New Tactic To Get The Economy Going: Charging You for Money in the Bank

Since the recession, the Federal Reserve Bank has used every arrow in its quiver to get the economy going again. It held interest rates at near zero; thinking that consumers and businesses would take on more debt and buy more things.  It injected trillions of dollars into the economy by buying back financial assets from commercial banks in hopes that the interest rates on those assets would increase the money supply and stimulate the economy, but at the same time insure that it didn't get too hot with excessive inflation.  Yet, that policy has not really worked.  Instead we have both minimal inflation and record low growth since the end of the recession.

Now the Fed may follow the lead of the European Union, Switzerland, and Sweden and institute a policy of "negative interest rates" in order to kick start the economy.  What that means to you and I, is that instead of receiving interest earned on your savings account, you would actually pay some percentage (usually 1/2 percent) as a penalty for holding on to that money.  The belief is that consumers will see no advantage of keeping money in the bank, and start spending again.  The rationale for this is displayed in the following two charts.

The first shows how, after years of not saving, American's savings rates are now trending higher as more and more people are putting money in the bank:

Click on Image to Enlarge

Thus, from a low of 2.6% in 2005, people are now saving at a rate of 5.5%; more than double the low rate in 2005.

Because of this, the growth in retail sales has been increasingly slowing since 2011.  And, since consumer activity makes up 70% of economic growth as measured by the GDP (Gross Domestic Product), this slowing in retail sales results in a slowing of the economy. In fact, the economy only grew by seven-tenths of one percent in the last quarter of 2015.  With that in mind, look at this chart from Bloomberg showing the increasing slow down in retail sales:

Click on Image to Enlarge

In countries that implemented "negative interest rates", it was surprising to economists that consumers didn't empty their bank accounts and start spending again, because this ignores the real reason why people are saving: Fear!

In Europe, there is a "fear" that the European Union will collapse.  In this country, people don't feel that the economy is strong, and what happened in 2008-2009, will happen again.

For these reasons, I believe the Federal Reserve is completely powerless in trying to stimulate the economy and in thinking that "negative interest rates" are going to do the trick.  People will only become more fearful and more frustrated at seeing more of their wealth being chipped away.  Those who have limited retirement resources that they thought were protected in the bank, will only see their retirement fund dwindle away.

If we want to get America going again, we need to get the federal government out of the way.  For example, forcing people to buy health insurance, when they can't afford to do so, only lowers the money that would have been used to boost retail sales.  Forcing companies to provide health insurance in lieu of good wage increases also reduces the consumer's spending ability.

There is no logic behind reducing people's savings in order to improve the economy.   In addition, countries with negative interest rates also have considered making it illegal to withdraw cash to prevent people from stashing it away in their mattresses.

References:

Negative 0.5% Interest Rate: Why People Are Paying to Save: http://www.nytimes.com/2016/02/13/upshot/negative-interest-rates-are-spreading-across-the-world-heres-what-you-need-to-know.html

Definition of Quantitative Easing: http://www.investopedia.com/terms/q/quantitative-easing.asp

St. Louis Federal Reserve: Personal Saving Rate: https://research.stlouisfed.org/fred2/series/PSAVERT

Retail sales declined to the lowest rate since 2009: http://www.bloomberg.com/news/articles/2016-01-15/retail-sales-in-u-s-decrease-to-end-weakest-year-since-2009

Cheap Oil Isn't Helping Our Economy

All through 2015, gasoline prices fell.  Many economists wrongly predicted that this would stimulate the economy with stronger retail sales.  Yet, when it was all said and done, 2015's consumer activity was the worst since 2009, when sales were at a negative growth rate as this chart from Bloomberg.com shows:

Click on Image to Enlarge or See Link Below

Overall, total retail sales came in at just 2.1% for 2015.  Less than half that when auto sales are excluded.  What's worse, retail sales in December actually fell one-tenth of a percent in a month that most retail expected strong Christmas sales.

