Outside Economics

The yield on the 10-year U.S. Treasury fell to a record low of 1.318 percent in early July, sending bond prices higher throughout the fixed income markets. Bonds have continued their rally since the beginning of the year as the Fed has held off on raising rates, while central banks in Japan and Europe have maintained unprecedented low rates.

Repercussions from Brexit channeled money towards the perceived safety of German government bonds in July, as Germany became the first country in the EU to sell 10-year government bonds with a negative yield at auction. A negative yield means that investors are willing to essentially pay Germany in exchange for holding funds in German bonds. Germany sold  €4.8 billion ($5.3 billion) of 10-year notes at an auction, with a yield of -0.05 %. 

As of this past month there has been a continuous decline in long-term interest rates for 25 years, spanning from 8.3% in 1991 to 1.36% in July for the 10-year U.S. Treasury. Some bond analysts estimate that any continued decline in yields has become much less probable. But we all know, never say never!

With the Fed and its monetary stimulus efforts at capacity, many economists believe that this leaves ample room for fiscal stimulus in the form of lower tax rates. The presidential campaign has brought about the topic of lowering taxes and perhaps at a timely juncture that would help stimulate economic growth where the Fed may not be able to any longer.

A chellenge with this thought, is that this comes at a time when the federal government needs all the money it can get its hands on. (see the article: How Interest Rates Feed the Pig.) Its a fact that lower taxes has proven to increase the the total tax revenue, however to many people lowering taxes is unfair.  

This news on the heals of all the economy has been through since the Great Recession is a clear indicator that the economy has not completely recovered. With intermediate interest rates way below the historical average of 5.5%, this becomes a very serious concern for retirees who depend on their fixed income securities to help pay for their living expenses.

What to Do

Understanding this, the rate at which a person withdraws money from their retirement accounts will have a huge impact on the longevity of that account. People will need to simply save more for retirement and or live on less than originally expected. Both are unpleasant challenges. Getting out of debt will help with both of those challenges, as it frees up cash flow for additional savings and with little to no debt, it requires much less to live on. 

One strategy would be to take out much less during the earlier years of retirement and allow your savings to continue to grow, even for an additional five to seven years. This extra seasoning of your portfolio would make a world of difference.  Those who are preretirees may want to consider to start winding down their spending and try living on much less income, this will allow you to put more in savings and or get more debt paid off. It will also start you on a road of more discipline in your finances.

Sources: Federal Reserve, Bloomberg

Remember:

Training is everything. The peach was once a bitter almond, and the cauliflower is nothing but a cabbage with a college education.  - Mark Twain

In the United States we have enjoyed the largest economy in the world for so long that we often don't think of how events around the globe affect us. Maybe we just don't want to admit that we are suceptable to the economic occurances that take place twelve thousand miles away in some small country! But those things do affect us now that we really operate in a global economy and the macro view is not just a look at the United States any more - it is a look at the world. Maybe we will have to reference Macro as the Super Macro View for the world economy, vs. the Macro View for the U.S. Economy. Luckly we have not sneezed this year so the rest of the world has not caught a cold, but there are events that have occured that are affecting us. Maybe what we have is a case of "the argues" as old Festus from Gunsmoke use to describe his aches or pains in his body - it was when one part of the body was arguing with the other! (Wow that really dates me!)

Macro Overview

Macro risks are still prevalent throughout the world as the effects of Brexit and terrorism continue to be ongoing concerns. U.S. markets have been resilient to the uncertainties, as major U.S. stock indices reached new highs in July.

Some believe that the outcome of the EU vote, as well as the sentiment in Britain shortly before the vote to leave the EU, has many similarities to the U.S. presidential race. Key election issues and how they may affect the economy include: NAFTA, immigration, terrorism, and banking regulations such as Glass-Steagall and Dodd-Frank.

The presidential campaign has brought about the suggestion of reforming existing regulations, which are adversely affecting the banking and financial services industry. Some candidates argue for the repeal of Dodd-Frank, regulations put in place during the current administration to regulate banking activity.

