The economic clout of the USA has been huge since the end of World War II. The relative position has been decreasing recently with the rise of not only Europe and Japan but Korea, China, India, Brazil and many more. This means the risks to the USA of failing to deal with perennial problems (the most costly but not most effective health care system, spending beyond our means, weak diplomacy, excessive legal costs, poor management practices…) is higher today than it has been.
Fareed Zakaria’s Post American World is a good explanation of some of the current global economic forces in play. He comes to the same conclusion I do that the USA is still in the strongest position today. But the world is changing and the relative position of the United States is declining. The new world requires working with others and the USA needs to adjust to this reality. Too many think the USA can continue to act as though the rest of the world must comply with the wishes of the USA.
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The litigation system is now routinely referred to as a huge cost of doing business, but no one dares propose any reform of it. Our mortgage deduction for housing costs a staggering $80 billion a year, and we are told it is crucial to support home ownership. Except that Margaret Thatcher eliminated it in Britain, and yet that country has the same rate of home ownership as the United States. We rarely look around and notice other options and alternatives, convinced that “we’re number one.”
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America has become a nation consumed by anxiety, worried about terrorist and rouge nations, Muslims and Mexicans, foreign companies and free trade, immigrants and international organizations. The strongest nation in the history of the world now sees itself as besieged by forces beyond its control.
The book focuses quite a bit on the USA, China and India and provides good overviews of the economic strength and weaknesses of those countries. The USA is in a leadership position but the future requires an understanding that others deserve to be treated as partners not allies to be dictated to. If not they will just partially disengage with the USA and create stronger relationships with others. That would not be in the interests of the USA.
Related: Best Research University Rankings (2008) – Dr. Deming’s 7 Deadly Diseases of Western Management – Science leadership and economic growth – Easiest Countries for Doing Business (2008) – Top 12 Manufacturing Countries in 2007 – Why America Needs an Economic Strategy – Country H-index Rank for Science Publications – USA Spent $2.2 Trillion, 16.2% of GDP, on Health Care in 2007
One factor you must understand when evaluating economic data is that the data is far from straight forward. Even theoretically it is often confusing what something like “savings rate” should represent. And even if that were completely clear the ability to get data that accurately measures what is desired is often difficult if not impossible. Therefore most often there is plenty of question about economic conditions even when examining the best available data. Learning about these realities is important if you wish to be financially literate.
Bigger U.S. Savings Than Official Stats Suggest
A closer look, however, shows that Americans have tightened their belts more sharply than the numbers report. The reason? Official figures for personal spending include a lot of categories, such as Medicare outlays, that are not under the control of households. They also include items, such as education spending, that should be treated as investment in the future rather than current consumption.
After removing these spending categories from the data, let’s call what’s left “pocketbook” spending – the money that consumers actually lay out at retailers and other businesses. By this measure, Americans have cut consumption by $200 billion, or 3.1%, over the past year. This explains why the downturn has hit Main Street hard.
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Finally, for technical reasons the BEA throws in some “spending” categories where no money actually changes hands. The biggest is “rent on owner-occupied housing,” the money that people supposedly pay themselves for living in their own homes. Despite the housing bust, this number rose by 2.6% over the past year, to $1.1 trillion.
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A closer look at BEA numbers shows that Americans reduced spending by 3.1% in the past year, indicating that the savings rate has risen to 6.4%
He raises good issues to consider though I am not sure I agree 100% with his reasoning.
Related: The USA Should Reduce Personal and Government Debt – Financial Markets with Robert Shiller – Save Some of Each Raise – Over 500,000 Jobs Disappeared in November (2008)
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A recent Pew poll found that 21% of Americans planned to grow their own vegetables, 16% had held a garage sale or sold things online and 10% had either taken in a friend or relative or moved in with one. Pundits are coining phrases such as “austerity chic” and “luxury shame”. Four-fifths of Americans told the BCG they would defer big purchases that can wait.
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The beneficiaries of the new parsimony are, unsurprisingly, firms that offer low prices. The only two stocks on the Dow Jones Industrial Average that rose in 2008 were Wal-Mart and McDonald’s.
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The hangover from this party will be long and painful. Households’ total outstanding borrowing fell in the fourth quarter of 2008, for the first time since the second world war. The personal-saving rate rose to 4.2% in the first quarter of 2009, from a nadir of minus 0.7% in 2005. “It is easy to see how consumer deleveraging could result in hundreds of billions of dollars-worth of forgone consumption in coming years,” say Martin Baily, Susan Lund and Charles Atkins of the McKinsey Global Institute.
American consumers are burdened by far too much consumer debt. And spending on non-essentials with debt is un-wise and creates personal risks and a weak (fundamentally) economy. It is true the current economic data will look good when people spend money they don’t have. But it just creates a huge burden for the future economy to cope with.