But, this data comes on the heels of another piece of worrisome data: the Consumer Price Index (CPI). Like retail sales, saw its lowest growth in prices in years.  This time since 2008. Note this chart from usainflationcalculator.com:

Click on Image to Enlarge or See Link Below

The reason that these two charts are so important is that they both show a serious slowing of consumer activity which may result in a recession in 2016.  The reason being that 70% of our growth is a direct result of consumer spending.  For example, in 2014, our economy was calculated to be $17.4 trillion dollars.  Consumer spending was responsible for $11.9 trillion dollars.  So, any significant slow down in that area would result in negative growth; and, two consecutive quarters of it are the classic definition of a recession.

So, the slowing in retail sales is obviously a problem.  But, the slow down in the CPI inflation is less obvious but an equally serious problem. A healthy economy should see CPI inflation between 2 and 3% per year.  That indicates that wages are increasing; a confidence in the economy and the job market; when retailers feel like the can raise prices without losing business.  But, we haven't seen that kind of growth in the CPI since 2011.  Simply, the year-by-year fall in any CPI inflation shows that there are pricing restraints.  In other words, people are buying enough to convince retailers to increases prices.  To economists, this is called disinflation.  And, should the growth in the CPI go negative in the coming months, that would be called "deflation".  That is serious and that would also show a contraction.  Possibly, a recession.

Thus, when I hear certain politicians and economists claim strength in the economy, I look at these two charts and think not.  To me, these charts are like two canaries in a coal mine; signalling economic disaster in the not too distant future.  Despite falling gasoline prices, the consumer has decided to save and not spend; indicating a certain amount of fear and uncertainty.

References;

Retail Sales in U.S. Decrease to End Weakest Year Since 2009: http://www.bloomberg.com/news/articles/2016-01-15/retail-sales-in-u-s-decrease-to-end-weakest-year-since-2009

Current US Inflation Rates: 2005-2015: http://www.usinflationcalculator.com/inflation/current-inflation-rates/

What Are the Components of GDP? Explanation, Formula and Chart: http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm

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Strong Retail Sales Does Not Mean A Growing Economy

Last Thursday, the retail sales numbers saw a surge; prompting the news agency Reuters to state this:

U.S. retail sales surged in May as households boosted purchases of automobiles and a range of other goods even as they paid a bit more for gasoline, the latest sign economic growth is finally gathering steam.

What I take issue with is the "finally gathering steam" statement.  Quite simply, a retailer can have stronger sales, not just because of more foot traffic to their store, but also because they may have been forced to raise prices.  If a retailer doesn't have enough sales to pay the bills, it will have no other choice but to close its doors.  This is a reality that is growing in strength, and which, belies the "gathering steam" comment.


The fact is, that American national retailers are suffering. Dozens of them are announcing store closures.  CNBC predicted this a year-and-a-half ago with their story titled  "A 'tsunami' of store closings expected to hit retail".  Since that story was run, Radio Shack has announced the closure of 1784 stores due to bankruptcy.  McDonald's is shuttering 700. The combined Office Depot/Office Max operation is closing 650 retail operations, and their chief competitor Staples, 225. Others include 200 Walgreens; 338 Wet Seal; 77 Sears; 100 Pier One's, 300 Deb Shops; 40 J. C. Penney's; and on and on with a list too long to enumerate (See References). 

In addition, shopping malls are also shuttering their doors.  Forbes is predicting 300 Mall closures in the next 10 years, mostly because they are losing their "anchor" stores like J.C. Penney,  Sears, and Macy's.  But, when a mall closes its doors, so do the dozens of small retail stores that probably won't survive without the large amount of foot traffic a mall provides.

We're six years passed the end of the Great Recession and we are seeing national chain store closures as if we were still in the midst of it; leaving us to question whether or not small local retailers are also closing at that same high rate.

I personally believe that "retail" is hitting the proverbial "brick wall".  You have a consumer who has so little money to spend after necessities, that you would have to go back 20 years to see the real median household incomes this low.