The problem has been that the costs of the new regulations have inhibited smaller banks and credit unions. Some candidates lobbied to bring back legislation known as Glass-Steagall, put in place during the depression in order to prevent banks from combining financial services and lending simultaneously with the more risky business of investment banking.

In the last eight years since the “Great Recession” there have only been four community banks started in all 50 states, down from about 160 in 2007. Community banks are often a major economic engine for the local economies.

Economic growth, measured as GDP, was reported by the U.S. Department of Commerce to have increased at an annual rate of 1.2 % in the second quarter of 2016, below analyst’s expectations of 2.5%. The dismal GDP report was accompanied by a drop in oil prices of over 15% in July and a record low for the 10-year Treasury yield hitting 1.37%.

Upcoming economic data for the U.S. may influence the Federal Reserve to act on raising rates rather than waiting any longer. Analysts believe that a rate increase by the Fed before the end of 2016 based on U.S. economic data may be a mistake. Rates in Europe and Japan remain in negative territory due to the uncertainty of growth within the EU and the expected derogatory effects of Brexit on global business transactions. Fed members decided to leave interest rates unchanged during their July meeting, stating that it was prudent to wait for more data following the consequences of Britain leaving the EU.

Banks in Italy have become the latest of concerns in Europe as souring loans are being recognized throughout the Italian banking sector. As the third largest economy in the EU, Italy’s banking sector is prone to a crisis that could have dire consequences for the country and neighboring trading partners.

Stagflation On The Horizon – Monetary Policy

Former Fed Chairman Alan Greenspan said that the U.S. may be heading toward stagflation, a slow-growth economy coupled with rising inflationary pressures. Greenspan also said that there seems to be pockets of inflation even though low productivity is prevalent in the economy.

Stagflation is an economic phenomenon when there is slow or stagnant economic growth at the same time as rising inflationary pressures. The 70’s were a period when rapidly rising fuel prices coupled with dismal economic growth, led to stagflation. This same scenario occurred in the first two years of the 80’s, until both monetary and fiscal policies were enacted that halted destructive inflationary pressures and curtailed taxes to boost economic activity.

Inflation is measured by the CPI (Consumer Price Index) and economic growth is gauged by GDP (Gross Domestic Product), which are both released by the Department of Commerce each month. As a barometer of general prices throughout the country as well as current economic activity, both indices help identify any possible stagflation scenarios.

Managing your way through this current economic time can be challenging. It would seem that rates will remain low for the near future, certainly into 2017. The Fed may make minor adjustments, but I don’t think we will see any drastic increases. Wall Street needs better earnings to keep it going, I think they have had their fill of low rates. It’s a good time to review where you are at, and how your plans are shaping up for the year. Additionally, now is the time to start the final work for income tax reduction strategies, as we finish the third quarter. It much better to do this now rather than starting in December!

The current low rate environment, is no longer an effort to keep fueling Wall Street, but in an effort to keep the Federal Government afloat (they are the largest borrower in the world). If rates increase for the government, then ALL TAXES must go up to pay for the increases in interest payments. Don’t get me wrong, lower rates do help the Market, but the Market has adpted to lower rates for some time.  Now the Federal Government needs to get its borrowing under control for the rest of the economy to move forward. (See Feed the Pig Article)

Sources: EuroStat, Dept. of Commerce, BEA, Federal Reserve, ECB

Remember:

"So that the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system."  Milton Friedman

Market forces in the economy help determine the rental rates in every community. Each landlord worries whether the ad they ran to attract a renter, will actually bring one in who will not only pay the rent on time, but take care of the property. And hopefully not burn the place down as one of my tenants did 20 years ago! In any event, I certainly understand the other side too - people want to live the American Dream and own their own property/house/castle! It is hard to make the leap and buy a home, when we are surrounded with economic turbulence and uncertainty. Home ownership requires a higher level of economic stability.

As banks and financial institutions have been mandated to increase their loan qualifications for home mortgages due to government regulations, more and more families are being forced to rent rather than own. As the demand for rentals has been increasing, the level of home ownership has been falling. Some attribute this dynamic to a low inventory of homes on the market, while others blame excessive government requirements imposed on mortgage lenders.

