" Where economics isn't just a job, but an adventure"
Quote of the Week
In the late 19th century, JP Morgan was cruising the Hudson river with his 165 foot yacht, the Corsair. He was in the process of brokering a deal between the various railroad companies. One of the RR exec's asked, "Pierpont, wonderful boat you have, what's something like this cost?." Morgan's reply:
If you have to ask, You can't afford it!
Click on the pictures to enlarge
BLOG Topics 2013
January Do Protected Seals lead to Depleted Fish Stocks February Prohibition: Profits to Cartels & Increased Violence March Increased Minimum Wage & Extended benefits lead to Higher Unemployment April Ethanol from corn & Agflation May Cash for Clunkers lead to Higher Used Car Prices & Wasted Tax Dollars June The Affordable Care Act; Anything but Affordable Part 1 July The Affordable Care Act; The poster Child for False Advertising August Detroit: Higher Taxes + Liberal Benefits = Bankruptcy September No Keystone Pipeline leads to more pollution October Global Warming! Or is it Global Cooling! November Poverty & Benefits December Does Affirmative Action lead to Reverse Discrimination?
Blog Topics 2014
January Will Lake Meade become another Aral Sea February Does Taxing the rich hurt the economy March The Cause of the Great Depression April Temporary Agricultural Subsidies lead to wealth Farmers and Higher Prices May The Presidents Stance on Gun Control leads to Increased Gun Ownership June Is there really a Gender Pay Gap
After being down 123 points on Friday, The Dow finished up 23 points on Monday closing below 17,000 at 16,982. Volume was low to moderate since a slew of market moving data will be released later this week. Prior to the markets open, the DOW is up 40 points, gold is hovering at $1300/ounce, and oil is at $100/barrel. On Wednesday, preliminary GDP figures for the 2nd quarter will be announced this Wednesday prior to the markets open. These are only preliminary figures and will undergo 2 revisions in the following months. After declining 2.9% in quarter 1 (attributed to weather), it is expected to be significantly higher for quarter 2. Also on Wed, The FED's FOMC (see FED Speak) will make an announce at approximately 2 PM following its 2 day meeting. The FED's policies are data driven and are a function of GDP, inflation and unemployment and they will be closely watching unemployment figures. And speaking of unemployment, this is jobs Friday and the government (via the Bureau of Labor Statistics) will announce unemployment figures for July. The current unemployment rate is 6.1% and the economy has been creating about 200,000 jobs/month. One last note, to no surprise, the New York Times is advocating the legalization of marijuana. This is one of the fey areas where the editors of the Times and I agree. I'm just wondering why the very liberal Times took so long.
After finishing done over 100 points on Friday, the Dow is up 28 points at midday after starting in negative territory. The turn-around in the Dow was helped in part by Merger Monday (when companies generally announce mergers or acquisitions). "Zillow (Z) confirmed that it plans to buy Trulia (TRLA) for $3.5 billion in stock. The acquisition merges the two biggest names in online housing, and CNNMoney reported last week that some real estate agents were nervous that the sites' combined depth of local housing data could make in-person brokers irrelevant. Shares of Trulia surged 12%, while Zillow slipped.' On Friday, orders for durable goods (those items that last longer than 3 years; cars furniture, etc), rose by .7% in June, more than expected. Orders for durable goods are considered a leading economic indicator (see 7/18 Update) and is a good sign. Generally, during a recession, orders for durable goods fall (since most durable goods are not considered a necessity to replace) and during an expansion they will increase' e.g., instead of fixing your old car, you'll buy a new one. Economists polled by Reuters had forecast orders rising 0.5 percent in June after a previously reported 0.9 percent fall the prior month. Also on the plus side, activity in the service sector is at its highest level in over 4 years. Financial data firm Markit said its preliminary services Purchasing Managers Index was 61.0 in July, unchanged from June and above expectations for a reading of 59.8. Any reading above 50 indicates expansion and a healthy economy generally has a reading between 55-60. This is particularly important since we are primary a service economy. Consumption is 70% of GDP and services make up more than 60% of consumption (see FED Speak). Examples of services are education, lawyers, movies etc. Stay tuned for Wednesday, when preliminary 2nd quarter GDP figures will be announced.
For the most part, today was inconsequential. The Dow was down 3 points finishing at 17083. After hours, Amazon is done over 40 points after disappointing earnings despite strong sales growth, dropping from 360 to 320, over 11%. The Web retailer on Thursday reported a wider-than-expected loss of $126 million for the second quarter despite a 23% jump in revenue. It also indicated there is more red ink ahead, projecting an operating loss in the current period of as much as $810 million. I'm going to be on the sidelines with Amazon and may consider jumping in at $285 (see chart). More on Obamacare CNN reports the following: "More than 6.8 million Americans will get a refund from their health insurer this summer. Total value of the rebates will be $332 million, with an average of $80 going to each family. They'll be issued by August 1. Thank the Affordable Care Act for the windfall. Under one of the law's provisions, insurers must issue refunds if they spend more than 20% of what customers pay in premiums on administration and marketing expenses, instead of medical care. Insurers were first required to issue these refunds in 2012, shelling out a total of $1 billion to consumers. The total dollar amount of refunds has decreased each year since then, as insurers have adjusted to charging less for premiums and operating more efficiently. Insurers paid back $504 million to customers in 2013." I'm torn on this one. AT 1st blush, it seems like a great way to make insurance companies more efficient; however, keep in mind that 90% of health insurance companies are publicly traded corporations and they are "for profit". As a result, we're paying for this in the form of higher premiums, but it may prove to be more beneficial in the long run. I'll be following this closely.
