2005/gdp205f.htm

“Final” Estimates of GDP
THURSDAY, September 29, 2005

Thursday, September 29, 2005 | 09:34 AM | Permalink | Comments (11) | TrackBack (0)
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Tax Cuts Stimulate the Economy

Thursday, September 29, 2005 | 09:30 AM

I'm agnostic/utilitarian: I'll use whatever tool works -- but still, this cracked me up:


When even the comics at Yahoo! know that Supply Side economic theory is "flawed," you gotta wonder about the Politicians who haven't figured it out yet. 

Thursday, September 29, 2005 | 09:30 AM | Permalink | Comments (13) | TrackBack (1)
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NYT shines some sunlight on the worst of Wall Street

Wednesday, September 28, 2005 | 01:47 PM

The NYT has been all over Wall Street lately: criticizing its product offerings (SPACs), mocking its hedge fund managers (too arrogant), trashing a well known mutual fund manager (excessively piggish).

If the NYT reports are accurate, we are not a pretty lot. While its tough to objectively label someone as too arrogant or piggish -- these are such visceral emotional issues -- the Times does not paint a pretty picture.

Consider these three tales:

•  'Super Mario' Has a Super Headache
Mario Gabelli is revealed as an overpaid fund manager, and gets trashed as a greedy majority shareholder who treats his minority shareholders exceedingly poorly.

Litigation to follow . . .

•  A Noted Poison Pen Starts a Hedge Fund Hiring Showdown
Daniel S. Loeb runs the $3.6 billion hedge fund Third Point, and the NYT rakes him over the coals. Since I don't know the man, I cannot attest to how accurate/fair the Times piece is; they seem to go out of their way to paint him as a pompous ass.

Citadel comes in for the wrecking ball also, with the NYT pointing out their unusual managment fee fluctuate, running as high as 6% (the typical hedge fund management fee is 2%).   

Crave Huge Risk? This Investment May Be for You
SPACs: The latest Wall Street product are expensive and risky -- but the tradeoff is that most are unlikely to succeed.

My experience is that Wall Street is filled with both heroes and goats, with pigs and weasels. While the Times is focusing on the seamy underside as of late, I know too many Wall Streeters who are conscientious, charitable, humble fellows.

Indeed, several firms dedicated a day of trading profits to Katrina victims (Cantor, Jeffries & Co, Rob Fraim, etc.). And of course, Todd Harrison's Investing Rock Stars Guitar is a terrific charitable venture.    

I guess for every Bull there's a Bear, and for each of them there's a pig . . .


Wednesday, September 28, 2005 | 01:47 PM | Permalink | Comments (9) | TrackBack (0)
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Confidence at 2 Year Lows

Wednesday, September 28, 2005 | 11:26 AM

Wsj_economy09272005184148Confirming similar readings as the University of Michigan survey, the Conference Board's Consumer confidence index slid to a two-year low in September. The WSJ noted that "consumer-confidence index fell to 86.6 in September, down sharply from 105.5 in August. That marked the largest decline in confidence since October 1990, when consumer spending was contracting in inflation-adjusted terms. The level of confidence was the lowest since October 2003. The index was equal to 100 in 1985."

Round up the usual suspects
Getting the blame for the plummeting confidence readings were soaring energy prices, new-home sales below expected numbers (as prices rose), and a job market best described as weak but improving. Those who said jobs were "hard to get" ticked up to 25.4% from 23.1% in August.

Surprisingly, the confidence drop cut across all economic strata: Low end Consumers have been squeezed by gasoline prices; Middle class spenders have been increasingly dependent on rising home values or falling mortgage rates as a source of ready spending cash; Even luxury retail sales -- typically far less sensitive to energy-prices -- suffered in September. Michael Niemira, The International Council of Shopping Center's chief economist, said "There are lots of worries and few positive signs out there."

The WSJ Ubiq-cerpt:™

"Taken together, the reports point to potential troubles for consumers, who have been squeezed by soaring gasoline prices and who depend increasingly on rising home values to fund their purchases. Household spending has proved resilient to shocks in the past, though it remains unclear whether that will be the case this time.