A lack of available rentals along with the increased demand for rentals has propelled rental costs upward. The number of individuals dedicating at least half of their income towards rent hit a record high of 11 million people in 2014, according to the annual State of the Nation’s Housing Report from the Joint Center for Housing Studies.

As rental prices have been rising faster than wages, losing such a large portion of a paycheck to cover housing, means cutting back on essentials such as food, clothing, and health care. This can be draining on young families trying to save for a down payment on a home and then not knowing if they would be able to get approved or not.

Last year saw the biggest surge in new renters in history, according to the report on Housing Studies, bringing the number of people living in rental units to around 110 million people, accounting for about 36% of households. Middle-aged renters made up a substantial portion of the new demand with 40% of renters aged 30-49.

More affluent renters are staying in the rental market longer and driving up the demand for housing.  Traditionally, the wealthy move on to become homeowners, but tight inventory in the housing market is keeping them in rentals longer.

The median rent on a new apartment was $1,381 in 2015, according to the report, which means that a renter would have to make at least $55,000 a year before taxes in order to be able to afford the rent.

It is important to remember also that many people rent for various reasons, they are in work transition, divorce, personal choice, students, newly immigrated. The fact that so many poeple rent is not such an issue as the percent of their income going to pay for rent - that is where the government gets all bent out of shape. According to their model, housing should not cost more than 30% of household income.

When 11 million people pay upwards of 50% of their income for rent, this is going to add fuel to the fire for raising the minimum wage or some sort of rent controls. Either way there will be those in government that think they need to "solve this problem". Landlords: Watch Out!

Owning a home or renting requires effort to budget your income properly. Any time housing costs reaches close to 50% of income things get really tight. As one of my old financial planning professors use to say, “There are only two things you can do, help people cut expenses or help increase cash flow.” In life there are only so many expenses you can cut, and for many people you can only pound so many nails in a day. But generally increasing income provides the greatest opportunity. It is wonderful to see people transition from barely making ends meet to an abundance!  

Sources: Joint Center For Housing Studies

Remember:

The economy this past quarter has been a great improvement over the first quarter. I am expecting some market stability as we head into the convention season and through this years election cycle. Who is elected will determine much of what happens next. We are however due for a recession soon, depending on which economist you follow. I fully expect we will see something in the next 12 to 24 months. 

Macro Overview 

The British vote to exit the EU (Brexit) was essentially a validation that a disintegration process of the EU is possibly underway, causing destabilization for countries throughout the EU. Britain’s vote may lead to other similar referendums, particularly with the Netherlands and France where populist sentiment is growing.

The British pound fell to a 30-year low versus the U.S. dollar following the outcome of the referendum. Conversely, the fall in value for the British pound can be beneficial for the country as Britain’s exports become cheaper worldwide and tourism increases as stronger foreign currencies come into the country.

The unraveling of Britain from the EU is not expected to be automatic or immediate and may take years for it to finalize. Britain would need to execute a divorce clause titled Article 50 of the EU agreement in order to move forward with the separation from the EU. Several member EU countries, including the IMF, are eager to have Britain expedite the exit in order to minimize uncertainty.

In the wake of the referendum’s outcome, international equity markets tumbled as uncertainty led the course. U.S. financial markets were incredibly resilient following the days after the British EU vote, with U.S. equity and bond prices all propelling to higher levels. 

The Fed’s plan to further increase rates this year took a different course as the repercussions from Britain’s EU vote are expected to lead to slowing economic growth and a sustained low interest rate environment. Some Fed watchers believe that the Fed may ramp up its stimulus efforts again with lowering rates should the EU and Europe’s economy falter.

Overshadowed by the Brexit news, the U.S. Census Bureau reported data that may help solidify the Fed’s wait to raise rates. Durable goods orders fell 2.2% in May, worse than anticipated. Such data is an indicator of whether inflationary pressures are present and if inconsistent expansion exists in the economy due to less capital spending.