Then, retail prices are being driven higher by a variety of factors.  For starters, this is the first year that the employer mandate of ObamaCare kicked in.  Thus large national chains are being forced to provide health care insurance or pay a fine of between $2000 and $3000 for each employee not properly covered.  On top of that, liberal state legislators and city councils are raising the minimum wage.  For example, California's minimum wage was raised to $9 this year; and will go to $10 as of January 1st.  Additionally, President Obama, through executive order, is expected to force any employer, whose salaried workers make less than $52,000 a year, to pay overtime (time-and-a-half) when they work more than 40 hrs/wk..

The increase in retail sales is more about higher prices and not increased sales. Simply, the consumer is cash strapped and marginal retail operations are being forced to close their doors due to declining foot traffic.  

References:

Strong U.S. retail sales boost growth outlook: http://www.reuters.com/article/2015/06/11/us-usa-economy-idUSKBN0OR1H720150611

A 'tsunami' of store closings expected to hit retail: http://www.cnbc.com/id/101353168

Store Closings Index 2015 of Largest US Brick-and-Mortar Retail Chains: http://retailindustry.about.com/od/USRetailStoreClosingInfoFAQs/fl/All-2015-Store-Closings-Stores-Closed-by-US-Retail-Industry-Chains_4.htm

Some 300 malls should close in the next decade: http://fortune.com/2015/01/28/2015-mall-outlook/

Real Median Household Income in the United States - FRED: https://research.stlouisfed.org/fred2/series/MEHOINUSA672N

ObamaCare Employer Mandate - ObamaCare Facts: http://obamacarefacts.com/obamacare-employer-mandate/

State Minimum Wages | 2015 Minimum Wage by State: http://www.ncsl.org/research/labor-and-employment/state-minimum-wage-chart.aspx

White House plans to force business to pay more overtime: http://www.washingtonexaminer.com/white-house-plans-to-force-business-to-pay-more-overtime/article/2556692

What the December Retail Sales Drop Is Saying....and Its Not Good

For weeks, we have been told that falling gasoline prices should put more money in the pockets of the consumer.  Money that could then be spent elsewhere.  However, that conventional wisdom ignores all  other factors that influence consumer spending such as indebtedness, inflation, income, job security and, the need to save.  That conventional wisdom was certainly dashed when the December Retail Sales Report was released by the Commerce Department.

Despite the drop in gasoline prices, retail sales fell nearly a full percent to -.9%.  This quickly caused the stock market to sell off by more than 300 points.  The consensus of economists was that the sales number would be tempered by lower oil prices but, that overall sales would rise one-tenth of a percent with consumers spending more in the all-important Christmas month.  Instead, the consumer spending -- less gasoline  -- was also negative; down 4-tenths of a percent.

So, why did the economist's get it so wrong?  Well, simply, they are ignoring other past reporting that shows that there is weak consumer spending; not only in this country but worldwide.

The first sense that international  spending was on the rocks came from the China Export Report for November.  By far, China is the world leader in exports.  So, when the growth in exports in November comes in by half of what was expected, it says a lot about what is happening in the other world economies.

In our own country, import prices dropped.  Excluding oil, imports of all other items fell by 2-tenths of a percent in November.  A fact that was a repeat of the two previous months.  While some of this had to do with a strengthening U.S. dollar, which makes imports less expensive to buy in this country,  the drop does still indicate a slowing consumer demand.

Also, we saw a substantial drop in credit card debt in November.  This too shows that the consumer is probably concerned about their financial health or job situation and not willing to splurge the savings they are seeing from falling gasoline prices.

Lastly, December unemployment showed that hourly wages fell by 5 cents.  At the same time, food prices have been soaring this year.  These two facts, together, are probably making the consumer quite nervous and, as a result, he or she is not willing to spend but, instead, reduce their debt or save.  In either case, retail sales should have been expected to fall.