Related: USA Consumers Paying Down Debt – Too Much Personal Debt – $2,540,000,000,000 in USA Consumer Debt
Why Rising Productivity Is Cause for Worry
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But there may be another, less benign, reason for rising productivity. In past downturns, educated professionals have escaped mainly unscathed. This time businesses are relentlessly hacking at their professional workforce—a tactic that boosts short-term productivity while hurting long-term growth. Rising productivity may be a sign of weakness, not strength.
Over the past year the number of employed professionals has fallen by 0.7%, a rare decline. Outside of the still-growing education and health-care occupations, the number of employed professionals has dropped by a dramatic 3.6%.
Cutting productive staff for short term rewards is definitely a negative for long term productivity. My guess is the management ranks are not as productive as the non-management ranks are however. My sense is their is more room to eliminate non-value added activity from management positions which will not harm long term productivity growth.
A good way to improve productivity is to reduce excessive pay for senior executives. As the money wasted on exorbitant pay that senior executives lavish on themselves is reduced the capital wasted on them can be better deployed in ways that will improve productivity.
Related: The Real Threat Is Decreased Productivity – Manufacturing Productivity – Manufacturing Contracting Globally
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Growing Crude Storage in China
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Bernstein estimates that the amount of crude entering the SPR ports in China—the world’s second biggest oil consumer after the U.S.–has increased by around 400,000 barrels a day since November, based on its assessment using the satellite imaging services of Google, the search engine company.
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There’s likely more to come. Bernstein says satellite images show a marked increase in oil-storage construction over the past few years and estimates that China’s number of days of forward demand–a gauge of oil storage–amount to just 28 days of imports and 14 days of total demand.
China is targeting storage capacity that will hold demand cover of around 90 days. (The U.S. currently has storage for about 62 days of oil imports.) In other words, there’s a lot more oil still to be packed away in China now and in the coming years as more facilities are built.
This is another smart move by China, in my opinion. With the huge amount of cash they are holding, I would rather hold more of it as crude than dollars. And stockpiling the crude also protects the domestic demand from supply shocks. I would also take other steps they are taking, like investing heavily in adding wind power capacity.
Related: I Wouldn’t Sell Oil at These Prices – Who Will Buy All the USA’s Debt? – Oil Consumption by Country – South Korea To Invest $22 Billion in Overseas Energy Projects
Economist blog post on Health care:
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In hindsight there seems something rather perverse about only providing the best care to retired workers. In theory, the government should make private insurance cheaper for everyone else because then the young won’t have to subsidise (at least through their health-care premiums) the old. The main problem, which European countries have learned, is that sustainable, government-provided care and timely access to the most innovative treatments tends to be mutually exclusive.
Related: Many Experts Say Health-Care System Inefficient, Wasteful – Improving the Health Care System – USA Spent $2.2 Trillion, 16.2% of GDP, on Health Care in 2007
Can unemployment claims predict the end of the American recession? by Robert J. Gordon
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To this point I have examined a single indicator to see if it is useful in predicting the end of recessions without any consideration of what is going on in the rest of the economy. Our conclusion is supported by the fact that previous false peaks occurred when new claims were at 80 to 90% of the level at the ultimate true peak. For the peak of 4 April 2009 to be false by this historical precedent, the ultimate future peak would have to be in the range of 730,000 to 800,000. As the weeks go by, such a sharp future increase in new claims looks increasingly implausible.
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My reasoning leads me to conclude that the ultimate NBER trough of the current business cycle is likely to occur in May or June 2009, substantially earlier than is currently predicted by many professional forecasters.
Interesting points. Time will tell what happens. I am skeptical this measure alone will prove to be perfect but I can believe it will be one useful measure to consider. I tend to be skeptical we are close to a strong recovery. But at what point the economy moves out of a recession is less certain. I still believe we will be lucky if we show job gains by the end of this year.
Related: How Much Worse Can the Mortgage Crisis Get? (March 2008) – Unemployment Rate Increased to 8.9% – Manufacturing Employment Data – 1979 to 2007 – First Quarter 2009 GDP down 6.1% – Poll: 60% say Depression Likely (Oct 2008)
Welcome to the second edition of our investing and economics carnival.
- How Does the Current Crisis Compare to the Great Depression? by Price Fishback – “How does this compare to the Great Depression? We won’t know the final outcome of this recession for a while, but I can safely say that the current situation is nowhere near as bad as the situation during the 1930’s.”
- US GDP and imports by Matt Nolan – “Now, this doesn’t actually make sense as a measure to look at. Why? Well when we measure GDP we are interested in ‘domestic production’…”
- 100th Entrepreneur Loan by John Hunter – “Participating with Kiva is a great antidote to reading about the unethical ‘leaders’ taking huge sums to run their companies into the ground (or even just taking obscene sums to maintain their company). The opportunity to give real capitalists an chance at a better life is wonderful.”
- The Best 15 Financial iPhone Apps by David Weliver – “More than a dozen great financial apps for the iPhone make tracking and managing your personal finances on the go as easy as texting. Want to enlist your iPhone to help you get richer?”