In the midst of the Brexit turmoil, the Federal Reserve announced that 33 selected U.S. banks passed an imposed stress test to see how well they would perform under severe circumstances, such as high unemployment, recession, and falling asset prices. The stress test revealed that the 33 banks tested had nearly twice the amount of required capital needed, up significantly from the last stress test conducted.

Equity Update – Domestic & Global Stock Markets

U.S. stocks fared better than international stocks following Britain’s announcement on leaving the EU. U.S. equity markets were resilient once the surprise of Brexit unfolded, with the S&P 500 Index and the Dow Jones Industrial Index both positive for the year.

Domestic equities are more insulated from global developments and any other major equity markets since American companies generate 70% of the revenues from the United States. Japanese companies generate 50% from within their economy only and European companies generating a mere 49% from Europe only.

U.S. equities are considered attractive relative to negative yielding government bonds in Asia and parts of Europe, even as the U.S. 10-year note finished below 1.5% in June. The S&P 500 index currently carries 60% of its stocks with a dividend yield higher than the 10-year treasury bond yield.

The primary British equity index, the FTSE 100, tumbled in June following the Brexit vote. Companies within the index generate about 75% of their revenues outside the U.K., with many maintaining contracts and arrangements with other companies based in other EU countries. Since the actual extraction of Britain from the EU may take years, decisions for capital spending and expansion by European companies may be hindered.

Certain equity sectors are becoming increasingly sensitive to what the presidential candidates are proposing.  Concerns lie with those sectors where newly enacted regulatory policy can inhibit growth and profits. Other sectors are being adversely affected by low rates, such as banks whose earnings are hindered by low rates, which limits the amount of profits they can earn as deposits fall and loan rates drop.

Precious Metals, Oil & Gas, and Wages

Precious metals have increased dramatically this past quarter. Economist, Mark Skousen, said, “I think they (Federal Reserve officials) are working overtime to bring inflation back. Gold, which is finally moving, is the best indicator of future inflation. So we may see a return of inflation here if the gold market continues to rise. So that's what I'm looking at more than the bond market.”

Silver has rallied this year increasing nearly about $6.30 per ounce over the $13.83 at the start of the year. That is a 45.55 percent increase in price. For the past several days it has reacted independently of gold as gold prices have come down a bit; Silver has continued to go up. It seems there may be some hedging going on due to Silver’s expanded use in industrial applications. These are the highest prices for silver since the summer of 2014.  

Oil and Natural Gas are also on the rise. According to Dan Steffens, President of Energy Prospectus Group, (EPG) of Houston, TX, “The combination of rising demand and falling production has pushed the natural gas prices up from $1.70/mmbtu in February to near $3.00 at the end of June. My prediction is now we will see gas trading for more than $4.00/mmbtu by December.” If that is the case, lets hope all the global warming kicks in so we have a mild winter or we will be paying more than double for heat.  

With U.S. oil production down from last year, we are back to importing about 50% of our oil. Other countries are having production issues too, which may cause an increase up to about $70/bbl by the end of the year. Third quarter typically sees an increase in oil demand due to summer travel, which could easily eat up the surplus that has been keeping oil prices low. Some analyst think that oil will remain fairly steady around $50/bbl for the near future.

The Department of Labor reported that average hourly earnings grew by 2.5% over the past year, thus placing pressure on corporate earnings as wages move up. Many analysts believe that wages will continue to increase as unemployment rates remain below 5%, enticing companies to keep performing workers and paying them more.

After a market run up as we have seen this past quarter, I would not be surprised to see some profit taking in the next couple months, particularly if this earnings season does not produce any great results. If inflation takes off  then expect oil, precious metals, wages and other commodities to increase, which will certainly put pressure on corporate profits, and will also stress the markets. Now is a good time to continue to get out of debt and put a little extra away for a rainy day. 