References:

U.S. Retail Sales Reflect Consumer Caution Despite Lower Gas Prices: https://www.google.com/search?q=U.S.+Retail+Sales+Reflect+Consumer+Caution+Despite+Lower+...&ie=utf-8&oe=utf-8

China faces more pressure as Nov imports shrink unexpectedly, exports slow: http://www.reuters.com/article/2014/12/08/us-china-economy-trade-idUSKBN0JM04U20141208

List of countries by exports: http://en.wikipedia.org/wiki/List_of_countries_by_exports

Credit Card Debt Dropped Significantly in November:  http://www.lowcards.com/credit-card-debt-dropped-significantly-november-29871

The "Bad" of the December Employment Report: The Average Worker Loses Purchasing Power: http://cuttingthroughthefog.blogspot.com/2015/01/the-bad-of-december-employment-report.html

Food Prices Are Soaring And Washington Doesn't Care: http://thefederalist.com/2014/07/08/food-prices-are-soaring-and-washington-doesnt-care/ 

Retailers Are Signalling Economic Woes For 2014

In the first quarter of this year, the nation's economy, as measured by Gross Domestic Product (GDP), grew at a barely measurable rate of one-tenth of one percent. That was a 93% miss from the 1.5% that the economists were originally projecting.  In defense of this horrible number, the Obama Administration blamed the lack of economic growth on low consumer spending; all because of the bad weather in the Northeast and Midwest in January through March of this year.

However, having lived in the Midwest for many years, the forecast of a bad storm actually forces store shelves to be emptied.  People buy things they otherwise might not buy; like snow blowers, generators, space heaters and a whole host of other products.  They stock up on food and water.  And, after the storm has passed, consumers replenish what they used and typically buy the things they weren't able to   during the storm.  So, typically, the economic impact is not that significant; especially since most of the rest of the country is unaffected by any regional activity.

The problem with the "bad weather" excuse is that it ignores a deeper problem that is hurting our economy.  That problem that consumers aren't buying like they used to. The major retailers such as Wal-Mart, Kroger, Target and Macy's are all seeing changes in buying habits.  People aren't splurging on non-essential products.  In fact, they also aren't buying as much food. Wal-Mart, despite having lower grocery pricing than their competitors, has consistently seen a drop in grocery revenues.  Last quarter, grocery sales, among all the stores that were in operation a year or more, dropped nearly 1%.

Going forward, every retailer is warning that their earnings are at risk this year due to a slow down in consumer spending.  Since consumer spending makes up 70% of GDP, any drop could cause the economy to stall and, as a result, fall into another recession.  If the next revision of the current GDP growth of 0.1% goes negative in a couple of weeks, it could signal the first of two quarters of negative growth which, by definition, is a recession.

References:

Target echoes warnings about cautious consumer patterns: http://www.ktvu.com/videos/business/economy/target-echoes-warnings-about-cautious-consumer/v9dRG/

Wal-Mart is hurting for shoppers: Wal-Mart woes deeper than winter snow: http://money.cnn.com/2014/05/15/investing/wal-mart-weather-earnings/

Wal-Mart's biggest problem: Its customers: http://www.cnbc.com/id/101680657

Kroger...cautious in its earnings guidance for the year, citing uncertainty around the economy: http://supermarketnews.com/retail-amp-financial/kroger-marks-10-years-positive-comps

First-Quarter U.S. Economic Slump Looking Uglier by the Day: http://www.bloomberg.com/news/2014-05-06/first-quarter-u-s-economic-slump-looking-uglier-by-the-day.html

The Lack Of Retail Sales Confirms Last Friday's Jobs Number

Last Friday, the employment number was terrible. If you stripped out the temporary census worker jobs and, then, netted the loss of other government jobs against the slight growth in the private sector, only 21,000 jobs were created last month. On average, that's only 400 jobs added per state. In fact, 400 people would hardly fill "half" the seating available in an average high school gym.

