The Economy in November
by Guy Baker
Most of our readers know by now that The Federal Reserve (FOMC) lowered short-term interest rates by fifty basis points. The rate is now a whopping 1% and at the lowest level since 2003. What else could we expect when the economy is showing negative growth (-0.25%) during the third quarter based on the Commerce Department data.
The drop in personal consumption by more than 3% was the key element in the decline. Personal consumption normally makes up about two-thirds of this overall economic activity. Another indicator of where the economy is headed was the huge decline in durable goods spending (-14%).
Analysts say "Households are cutting back because of the end of tax rebates, tighter credit, a worsening labor market, falling house prices, the devaluation of the stock market, and just general angst." But consumers know what is happening even if they don’t have any official government reports to study. The Consumer Confidence Index plunged to 38.0 in October compared with 61.4 in September (and 105.1 October of 2006). This is the lowest it’s been since the series began measuring confidence in 1967. Wonder what impact this will have on the holiday season?
On the positive side, personal income gained +0.2% in September, while at the same time personal spending fell by -0.3%. These factors increased the nation's savings rate to +1.3%. Still far short of the savings rate in the 80s and 90s, but an improvement is an improvement. Consumer fear likely will result in additional savings and debt repayment instead of overspending and more borrowing.
And in case you were wondering, the housing sector is trying to recover. New home sales increased +2.7% and unsold homes inventory dropped slightly to 10.4 months. But at the same time, new-home sales declined -33.1% compared with a year ago and the median sale prices dropped -9.1% during the past year. So, some improvement, but nothing to pull us out of this funk.
THE MARKETS
They surged in anticipation of the election and elimination of uncertainty. November 4’s results will probably raise as many questions as it will answers, but at least the last 24 months of campaigning and negativity will stop. The Dow [-29.70%], the S&P 500 [-34.03%], and the NASDAQ [-35.11%] all recorded double digit gains in the last month. Those gains seemed to be the result of the Fed's action and some thawing in credit markets but little to do with corporate earnings optimism. As a matter of fact, GDP shows corporate profits declining for the fourth quarter. It would be hard to believe that falling consumer demand and durable goods sales will change much of anything in the coming year.
T-bill rates did drop quite a bit despite the sharp upswing in the market. There may have been some profit taking by short term investors. At the same time, mortgage rates continued to move all over the place with no clear direction from week to week. That market is probably waiting to see the impact of the “bailout/rescue" package, if any.
The U. S. dollar maintained its strength against both the Euro (€) and the Japanese Yen (¥). Overall, according to the GDP report, trade was a large positive for the economy in the third quarter. Imports fell 2% while exports gained 6%. US goods are still in demand.
Oil and gas prices continued their downward slide despite OPEC’s threats about production cuts. Gasoline prices dropped $0.26 per gallon and are now well below where they were at the beginning of the year.
USEFUL FINANCIAL WEB SITE
http://www.annualcreditreport.com/ - In case you did not know this, you are entitled to a free credit report each year. Do it for your own protection. My experience has been that the reports are often full of missing, incorrect, or out of date information. These days, when your credit score and records are so important in qualifying for a loan, having accurate information is essential.
FINANCIAL FACT OF THE WEEK
The Tax Policy Center, which is part of the Urban Institute and the Brookings Institution, estimated 15,500 estates would face a federal estate tax bill this year. However, of the estimated tax revenue of $23 billion, more than half would come from just 700 estates with a tax bill of $5 million or more.
WHAT TO DO WITH YOUR INVESTMENT PORTFOLIO
A lot of people are asking what to do. If you are in the market, stay in. Stay the course, that is the advice every high profile money manager is giving. If you are not already in, then I would suggest dollar cost averaging. If the market goes up, you will buy as it goes up. If the markets go down, you will go down with it obviously, but by dollar cost averaging, you will buy even more shares. So when the markets do recover (and they will) you will own many more shares than if you went into the market 100% right now.
So stay the course and trust that markets will do what they always do – they go up and they go down.
Back to Newsletter