Kind Regards,

Your Arm-Chair Economist

Sources: Eurostat, Department of Labor, S&P, Bloomberg, Federal Reserve, U.S. Census Bureau, EPG

Last week we looked at our inflation, now we will take a looks at what hyper inflation looks like  for one of our neighbors to the south. The price of oil has affected many economies around the world. It has hurt our economy in many ways, and helped in many other ways. But our economy is we diversified which is why the low price of oil has had such a balancing effect in our economy - other countries are not so blessed. 

One major oil exporter, Venezuela, is particularly hurting because of the low oil prices. As oil became the main income source, the country began to ignore other industries, like agriculture, and thus requires most of their food to be imported from Columbia and the United States. 

Before the 1950s agriculture was greater than 50 percent of Venezuela’s GDP, now it accounts for approximately five percent of GDP. This is a serious problem for the country’s leadership. As oil prices drop they are truly hurting. Its like still needing to feed the family on half the income; some things you can no longer afford and you don't have the economic base to find the income from other sources.

With oil exports accounting for over 95% of Venezuela’s revenue, the 50% collapse of oil prices in the past two years has thrown the country into fiscal and political turmoil. In order to raise critical cash to keep the government operational, officials have started to sell the country’s gold reserves. 

Even though the country is a major exporter of oil, it is also a major importer of essential goods for its citizens. The country’s currency, the bolivar, has collapsed to the value of one U.S. cent, creating hyperinflation which led to prices soaring over 121% in 2015, and expected to rise nearly 500% in 2016, as estimated by the IMF.

Inflation of this magnitude is similar to having a massive heart attack after twenty years of high blood pressure! It can really kill an economy!

In addition to its fiscal woes, the country is also suffering from little rain, which has brought about severe electricity shortages due to its main source of power generation, a dam whose water levels have dropped to historical lows. In late April, the country’s president ordered a two-day work week for government employees, in order to stem the consumption of electricity. The government workweek now is down to Mondays and Tuesdays, affecting roughly 2.6 million employees, representing 20% of the nation’s workforce.

Economic conditions have worsened, as the economy shrank 5.7% in 2015 and is projected to shrink another 8% in 2016, as estimated by the IMF. Such dire circumstances have created concern among U.S. officials, which are increasingly worried about an unraveling socialist economy and a political meltdown. Such an occurrence could lead to social unrest, chaos and political instability, causing tensions to rise with neighboring countries in South America.

So why is this important? Well hopefully two reasons: 1. perhaps it will bring about a political change, which will move the country back to a democracy and a free market economy and away from its current socialist/communist government. 2. hopefully they will begin to expand their industrial base and grow into other industries besides oil. Any time an economy is based on a single product the risk goes way up for future economic troubles.  

Additionally, it would be great for our two countries to get along better - geographically we are very close to Venezuela (less than 1400 miles) and the several people I know from Venezuela are wonderful people!

Sources: IMF

Remember:

There are plenty of good five cent cigars in the country. The trouble is they cost a quarter.
Franklin Pierce Adams

With a population of 38 million people, California maintains the single largest cluster of hourly workers of all 50 states at over 9.1 million workers, per U.S. Labor Department data released in 2015 . According to Kevin De Leon, president pro tempore of the California state senate, about 5.6 million Californians, representing roughly 32% of the state’s workforce, currently live on the minimum wage.

California’s current statewide minimum wage of $10 per hour is already among the highest in the country. The state of New York is also considering raising its minimum wage to $15 per hour, where fast food restaurants are already subject to a $15 per hour minimum.

Both houses of California’s state legislature passed a measure to raise the wage on March 31st. California’s current minimum wage is set at $10 an hour. Under the measures, increases would start in 2017 with a $0.50 hike to $10.50 an hour. This would be followed by another $0.50 raise in 2018, and then annual $1.00 increases through 2022.

Individual cities and counties may also impose their own minimum rates, such as Los Angeles which will be increasing its minimum to $15 per hour by 2020.

Nationally, the federal minimum wage has not increased since 2009 and is currently set at $7.25 an hour, yet 29 states and D.C. have higher minimums.