This morning, the Retail Sales number was also abysmal. Sales in the last month fell by 1.2 percent. This confirms why last Friday's employment number was so bad. Since 70% of the jobs in this country come from small businesses and, primarily, from retailers like your local franchised McD's or your local independently owned gas station, it is no wonder why those business didn't hire last month. People just weren't buying as much as they were in previous months. Quite simply, it takes increased buying for any retail business to even consider any new hires.

Now, one month's set of numbers doesn't necessarily spell a trend. However, if the consumer is seen as pulling back in the next report or in the next few months ahead, the economy will have stalled and the economic recovery will definitely be put off. If that be the case, we easily could see the double-dip recession that so many economist have been worrying about.

One Who Lives In The Cuckoo's Nest

Today was quite the day for economic data:

• Just last week, 570,000 workers lost their jobs and those remaining on unemployment comp grew by 92,000.
  
• Retail sales were down an overall 2.1 percent despite back-to-school spending.
  
• It was announced that food stamps are now being used by more than 35 million people
• Also announced was the fact that 1.3 million unemployed will lose their benefits by the end of the year.

Yet, despite all that, Joe Biden had the gall to state that the stimulus bill is doing more than they hoped (Click to See Full Story: "Biden: Stimulus doing more 'than we had hoped'"). He points to the fact that 500,000 to 750,000 jobs have been "saved" or "created" by the stimulus in the last 20 weeks; or about 25,000 jobs a week. Putting aside the fact that this is truly an unprovable and unquantifiable set of numbers, this guy has apparently strayed a little too far into the cuckoo's nest with that nonsensical comment.

He seems to overlook the fact that Americans have been losing their jobs, on a weekly basis, at a clip that is greater than all the jobs he seems to think were being saved or created by the stimulus plan. To say that the stimulus is more "than we hoped" is just as dopey. We are well past the 8% unemployment rate that Obama promised would be the unemployment ceiling when the stimulus bill was being rammed through Congress. Many economists now feel like we are beginning another downward fall in what could easily be a double-dip or "W-type" recession.

I don't know if Joe is off his meds or if he just woke up from some kind of "midsummer's night dream"; but, he must think that Americans are totally unaware of the real facts about the state of this economy. Maybe he was somewhat confused. Maybe he was referring to the 10-year budget deficit as being "more than we had hoped" which is now project to be $9 trillion after this President's economic team had originally said -- just 5 months ago -- that it would "only" be $7.4 trillion. Is that it, Joe!

The Consumer is MIA!

This morning, the latest month's Retail Sales Report came out and, after 2 months of meager but positive growth, the consumer is once again missing in action. The economists who had been surveyed before the report, had looked into their dusty crystal balls and had predicted the future to be a growth in sales of seven-tenths of one percent. In actuality, the overall sales came in with a "loss" of one-tenth of one percent. Worse than that, if you yank auto sales out of the number and their artificial boost due to the "Cash for Clunkers" program, the actual sales in all other areas were down by six-tenths of a percent; down almost as much as they were supposed to be up (Click to See Full Story: "Bleak sales are another reality check for economy"). I really think all those economists should have their crystal balls checked before they make another one of their not-even-close projections.

The ominous thing about this report is that unless the consumer enters back into the picture and starts buying things, our economy will never recover. The economy is 70 percent consumer driven. Obviously, the tax cut that Obama gave to 95 percent of Americans -- the one that gave everybody who got it about $13 a week --- isn't working. As I've said before, that silly tax cut won't even buy a daily donut and a cup of coffee; let alone, even mildly attempt to restart this economy.

We are now nearly 7 months past the enactment of the Stimulus Package and we are still getting horrible numbers. From meager tax cuts to part time infrastructure work, the "Stimulus" is just a flop!

In addition to that bad news, the foreclosure rate just keeps rising. Foreclosures were up by 7 percent in just one month from June to July. On top of that, the number of foreclosure filings, as compared to last year's July number, went up a whopping 32 percent (Click to See Full Story: "Foreclosures rise 7 percent in July from June"). Again, where's that Obama program -- his 31 percent solution -- that was supposed to help stop all these foreclosures? (Click to See My Blog Entry: "The 31 Percent Solution?")