The Conference Board said its consumer-confidence index fell to 86.6 in September, down sharply from 105.5 in August. That marked the largest decline in confidence since October 1990, when consumer spending was contracting in inflation-adjusted terms. The level of confidence was the lowest since October 2003. The index was equal to 100 in 1985.

The private research group attributed the drop to rising gasoline prices and Hurricane Katrina, which battered the Gulf Coast in late August. A softer job market also seemed to be a factor. The percentage of individuals saying jobs were "hard to get" increased to 25.4% from 23.1% in August. It was the highest percentage in that category since last December.

"Fuel prices remain high, though they have retreated in recent days, and when combined with a weaker job-market outlook, will likely curb both confidence and spending for the short run," Lynn Franco, director of the Conference Board's Consumer Research Center, said. "As rebuilding efforts take hold and job growth gains momentum, consumers' confidence should rebound and return to more positive levels by year end or early 2006."

The housing market is an important wild card for consumers. Last year, households supplemented their spending power by borrowing nearly $600 billion against the value of their homes, according to research by Federal Reserve Chairman Alan Greenspan. A housing slowdown could sap that source of spending. (See related article.1)

The Commerce Department's report on August sales of new single-family homes hinted at a slowdown, though the evidence is far from conclusive. Sales of new homes decreased 9.9% to a seasonally adjusted annual rate of 1.237 million, after rising 5.3% the month before."

Correlation & Tendencies
Confidence is a tricky issue to use as an indicator:  On the one hand, it tends to lag, follwoing rather than anticipating events. Further, we're always better off watching what people DO rather than what they SAY.

Still, we cannot completely ignore these drops, as there is a tendency -- not a 100% correlation, mind you -- but a tendency for lower confidence to beget reduced spending. That's why all the other indicators I follow are so important to my understanding of what is most likely to occur next.


Consumer Confidence Weakens To an Almost Two-Year Nadir
Energy Prices, Job Market Weigh on American Minds; Sales of New Homes Drop
THE WALL STREET JOURNAL, September 28, 2005; Page A2

Wednesday, September 28, 2005 | 11:26 AM | Permalink | Comments (2) | TrackBack (0)
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How to Destroy the US Economy in 1 Easy Step

Wednesday, September 28, 2005 | 09:29 AM

The fastest way to economic destruction is the debasement of the engine of growth. In this country, that's Science and Technology.

The godless central planning communists in China must be laughing their arses off at the attempts here in the to introduce non-science into the scientific curricula in the United States.

This is a sure path to economic ruin.

In the marketplace of ideas, the strongest arguments should (theoretically) triumph. Therefore, to help dispel the self destructive campaign of dumbing down our scientific future, here is the Index to Creationist Claims.

Its an incredibly detailed point by point refutation of all the failings, false statements and inaccuracies of the personal religous belief system of Creationism and Intelligent Design.

UPDATE  September 20, 2005 7:31pm

Here's a 2nd resource: Things Creationists Hate


Index to Creationist Claims

Things Creationists Hate

Wednesday, September 28, 2005 | 09:29 AM | Permalink | Comments (33) | TrackBack (2)
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Read it here first: Wealth Concentration in America is Rising

Wednesday, September 28, 2005 | 08:27 AM

As we discussed last week (The Disconnect and Economic Classes), the middle class is starting to disappear mean revert, while the group we described as the "ultra-wealthy" are expanding.

Here's an excerpt from Sunday's NYT:

"Twenty years ago, there were 14 American billionaires on the Forbes 400. Today, the list includes 374 (known) billionaires. In 1985, the combined wealth of the Forbes 400 was $238 billion, adjusted for inflation. Today, the 400 richest people in America are together worth $1.13 trillion. To put that number in perspective, $1.13 trillion is more than the gross domestic product of Canada. And it is more than the G.D.P. of Switzerland, Poland, Norway and Greece - combined.

The median household income of Americans has been stuck at around $44,000 for five years now. The poverty rate is up. Members of the Forbes 400, meanwhile, are richer than Croesus, and every hour they are getting richer."

As previously mentioned, I find the significance of this to be the waning middle class -- a group that increasingly appears to be a mostly post-war phenomena. 