For over 74 years, workers in the United States have been granted a minimum wage level for their benefit. An initial attempt to establish a minimum level for wages occurred in 1933, when a depression era mandate set a wage minimum at 25 cents per hour ($4.10 in 2012 dollars). The National Industrial Recovery Act, which was the act that the initial wage evolved from, was declared unconstitutional by the Supreme Court in 1935.

In 1938, the minimum wage was re-established successfully under the Fair Labor Standards Act. The act held ground because the Supreme Court noted that Congress had the power under the Commerce Clause to regulate employment conditions. Since then, a minimum wage has always been in place and enforced nationally.

The Fair Labor Standards Act sets federal minimum wage standards, while state governments set state minimum wages. While some states have higher minimum wage standards than federal law, others have the same rate or none at all. Where federal and state laws have different minimum wage rates, the higher standard (wage) applies.

Some states don’t impose a minimum wage and just let employers abide by the federal standards. Alabama, Louisiana, Mississippi, South Carolina, and Tennessee currently have no minimum wage.

Sources: U.S. Bureau of Labor Statistics: Characteristics Minimum Wage Workers 2014 Table 3, Released 2015; www.senate.ca.gov

Equity markets rebounded in March as rate hike fears eased and healthy domestic economic data revealed consistent conditions, resulting in a resounding turnaround from the market lows experienced in February. Market volatility appears to be mellowing compared to a year ago (except for oil). “With Volatility trending lower assets further out on the risk spectrum, such as Emerging Markets, Small Caps, and High Yield rallied.”

This first quarter has seen a healthy run up in the prices of gold and silver, however the returns are fading as profit takers sell off. Some of the reason for the price moves, poor stock market return, fears about interest rate hikes, on going inflation worries and currency weakness. Some analysts believe that gold will drop back to support level of about $1,150 per ounce by third quarter; while Credit Suisse has increased its forecast for first quarter 2017 to $1,313 per ounce and Silver to $16.50 per ounce. Whom ever you believe it appears that at current prices gold and silly er are still pretty good buys. 

The concern of a rapid rate increase by the Federal Reserve subsided towards the end of the 1^st quarter, as Fed Chairperson Janet Yellen helped tame prior remarks made by fellow Federal Reserve members. Subdued inflation and economic growth expectations led the Fed to curtail its stance on predetermined rate hikes. The Fed identified “global economic and financial developments continue to pose risks”.

Labor Department data released for the first week in March showed that merely 253,000 Americans filed for unemployment, the fewest number since 1973. Economists view the lessening amount of unemployment applicants as a validation that the labor market continues to steadily strengthen.

Additionally, the Labor Department’s monthly employment report for March showed a 215,000 increase in jobs, with an increase in the unemployment rate to 5% from 4.9%, signaling that more people have entered the labor force.

Some analysts believe that oil may have found a bottom around $26 per barrel in the first quarter, alleviating fears of a further oil price drop. Oil prices recovered in March from persistent lows earlier in the year. This recovery will help strengthen the economy - a fair balance in oil prices will only help keep things moving.

Easing rate hike concerns led to the dollar’s derailment from its uptrend during the quarter, creating opportunities for additional exports, as American made products become less expensive for international buyers.

A new acronym arose from international central banks lowering rates to negative territories, NIPR (Negative Interest Rate Policy). The Bank of Japan adopted negative interest rates in January and lowered key lending rates to below 0%, nearly a year and a half after the European Central Bank became the first major institution of its kind to venture below zero. Other countries meandering into the negative arena include Switzerland, Denmark and Sweden.

The ECB ramped up its economic stimulus efforts in Europe by increasing its bond purchases from 60 billion euros to 80 billion euros per month. In addition, the central bank will be buying both government bonds and investment grade corporate bonds. Markets welcomed the strategy of venturing into the corporate realm, sending bond prices higher due to a limited supply of the debt.

