Friday, November 2, 2007

Strong Economy? Not!

Yesterday, the Dow has plunged 362 points just a day after the Fed lowered interest rates. The Dow is trying to recover today based on Job numbers. The economy added 166,000 jobs in October, the fastest pace in five months. Good news, right? Whenever I hear news like this, I ask the crucial question: What Kind of Jobs? I always want to see the numbers behind the headlines.
From Shaffers Research:

- of 278 industries, 53.4% were adding jobs in October, down slightly from 55.6% in September
- Of 84 manufacturing industries, 43.5% were hiring in October, which is the strongest figure since July.
- Jobs in goods-producing industries fell by 24,000.
- jobs were also lost at banks and mortgage brokers, where employment fell by 5,000 in October, bringing the cumulative loss to 56,000 since February
- the services industry saw strong jobs growth, where employment rose by 190,000, the most since May
- Food services added 37,000 positions
- health care added 34,000
- employment services added 34,000

So it appears that job growth is fueled by the healthcare industry that has become a drain on the pocketbooks of the average american and small businesses because no one wants to control health care costs. We have created jobs in the field of finding jobs, which is kind of messed up if you think about it. Finally, we have created burger-flipping jobs! Is this really good news? I hardly doubt any of these jobs can keep up with the real inflation in this country.

We are also told that inflation is holding steady. How could that be when costs for food, fuel, and health care are rising beyond our incomes? What do you know, Core inflation figures exclude volatile food and energy prices. The Christan Science Monitor reports that "overall inflation, as measured by the personal consumption expenditures deflator, is up 2.4 percent for the year, above the Fed’s so-called comfort zone of 1 percent to 2 percent. That rise, compared with 1.8 percent in August, most likely reflected the surging cost of crude oil, which pushes up gasoline and energy prices."

There are signs that inflation is really higher given the rise in the cost of fuel, food, health care combined with the declining value of the dollar, which effects our buying power. Another thing to keep in mind is that the cost of renting or buying a home due to the bubble and its aftermath, bites into the American wallet. The financial picture is excellent if you factor out all the basic necessities of living for the average american. Don't forget to factor in the rising costs of child care, education, and services and products.

We are also told that personal spending is still holding up, which is good news since personal spending, which accounts for two-thirds of the gross domestic product.
How long will Americans be able to keep spending? If you take a look at the New York Housing Bubble Blog, they have some very interesting news items including Bloomberg's report that US Home foreclosures Doubled in the 3rd Quarter of 2007 and that Realtytrac Inc reports there were 635,159 forclosure filings in the 3q or 1 in 196 households including default notices, auction notices,and bank repossessions.

Who is going to want to go Christmas shopping when they have just lost their home?

Keep in mind that we are at the beginning of the fallout of the real estate bubble.
Mortgage resets for the notorius subprime loans will end up spiking in the latter half of
2008. Then in 2010 and 2011, we will start seeing resets on option adjustable rate loans and Alt-A loans (or "Liars Loans"). Unless these people can refinance in fixed loans with monthly payments they can actually afford, a lot of people will lose their homes and there will be tough times ahead for all of us.

One of my favorite bloggers is Marinite from the Marin Real Estate Bubble website. He writes that the American people are being lied to when it comes to the economy. He quotes Peter Schiff's November 1st editorial about how bogus all these financial numbers are that are bolstering the belief that our economy is strong, when the average joe feels something is wrong. I have actually heard someone on CNBC boggle at that disconnect between what the "experts" are telling us and the reality Americans experience.

We have all heard about the decline of the Dollar and how good it is for our exports.
The US Dollar Index has declined from 92 to 78 in less than two years - a 15% depreciation
in value. This effects American buying power not just when they travel abroad, but what we
purchase in this country.

Interest rate cuts only make the situation worse. Rate cuts may make it easier to borrow
and provide relief for those who have already borrowed (especially those attached to Adjustible Rate Mortgages) but it punishes people who save and invest in safe investments and reduces overall purchasing power.

If one steps back, we can begin to realize that our consumer economy is broken. What buttresses our economy is the consumer's ability to spend. The consumer's ability to spend has a lot to do with their ability to borrow to buy beyond what they have on hand. Can you imagine our economy if people gave up their credit cards and didn't buy anything until they saved up for it? Where would our economy be if people scrimped and saved or just realized one day that the consumer appetite was unsustainable? Jobs would be lost and our economic system could collapse.

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