The author of the Times piece takes a different perspective, lamenting that there is not much change amongst the top of the Ultras:

"A few days ago, I read through the newest Forbes 400 list of the richest people in America, hoping to find many names I'd never heard of. They're not there. Through no fault of its own, the list no longer reflects a dynamic and elastic economy; instead, it reflects a growing concentration of wealth and economic power. Warren E. Buffett, Paul G. Allen, Kirk Kerkorian, John W. Kluge, Carl C. Icahn, Michael R. Bloomberg, Ronald O. Perelman, Leona Helmsley, Henry R. Kravis, the Waltons, the Pritzkers, the Newhouses, the Lauders - the same old names, one after another.

It's hard to say when the Forbes 400 list started to stagnate, but 1999 may have been a turning point. That was the year when Bill Gates's estimated net worth hit $100 billion. So quickly had his fortune grown that over the previous 12 months, according to Forbes's calculations, Mr. Gates had made himself another $1 billion every eight days. Mr. Gates, who has held the No. 1 position on the list continuously since 1994, is an extreme example of accumulated and self-generating wealth, but he's part of a trend."

What a shame that this accellerating economic shift isn't more entertaining . . .

Don't Blink. You'll Miss the 258th-Richest American
NYT, September 25, 2005

Wednesday, September 28, 2005 | 08:27 AM | Permalink | Comments (13)
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How accurate is Labor Dept. Data?

Tuesday, September 27, 2005 | 11:15 AM

Fascinating criticism of a recent Department of Labor's 2004 National Compensation Survey of wages and income (by career) by 2 airline pilots.

It calls into question the methodology and underlying presumptions of the Labor Dept. and by extension, the BLS:

We're Earning More? You Could've Fooled Us
September 26, 2005; Page A19

Your article "Wage Winners and Losers: Most Paychecks Fell in 2004 but U.S. Survey Finds Pilots, Doctors Came Out Ahead" (Marketplace, Sept. 13) did a grave disservice to the thousands of pilots who have sacrificed billions in salary concessions and billions in lost pensions, not to mention the thousands of pilots currently furloughed and those who have lost their jobs and benefits completely.

The Air Line Pilots Association has serious questions concerning the Bureau of Labor Statistics data and how the study was conducted. These questions remain unresolved despite repeated calls to the agency. As we told your reporter: "We're unclear how the government could have come up with numbers that show an increase. This study flies in the face of the reality that pilots are working more hours while taking substantial pay cuts, losing some or all of their pensions and paying more for health care."

Capt. Duane E. Woerth
Air Line Pilots Association

On behalf of the Allied Pilots Association representing the 13,000 pilots of American Airlines, I was surprised to read in your Sept. 13 edition that pilot pay has supposedly increased 15.6% from 2003. You also quoted Department of Labor statistics that indicate pilots work an average of 20.5 hours per week. In April 2003, our pilots agreed to a 23% across-the-board pay cut to help American Airlines remain solvent. Since the Sept. 11, 2001, terrorist attacks, nearly 3,000 of our pilots have taken a 100% pay cut as a result of being furloughed.

As for how much our pilots work, Federal Aviation Administration regulations limit airline pilots to 1,000 actual flying hours per year. To amass that much flying time, our pilots typically spend between 2,500 and 2,800 hours away from home, with many of those hours devoted to essential pre- and post-flight duties.

Our experience at American Airlines, the nation's largest scheduled passenger carrier, is that our pilots are working harder than ever and for substantially less income than they were at the beginning of 2003. A quick scan of the airline industry will tell you we are, by no means, alone in this regard.

Capt. Ralph Hunter
Allied Pilots Association
Fort Worth, Texas

Pilots making more money, given all the bankruptcies and layoffs? Hardly makes any sense to me. They raise some interesting points -- and should make you wonder what sort of unwarranted assumptions are built into the Labor Department models . . .

The graphic detailing the salary gains from the original WSJ article is below.

click for larger graphic



We're Earning More? You Could've Fooled Us
September 26, 2005; Page A19

Wage Winners and Losers
Most Paychecks Fell in 2004 But U.S. Survey Finds Pilots, Doctors Came Out Ahead
THE WALL STREET JOURNAL, September 13, 2005; Page B1

Tuesday, September 27, 2005 | 11:15 AM | Permalink | Comments (14) | TrackBack (0)
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