Thursday, July 31, 2014

Four Stories: Four Worrisome Signs That Our Economy Is In Trouble

When it comes to measuring the state of the economy, we know that 70-to-71% is driven by what you and I spend.  Therefore, in order for it to remain healthy and growing, the consumer must be increasingly active.  That activity, first and foremost, must come from increases in their incomes.  That brings us to the first story.

Just recently, the Bureau of Labor Statistics reported that real worker incomes -- incomes adjusted for inflation -- actually fell in June of 2014 when compared to June 2013.  While the drop is small -- 40 cents per work week or about $21 per worker per year -- the impact is fairly large when rolled up against 155 million workers; equaling a loss of a total of $3.2 billion in consumer buying power.  In other words, $3.2 billion that won't be spent to drive the economy.  More importantly, the economy could suffer even more by the "psychological" impact of lower wages.  That loss of $21 per year is an average.  So, some workers had a much larger loss of buying power.  If even a small percentage of employees feel they are behind the eight ball on salary and, as result, cut back a lot of discretionary spending, it could seriously hurt the economy.

Proof of the lack of consumer spending comes from another story.  Our major retailers are expected to close hundreds of stores in the U.S. as their retail sales continue to fall.  CNBC even called it a "Tsunami" of store closures. This is a sure sign that the shopper is backing away from spending.  Also, these closures mean a loss of jobs and, eventually, higher unemployment.

Then, there is this concern.  Last month's employment report showed an overall increase of 404,000 workers.  Of this, 275,000 temporary help jobs were created.  Simply, that means that almost 70% of the jobs created in June were low paying and temporary.  Whether this fact was because employers are making adjustments to cope with low business activity or because of their attempts to circumvent the 2015 mandates of ObamaCare, it is possibly another reason why wages have fallen. Again, there is a negative psychological impact when a worker can only find part time work.  It results in a lack of confidence and, more likely, another reason not to spend money on non-essentials.

Lastly, a recent report from the Urban Institute showed that 35% of American's face debt collection.  A fact that proves that they have been living beyond their incomes for quite some time. To put it simply, 35% of Americans could have their credit ratings adversely impacted.  As a result, it could affect their chances of getting or holding a job when wage garnishment is threatened. It could also mean that millions may not be able to buy a house or rent an apartment; or, purchase an automobile; or, get any further credit cards or loans for emergency situations.  Having a third of the population in financial trouble, is a formula for disaster which could greatly impact economic growth.

Of course, just yesterday, the economy was said to have grown by 4% in the second quarter.  However, this is a preliminary number; subject to 3 more revisions.  The question then becomes whether or not that 4% will hold or fall in the same way that the first quarter had positive growth in its preliminary number; only to go negative and stay negative after that initial number's release. As far as consumer spending was concerned, non-big ticket items matched the growth of the first quarter at 2.5%.  But, understand that much of that growth was due to extremely high prices for food; driven by the drought and bad weather. Energy prices also drove up spending, but consumer spending for services fell by half from the first quarter.  What really drove that supposed 4% growth in the second quarter was the fact that imports fell (normally, a higher import number is a negative drag on our economy).  But, a drop in imports may be a sign that consumers aren't buying much of the goods we normally get from China, Indonesia, Mexico, etc. and, that business upped their inventory of products in anticipation of future sales.  Whether or not those replenished inventories will sell in the future with what appears to be a cooling of buying activity seems to be unlikely. In essence, the consumer didn't really contribute to the growth of the economy in the second quarter.


Real Incomes: June 2014:

A 'tsunami' of store closings expected to hit retail:

June 2014: Employment Situation Report: Table A: 

Study: 35 percent in US facing debt collectors:

U.S. Second-Quarter GDP Expands at 4.0% Rate:

Q2 GDP Surges 4%, Beats Estimates Driven By Inventories, Fixed Investment Spike; Historical Data Revised:

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