The economy continues to worry many people, I see many people who have just been laid off from their job, which is a very big concern. This gives rise to worries about a future recession - some analysts talk that we are long over due, others say that we have not fully recovered from the last "Great Recession". Personally, I think while the technical definition of a recession ended in 2009, we have not fully recovered. For many people it certainly does not feel like it has ended, as they are not any better off. They feel like they are still treading water. However I don't see the U.S. slipping into a recession until after the presidential election this fall, so maybe in the first half of 2017.

Sources: Fed, Dept. of Labor, Eurostat, ECB, Dept. of Energy, State Street Global Advisors

Each month, the Energy Information Agency (EIA) tracks the price of gasoline nationwide as well as how much households (consumers) are buying overall.

The EIA expects gasoline prices to start rising this year, while continuing to head higher into 2017 as demand picks up and supply levels drop. Gasoline prices had been falling because of lower crude oil prices, which account for about two-thirds of the price U.S. drivers pay for a gallon of gasoline.

Increases in fuel economy are also contributing to lower fuel expenditures, as cars and trucks are more efficient and travel farther on a gallon of gasoline. According to the Environmental Protection Agency, the production-weighted fuel economy of cars has increased from 23.1 miles per gallon for 2005 cars to almost 28 mpg for 2014 cars, an increase of over 20%. Similarly, the fuel economy for trucks has increased 19%, from 16.9 mpg to 20.1 mpg in the same timeframe.

The Consumer Price Index (CPI), a statistical measure of inflation, has gasoline accounting for 5.1% of consumer spending as of October 2014. Reductions in gasoline prices ultimately impact the relative weight of gasoline compared to other expenditures such as shelter, clothing, food, and entertainment in price indices compiled by the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis.

The demand for gasoline is very price inelastic over short time periods, meaning changes in price have little impact on the number of gallons used. Falling gasoline prices allow households to spend their income on other goods and services, pay down debt, and/or increase savings. However, the longer prices remain low, the more time households have to plan for driving vacations and decide on where to spend their excess money.

Sources: EIA, Commerce Dept., BLS, EPA

Remember:

"If you can't make them see the light, make them feel the heat." - Ronald Reagan

During the final days of 2014, the government issued a report stating that the GDP had grown by 5% in the third quarter of the year. Many are cheering the news, but there are also many who are calling slight of hand! I have three articles that I will reference to dissect this report, one supports the government's claim, and two oppose.

The first article is called “Why Aren't We Thanking 'Gridlock' For Saving The Economy?” written by David Harsanyi. His reasoning for the 5% jump is that for the first time in the Obama administration, no one was 'tinkering' with the economy. To be fair, he doesn't give credit to Obama for turning it around, nor does he give congress the credit. Rather he says that because of gridlock in D.C., no one was able to accomplish anything, and just the mere fact of letting the economy maneuver for itself, allowed it to begin to pull out of this long recession.

By John Hendrix

From Harsyani, ““People often don’t realize that a political system is sometimes effective when it does not do certain things.” Pietro Nivola, a senior fellow in governance studies at the Brookings Institution, argued in 2013. “You can’t just measure the things it does, the actions it takes; you also have to measure the actions it does not take.” Nivola’s study was impressed by how gridlock has the ability to stop the Republican House from cutting spending too abruptly for the economy.

“And perhaps he’s right. Gridlock has caused an odd, but pervasive, stability in Washington. Spending has been static. No jarring reforms have passed — no cap-and-trade, which would have artificially spiked energy prices and undercut the growth we’re now experiencing. The inadvertent, but reigning, policy over the past four years has been, do no harm.”

I have always thought that if congress could only pass one new tax law, (one that raised revenue to the Federal Government in any way), every seven years, the economy would be much better off. This would give the public time to absorb the law before a whole new set of rules and regulations come out to hit us again.

Harsanyi also mentions that the congress has issued fewer laws during the last few years. While there may have been fewer laws passed, he overlooks the fact that the ones that have passed have been so large that the congressmen don't have time to read them before they come up for a vote. To quote Senetor Pelosi, “We won't know what is in the law until after it has passed.” A foolish way to govern and far from the do no harm policy Harsanyi claims.