Nothing that this Administration has done or promised to do has come true. That's why Obama and the Democrats "should not be trusted" with any more of our money for things like Health Care Reform and Cap and Trade. First things first! Get this economy rolling again!

Signs of Life?

On Wednesday, I wrote of caution with regard to Tuesday's stock market rally and CitiGroup's indication that they saw themselves as being profitable in January and February. I said that CitiGroup's profitability isn't necessarily transferable to the rest of the industry. Well, apparently others in the banking industry are seeing similar benefits from having received government bailout money last fall. On Wednesday, JP Morgan/Chase said that they, too, were seeing a turnaround; not just for them but, the whole banking industry (See Full Story). Then, today, Bank Of America seemed to echo what Citi and Chase were saying (See Full Story).

Armed with all the banking information and today's fact that Retail Sales were only down slightly last month (See Full Story) the stock market has been able to muster a 3-day rally.

This rally may be short lived or it could actually be the start of a recovery. I just don't know. I guess it will depend on what news we'll see in the future.

One thing, though, it shows that the rush to get the Stimulus Package passed may have been premature. The limited signs of economic life that we are now seeing have nothing to do with the Stimulus Bill. Actually, the cash outlays for the package are still just now starting to get off the ground. And, today, Obama, himself, admitted that things might not be as bad a previously thought (See Full Story).

I think this just proves that Obama was using the situation to push a social agenda through Congress. His thoughtless spending of a near trillion dollars may not have been needed. Leastwise, on the emergency basis that he kept claiming throughout all of January and February. Most recessions self-heal themselves in 16 to 20 months and we are right at about that point now. I think this further proves that maybe Nancy Pelosi' drive to have a second stimulus before this one has even had a chance to work is totally unwarranted.

It appears, once again, the kids have the keys to our car!

Retail Sales Up?

For the first time in seven months, retail sales, from December to January, increased by 1% (See Full Story). This was also the biggest jump in monthly sales numbers in the last 14 months.

Before too many people get all excited and think that this means that we are on the brink of coming out of our economic doldrums, it is important to understand what that number is really saying and to also put it into a broader context of another number: Consumer Credit.

First, the retail sales number is a comparison of gross dollar volumes from a month prior. It is not some kind of units sold number. Nor, is it a measure of how much money you or I are spending each month.

We already knew from last week's consumer credit number (as released by the Federal Reserve), that people aren't swiping their credit cards and buying all kinds of new stuff (See Full Story). So, to have a retail sales number that has increased may only mean that the retailers have finally found pricing and inventories levels that match their current level of sales activity; and, they are no longer deeply slashing prices to get the product off their shelves. Simply speaking, prices are stabilizing to meet the reduced purchasing activity of this depressed economy.

We have already seen this in gasoline prices. Despite the slipping demand, gasoline prices are rising again. That's because the retailers and the refiners have found some equilibrium in the supply and the delivery of their product. At the local gas station, inventory levels have bottomed out to a point where they can properly estimate and meter the amount of gasoline deliveries they need to match the reduced sales activity. Similarly, the refineries are now in a position to accurately measure demand and they are shutting down portions of their refining operations so that they don't overproduce and lose money. The fact that prices are rising just means that refiners and the local gasoline outlets have somewhat overshot this adjustment. Without any further increases in demand, prices should fall again as this process of fine tuning deliveries and inventory levels continues to properly match the level of sales. However, you shouldn't expect any big drop in gasoline prices. The adjustment of pricing will probably only be in the magnitude of 2 or 3 percent; or, a few pennies. Further, we are approaching the summer driving season and demand (and prices) are sure to go up.

All this is "not" to say that Retail Sales isn't a good measure of our economy. But it is just one number out of many measurements that should be taken into consideration. Everything has to be put into context. I would say that, if we see consumer credit starting to expand, a rise in retail sales could be a significant indicator that our economy is improving. But, to me, one without the other is just a hollow and false indication.