More Economic News

Here's some more economic news. From Yahoo News:

WASHINGTON - The warmest January in more than 100 years lured consumers out to the shopping malls to spend money at the fastest clip in six months, giving a strong boost to the economy as the new year began.

The nation's factories were also enjoying good times with a closely watched gauge of manufacturing activity posting a strong increase in February.

But despite the warm weather, construction spending grew far below expectations in January as home building, the economy's stand-out performer for many years, managed only a tiny increase.

Still, analysts said the various reports released Wednesday pointed to an economy that is shaking off the blows from the hurricanes and soaring energy prices dealt in the final three months of last year to grow at a solid pace in the first three months of this year.

Charts show personal income and spending for the past 13 months; two charts. (AP Graphic)

The Commerce Department reported that personal spending surged 0.9 percent in January, the biggest advance in six months, reflecting strong demand for autos and other durable goods and for nondurable goods such as clothing.

"You can't keep a good consumer down and the American household is one great customer," said Joel Naroff, chief economist at Naroff Economic Advisors.

Personal incomes rose a solid 0.7 percent in January. That reflected solid wage growth during the month and a number of special factors, including a 4.1 percent cost-of-living increase for Social Security recipients and the start of the government's new prescription drug benefit.

Without the special factors, personal income would have risen a smaller 0.4 percent in January.

Okay, my question here is what are all the special factors that reflect this wage growth and personal income increases? We know that two of the special factors is the cost-of-living increases in Social Security benefits, and the prescription drug benefit. Both of these factors benefit the retirees--not the regular wage earners. My question is are there special factors that benefit the wage earners? And I find it interesting that without the special factors of Social Security COLA increases and the prescription drug plan which both benefit the nation's retirees, the personal income statistic drops down from 0.7 percent to 0.4 percent--that's a significant drop! Continuing on:

Economists said the strong gain in spending meant overall economic growth, which slowed to a 1.6 percent rate in the October-December period, was rebounding strongly to perhaps above 5 percent in the current quarter. Consumer spending accounts for two-thirds of total economic growth.

Also helping boost the economy is a resurgent manufacturing sector, which was the hardest-hit part of the economy during the 2001 recession. The Institute for Supply Management reported that its closely watched manufacturing gauge rose to a three-month high of 56.7 in February, up from 54.8 in January, as the index for new orders jumped to the highest level in 16 months.

"The economy retains ample momentum early in 2006," said Stephen Stanley, chief economist at RBS Greenwich Capital. He said the level for the manufacturing gauge was consistent with overall economic growth above 5 percent.

However, a third report showed that construction spending managed only a 0.2 percent increase in January, the weakest gain in seven months and far below the 1 percent that analysts had been expecting.

A big reason for the slowdown was a tiny 0.1 percent increase in private home building, the poorest monthly performance since an actual decline of 0.4 percent last June. It was a further indication that residential construction, which has enjoyed five boom years, is beginning to slow.

Sales of both new and existing homes fell in January despite the warm weather and economists are predicting that continued increases in mortgage rates will slow housing further in coming months.

The bigger rise in spending in January compared to incomes kept the personal savings rate in negative territory at a minus 0.7 percent. That meant Americans spent more than their after-tax incomes, which forced them to dip into prior savings or increase their borrowing.

For all of 2005, the savings rate registered a negative 0.4 percent, the first time the savings rate has been in negative territory for an entire year since the Depression years of 1932 and 1933.

Economists said this is the wrong time for the savings rate to dip into negative territory with the looming retirement of 78 million baby boomers.

There is an interesting contradiction here that the new article glosses over. We know that consumer spending went up to 0.9 percent in January. And yes, since it was a warm January, people are going to the shopping malls to buy goods. But now look at this last statistic on the savings rate, registering a negative 0.4 percent for all of 2005. And for the first month of January, the savings rate was measured at a negative 0.7 percent. Americans are not socking money away in their savings account--they are taking money out of their savings account. Even more interesting is that this is the first time we've had a negative savings rate since the Depression.

So what does this all mean? Whatever income increases seem to be going towards the nation's retirees, while the regular wage earner's incomes are either stagnating, or moving up at a much slower pace. Americans are still spending, but they are going into their savings accounts to prop up their spending. And the manufacturers are still increasing their output, thinking that Americans will continue buying up their increased output. American perceptions of wealth have certainly been buoyed by the sizzling housing market and the refinancing craze, but that stimulus has died out now with the slowing construction industry, and the increasing stock of homes on the market. Also remember, both consumer confidence has dropped, and U.S. GDP has also dropped as written in yesterday's posting. Looking at these statistics, I'm starting to wonder if the United States is on the verge of an economic slowdown. I'm not sure that the U.S. economy is as resilient as these economists are touting. The two variables that I'm concerned with are the high energy prices, and the U.S. budget and trade deficits. The high energy prices--such as home heating and gas prices--are certainly reflected by the high cost of oil prices. Oil and energy traders are certainly worried over a number of shocks that could increase oil prices--the war in Iraq, Iran's nuclear ambitions, the rise of Islamic fundamentalism, dwindling supplies, and China's own voracious appetite for energy to prop up their industrialization are just a few factors that can send energy prices soaring. The high U.S. budget and trade deficits are also some variables to keep an eye on. With the budget deficit, the U.S. government is spending more money than they are taking in through taxes. In order to prop up that spending, the government has to print out U.S. Treasury bonds to sell to investors. The trade deficit shows that Americans are buying more imported goods, than they are exporting out goods and services to the world. U.S. dollars are flowing out to foreign countries--a prime example is China. China can use these dollars to purchase U.S. goods and services, or they can use these dollars to invest in U.S. Treasury bonds. I'd say that foreign investors are snatching up U.S. Treasury bonds and equities--in other words, they helping to prop up the budget deficit, and certainly the value of the U.S. dollar. What is going to happen when the foreign governments, such as China, decide that they have enough invested in U.S. Treasury bonds? What if China starts dumping their bonds and dollars on the world market? Certainly, the value of the dollar is going to drop, market demand for U.S. bonds will dry up, and the Feds will have to start raising interest rates--which will increase the interest rates on U.S. bonds--in order to keep the foreign investors to continue buying up U.S. bonds. Increasing interest rates will make it more expensive for both the manufacturers to invest in capital equipment, and for consumers to purchase big ticket items of cars, houses, and appliances. The result, a major U.S. recession.

Now I will admit that this is a simplified model. And it may not happen. But my fear is that this economic growth that everyone is marveling about, may not be on such solid ground. There are serious problems within this country, and with this economy--the budget deficit and the $8 trillion U.S. accumulated debt is just one example. These problems are going to cause a major shock to this economy--it is just a matter of when they will happen. It concerns me because the longer these problems fester, the greater the chance of their shock will occur.