The rise of the Internet has created an abundance of easily assessable economic information, making it difficult for investors to understand, digest, and even evaluate what’s going on. Where, then, can investors turn for objective economic analysis, market research, and breaking fiscal news that affects both Wall Street and Main Street?
Economic analysis means looking at the interconnected effects of global events. These events can be major, such as geopolitical tensions, elections, corporate earnings, housing markets, consumer sentiment, and rising unemployment rates, or seemingly innocuous news stories, including mergers and acquisitions, crude oil inventories, auto loans, birth rates, and retiring Baby Boomers.
When the U.S. economy was on the verge of collapse after the financial crisis of 2008, the Federal Reserve came to the rescue. The central bank provided the financial system with quantitative easing—it printed money and bought bad debt from the big banks. As a result, the Federal Reserve’s balance sheet has ballooned to $3.0 trillion; and continues to grow.
The eurozone is struggling to get out of a debt crisis that has been helping weigh down the global economy. Germany and France, the go-to countries for growth and stability in the eurozone, are beginning to feel the impact of the region’s economic strain. And may not be able to support the region and prevent it from slipping into a recession.
What does this mean for the eurozone? How will it impact the United States?
The global economy is in a state of eternal flux. Because global economies are interconnected and interdependent, geography is no longer a barrier to economic growth or failure. And why it’s essential to understand the global picture when looking at the U.S. economy.
China, the information age, an end to the 30-year down cycle in interest rates, the credit crisis, the debt crisis in America, the eurozone crisis, tensions in the Middle East…these are only a few of the events affecting the U.S. economy.
That’s also why in-depth macroeconomic and microeconomic analysis is more important than ever. It helps investors see the world from different perspectives and helps uncover opportunities to balance, diversify, and grow stock portfolios.
It’s not a hidden fact that the biggest force that drives the U.S. economy is consumer spending. If it declines, you can say the odds of a slowdown in the U.S. economy are increasing. Consumer spending roughly makes up 70% of U.S. gross domestic product (GDP), so you can imagine how a small change can make a huge difference.
Well, this is exactly what the U.S. economy is going through. Consumer spending is at stake, so it shouldn’t be a surprise that economic growth is on the line.
One of the key indicators of consumer spending is consumer confidence. The logic is very simple: if consumers feel good, they will go out and spend. When paranoid or afraid of change, they will do the opposite and step back, reducing their spending.
The Conference Board Consumer Confidence Index, a key indicator of where consumer spending is headed, declined in September, dragging down almost 2.5%, from 81.8% in August to 79.7% now. (Source: “The Conference Board Consumer Confidence Index Falls Slightly,” Conference Board web site, September 24, 2013.)
Unfortunately, we are already starting to see early indications of deteriorating consumer spending.
In August, new orders for durable goods in the U.S. economy, excluding transportation, declined 0.1%. At the same time, the inventory levels at the manufacturers of durable goods continue to increase. In August, they increased $0.3 billion, or 0.1 %, to $379.1 billion; this was the highest level since this data was first published. You don’t want to see this combination of declining orders and increasing inventory when you are hoping for economic growth. (Source: “Advance Report on Durable Goods Manufacturers’ … Read More
The financial crisis struck the U.S. economy five years ago. Those who remember the collapse of Lehman Brothers know how much uncertainty was actually there. It seemed the U.S. economy was going to halt and the financial system would collapse. Ripples across the global economy were felt. Nothing looked safe—it was a total bloodbath. Investors had many questions, including if they would be able to protect their nest eggs.
As a result of all this, to fight the uncertainty and handle the issues at hand, the U.S. government and the central bank jumped in and started to spend. They bailed out the big banks in the U.S. economy to make sure everything would continue to run smoothly. We passed through that successfully, and the worst didn’t come upon us.
Sadly, as all this happened, we saw troubling trends starting to form in the U.S. economy.
Look at the national debt.
As the government started to rev up its spending spree, it posted a budget deficit and eventually borrowed money. To give you some idea, in January of 2008, when the behemoth was starting to awaken, the national debt of the U.S. economy stood at $9.2 trillion. Fast-forwarding to now, it stands at $16.7 trillion. Simple math suggests this is an increase of more than 81%. (Source: “The Daily History of the Debt Results,” Treasury Direct web site, last accessed September 20, 2013.)