Further, while the number of laws issued may be less than in other years, the amount of regulations pouring out of D.C. have been more than most people can keep track of. There were over 3,000 that were ready for take-off the week of Thanksgiving alone! There were just as many issued back in the spring. While congress can't take credit or blame for these, they certainly do impact the economy in big ways.

For example, the energy sector is being regulated out of their current system into a coal-free one. We can debate all day what is the most earth-friendly method of creating a stable energy network that will serve our population needs in the most cost effective and efficient manner. However, in the past, the free-market and innovation led us to new advances, not regulations and red tape.

As a matter of course, it used to be that laws were presented by congress, to be enforced by the executive branch and appealed to through the judicial branch. Regulations by-pass our entire system of checks and balances, leaving us with a penal system that is deaf to any appeals. I submit that regulations are more damaging to a free economy than a president's policies or legally enacted law.

The next article, “Q3 GDP Jumps 5%; Ha! The Crap Behind the Numbers” written by Tony Sagami of Mauldin Economics. In this article he doesn't necessarily cry foul, but he raises some doubts about the integrity of the 5% claim because of other numbers in the economy that don't add up to a jump. He outlines four points:

“Fun with Numbers #1: The biggest improvement was in the Net Exports category, which increased by 112 basis points. How did they manage that? There was a downturn in Imports.

“Fun with Numbers #2: Of the 5% GDP growth, 0.80% was from government spending, most of which was on national defense. I’m a big believer in a strong national defense, but building bombs, tanks, and jet fighters is not as productive to our economy as bridges, roads, and schools.

“Fun with Numbers #3: Almost half of the gain came from Personal Consumption Expenditures (PCE) and deserves extra scrutiny. Of that 221 bps of PCE spending:

Services spending accounts for 115 bps. Of that 115, 15 bps was from nonprofits such as religious groups and charities. The other 100 bps was for household spending on “services.”
Of that 100 bps, the two largest categories were Healthcare spending (52 bps) and Financial Services/Insurance (35 bps).

“The end result is that 85% of the contribution to GDP from Household Spending on Services came from healthcare and insurance! In short… those are code words for Obamacare!

“While the experts on Pennsylvania Avenue and Wall Street were overjoyed, I see just another pile of white-collar manure and nothing to shout about.

“Fun with Numbers #4: Lastly, the spending on Goods—the backbone of a health, growing economy—declined by 27 bps.”

With this in mind, let's move on to the third article posted on December 26, 2014 by John Hinderaker in Economy, Obamacare, & PowerLine called, “About that 5% GDP Growth Rate…”. Citing another economist, Tyler Durden at Zero Hedge, Hinderaker helps uncover the sleight of hand being played out and points the finger assuredly on Obamacare spending as the main reason for the jump in the economy.

“Back in June, when we were looking at the final Q1 GDP print, we discovered something very surprising: after the BEA had first reported that absent for Obamacare, Q1 GDP would have been negative in its first Q1 GDP report, subsequent GDP prints imploded as a result of what is now believed to be the polar vortex. But the real surprise was that the Obamacare boost was, in the final print, revised massively lower to actually reduce GDP!

Of course, even back then we knew what this means: payback is coming, and all the BEA is looking for is the right quarter in which to insert the “GDP boost”.

Don’t worry though: this is actually great news! Because the brilliant propaganda minds at the Department of Commerce figured out something banks also realized with the sub “kitchen sink” quarter in November 2008. Namely, since Q1 is a total loss in GDP terms, let’s just remove Obamacare spending as a contributor to Q1 GDP and just shove it in Q2.

Stated otherwise, some $40 billion in PCE that was supposed to boost Q1 GDP will now be added to Q2-Q4.

And now, we all await as the US department of truth says, with a straight face, that in Q2 the US GDP “grew” by over 5% (no really: you’ll see).”

While the exact quarter predicted was incorrect, the overall scheme was called out back in June with 'Obamacare' spending accounting for two-thirds of consumer spending. We can only hope that increasing Obamacare costs don’t drive “personal consumption” any higher in future quarters, and also that integrity can somehow return to our public servants.