- Bolster Your Emergency Fund In A Prolonged Crisis – “To prepare for the worst, we should picture an unemployed scenario and get serious about bulking up our emergency fund to meet at least six to eight months of expenses.”
- How to make money without a job and why you should – “There are two more advantages to alternative income besides diversification of income sources. First of all is the expansion of skills… You are learning something new, and making it that much more likely that you’ll be able to add further income streams…
- Five Low-Risk Stocks For Gen Y – “There are much better alternatives for the ultra-conservative Gen Y investors than money market accounts, Treasuries and CDs. A conservative strategy focusing on high quality, low risk dividend stocks should significantly out-perform the above investments, with very little incremental long-term risk.”
- 5 easy ways to save money and the environment – “Bottled water is a huge drain on our resources and are grossly overpriced. Reusable water bottles use fewer resources, save you money… Compact fluorescent light bulbs use 25% of the energy of standard incandescent bulbs and usually last 5 years or more…”
- Text Messaging is the Biggest Scam of the 21st Century – “The cost per GB of cable internet is $0.75… the cost per GB of cell phone data $6.00… the cost per GB of text messaging data is $800…”
I decided to add this investing and economics carnival after running the Curious Cat Management Management Improvement Carnival for several years. If you like these posts you may also be interested in the Invest Reddit where a community of those interested in investing submit and rate articles and blog posts.
Nonfarm payroll employment continued to decline in April, and the unemployment rate rose from 8.5 to 8.9 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Since the recession began in December 2007, 5.7 million jobs have been lost. In April, job losses were large and widespread across nearly all major private-sector industries. Overall, private-sector employment fell by 611,000.
The number of unemployed persons increased by 563,000 to 13.7 million. Unemployment rates for April for adult men reached 9.4% and for adult women 7.1%. The number of long-term unemployed (those jobless for 27 weeks or more) increased by 498,000 to 3.7 million over the month and has risen by 2.4 million since the start of the recession in December 2007.
The civilian labor force participation rate rose in April to 65.8 percent, and the employment-population ratio was unchanged at 59.9 percent. The employment-population ratios for adult men and women showed little or no change over the month. However, since December 2007, the men’s ratio was down by 440 basis points, while the women’s ratio was down by 130 basis points. Since those that stop looking for work (retire or just stop actively looking) are not counted as unemployed the participation rate is a useful statistic to examine in conjunction with the unemployment rate.
Much of the commentary on the April job losses have been that the decrease in the number of job losses from previous months shows the economy is stabilizing. While it is true losing 611,000 jobs is better than losing 700,000 jobs, losing 611,000 is still very bad. The unemployment rate increased to 8.9% and long term unemployment is increasing drastically. This is hardly good economic news. It is true that there is hope that the economy is turning around, but the employment data we have so far is hardly positive (employment data is a lagging economic indicator so it is not surprising employment data does not recover before other signs point to improvement).
Related: Another 663,000 Jobs Lost in March in the USA – USA Unemployment Rate Rises to 8.1%, Highest Level Since 1983 – Over 500,000 Jobs Disappeared in November – What Do Unemployment Stats Mean?
Each year Warren Buffett and Charlie Munger answer questions in front of crowds of tens of thousands of Berkshire Hathaway shareholders in Omaha, Nebraska. The question and answer sessions provide great wisdom on economics, investing and management. Here are some of the highlights I have found from the meeting yesterday.
Buffett, Munger praise Google’s ‘moat’
Berkshire’s Buffett Calls Wells Fargo ‘Fabulous’ Bank
The stock closed at $19.61 yesterday after falling below $9 in March. Buffett said he was speaking to a class the day the shares dropped that low and told students that, at that price, “If I had to put all of my net worth into stock, that would be the stock.”
Buffett, who has said he values lenders partly on their ability to acquire funds from depositors, told shareholders today that he’d “love” to buy the entire bank and is unable to do so because Berkshire wouldn’t get permission from regulators.
But he warned that efforts such as the Treasury’s $700 billion Troubled Asset Relief Program and the $787 billion fiscal stimulus plan passed this year by Congress will have to be paid for, one way or another. And with political leaders showing little inclination to raise taxes, one sure way to pay for excess spending is to inflate the value of the currency, Buffett said. The biggest losers in a surge of inflation, he added, would include holders of bonds and other fixed-income assets.
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“Government does need to step in,” Buffett said, referring to the 6% contraction of the U.S. economy in the fourth quarter of 2008 and the first quarter of 2009.
That’s not to say he is pleased with the earmarks Congress has attached to some of the rescue legislation. Inevitably, Buffett said, when big organizations turn massive resources on a problem, “there’s a fair amount of slop.”
Related: Berkshire Hathaway Annual Meeting 2008 – Warren Buffett’s Letter to Shareholders 2009 – Great Advice from Warren Buffett – Warren Buffett’s 2004 Annual Report
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