Unfortunately, it doesn’t end here. Not too long ago, Treasury secretary Jack Lew sent a letter to the U.S. government saying that if they don’t increase the national debt limit currently in place by October, the U.S. economy … Read More
It wasn’t all that long ago that first-time home buyers were responsible for fuelling the housing market. They’d buy starter homes and fix them up; this helped sellers move to bigger homes, and so on. Then the housing market crisis began, and everything became topsy-turvy.
Today, first-time home buyers are competing with well-heeled individuals and investors looking to snap up distressed houses at bargain prices. This simple shift could undermine the long-term growth of the still-struggling U.S. housing market.
The most recent data shows that more than half of all homes sold last year and so far this year in the U.S. have been paid for in cash. Before the housing market crisis, just 20% of all homes were purchased with cash; since then, the all-cash purchase rate has more than doubled.
Why the huge increase? Even though mortgage rates continue to hover near record low levels, many first-time home buyers have been locked out due to tighter lending rules. They’re also getting outbid by well-heeled investors and institutions looking to add real estate to their portfolio. Many homeowners cannot trade up to a larger home because their homes have, since 2007, lost so much of their value—which means many homeowners are staying put.
A 2012 poll of homeowners, conducted by the National Association of The Remodeling Industry, found that more than a quarter of respondents (26%) said they plan to stay in their homes for an additional 16 to 20 years, because their home’s value decreased so much during the recession. On top of that, 23% said they were going to stay put for an additional six to 20 … Read More
No matter what the overarching economics are in the U.S., the fact of the matter is that you really can’t beat the Federal Reserve.
Sure, unemployment and underemployment are high, consumer confidence is down, personal debt is high, and housing prices are still 25% below their 2006 highs, but with the Federal Reserve dumping $85.0 billion per month into the markets and keeping interest rates artificially low, the markets can’t help but rejoice. And until those two dynamics change, the markets will continue to rally, with the odd pullback—which, for most investors, signals the perfect time to rebalance their portfolio.
And right now, it looks as if the winds on Wall Street are favoring the eurozone. After starting in the latter part of 2011, the longest ever eurozone recession has come to an end.
The economies of the 17-member eurozone grew by 0.3% during the second quarter, which is more than expected; the general consensus had the eurozone climbing at a rate of 0.2%. Some think the stronger-than-expected results provide further evidence that the worst of the eurozone’s debt crisis is over. (Source: “Eurozone comes out of recession,” BBC web site, August 14, 2013.)
But it might not be quite that cut and dry. The growth was driven mainly by business and consumer spending in Germany and France, the eurozone’s two largest economies. During the second quarter, Germany’s economy grew 0.7%, while France’s economy increased 0.5%.
Other countries in the eurozone have not been quite as fortunate. Spain and Italy are still struggling, Greece’s economy slipped 4.6% year-over-year, and the Netherlands and Cyprus are still in recession.
When the eurozone … Read More
America’s favorite sugar daddy, Federal Reserve chairman Ben Bernanke, has once again come to Wall Street’s rescue. The U.S. Federal Reserve said that while the economy continues to recover, it is still in need of support. As a result, it will continue its $85.0 billion-per-month bond-buying program unabated. (Source: “Federal Reserve Issues FOMC Statement,” Board of Governors of the Federal Reserve System web site, July 31, 2013.)
Before the markets opened Wednesday, the Bureau of Economic Analysis reported that second-quarter U.S. gross domestic product (GDP) expanded at a faster-than-expected pace of 1.7%; that’s up from a revised 1.1% in the first quarter. (Source: “National Income and Product Accounts Gross Domestic Product, second quarter 2013 (advance estimate),” Bureau of Economic Analysis web site, July 31, 2013.)
Despite the better-than-expected results, the Federal Reserve said that the U.S. economy expanded at a modest pace during the first six months of the year, and that the overall economic picture remains lackluster.
To help quell nervous investors, the Federal Reserve also revised the unemployment rate at which it would consider raising interest rates to six percent; previously, the Federal Reserve had said it would raise interest rates once the jobless rate hit 6.5%. Needless to say, with unemployment sitting at 7.6%, the U.S. economy has a long way to go.
Lower long-term interest rates are supposed to encourage consumers and businesses to take out loans for homes, new equipment, etc. At the same time, banks have been reluctant to lend to those who need it the most, which is reflected on Wall Street. Thanks to the Federal Reserve’s $85.0-billion-per-month quantitative easing policy, the S&P … Read More