The Dow continues to be bi-polar. After advancing 62 points on Tuesday, it is down 40 points on Wednesday shortly after the markets open and finished at 17088, down 25. It continues to be a traders market and there is money to be made on channeling stocks (see stock picks). The Affordable Care Act appears to be going back to the Supreme Court and it has to do with the 36 states that have not set up their own exchange but are on the governments exchange (healthcare.gov). One Appeals court ruled that it is unconstitutional for the Federal Government to give subsidies to the citizens of the 36 states and another appeals court ruled just the opposite in favor of the government. The Supreme Court is on break and reconvenes the 1st Monday in October; as a result, this issue will probably not be resolved until next June. The drama continues.
After declining 49 points on Monday, the Dow is up 60 points shortly after the markets open and is hovering at the 17,100 level. Inflation for June was .3%, still high after May's increase of .4%. Inflation for the past year still remains tame at 2.1%. A very simple definition of inflation is a general rise in the prices of goods and services in the economy. This increase was due in part to a 3.3% increase in gas prices in June and is a function of the price of oil which is currently selling at $104/barrel (42 gallons in a barrel and for every dollar change in a barrel, it equates to roughly a 2-3 cent change at the gas pump). Food prices also rose, primarily as a result of a drought in California. If you strip out volatile food and energy prices, inflation was up only .1% in June. The FED's general inflation target is 2-3%/year and is part of their dual mandate to keep the inflation rate and unemployment rate. What causes inflation? There are essentially two types of inflation, Cost-Push, and Demand -Pull. The most common is Demand-Pull and we'll talk about that 1st. A quick definition of demand-pull inflation is too many dollars chasing too few goods, and is indicative of a recovering or healthy economy. Essentially what you have is an unemployment rate that is improving and therefore people are working and making money. If they're making money, they're spending it which will result in some shortages of goods and services, and when you have a shortage, prices generally increase (graph bottom left). The other type of inflation is cost-push (bottom right graph) and is a function of business costs increasing (such as labor and energy), and these costs being passed on to the consumer in the form of higher prices. The most common type of cost push inflation is when energy prices increase. Even if businesses don't heat with oil (75% of all heating in the northeast is from oil), almost all businesses have to get their goods or services from point A to B. As you can probably deduce, any extra purchasing power that a person may garner thru an increase in the minimum wage is quickly eliminated as a result of businesses passing on their increased costs to the consumer in the form of higher prices.
As I write this, the market is down 70 points, 17,027, shortly after the market's open. The down market appears to be a function of global tensions in the Ukraine and Gaza, in addition to profit taking. ON CNBC's squawk box, Cramer stated that he was very bullish on Go Pro, and after the initial frenzy, so am I. Cramer feels they will have excellent earnings this quarter which they will announce Thursday July 31. He also thinks that some new uses for the camera, such as time lapse photography and pet cams (seeing the world from your dogs point of view) will add to their sales.
What I want to talk about today is interest rates and what they mean to you. There are a number of sayings on Wall street, such as "Don't fight the FED", (see 7-18's update), and "The FED is known to take away the punch bowl, just as the party is at it's wildest". Currently the Federal Funds rate (see FED Speak) is at .25%. What does this mean to you? The Federal Funds rate (the rate one bank charges another on an overnight loan), affects all other short term interest rates, such as the Prime Rate (the rate big banks give their best customers on short term loans), Home Equity Line of Credit (HELOC's), car/boat loans, personal loans and interest rates on CD's and savings. In other words, as rates increase, so too does the cost of borrowing money (savers also realize greater earnings). What of mortgage rates (long term loans)? Mortgage rates are usually 2-3% higher than the yield on the 10 year government bond (currently around 2.47%), and while not always, they usually follow short term interest rates. The yield on any government bond is inversely related to its price; in other words as the price of the bond decreases (usually as a result of inflation fears), the yield increases. The reason why the FED would raise rates is inflation, and right now the FED is signalling that they are going to raise interest rates in mid 2015. If you look at the chart bottom left, interest rates and inflation appear to move in unison, this is known as the Fisher Effect and is not surprising. As the inflation rate increases, (FED policies are data driven), the FED increases interest rates, thereby making borrowing more expensive, and slowing down an overheating economy and putting the breaks on inflation. Inflation figures will be released by the government on Tuesday. Tomorrow, the causes of inflation.
June Jobs Report The jobs numbers are out and they are excellent. June represents the 5th month in a row where the economy created more than 200,000 jobs. In June, 288,000 jobs were created and April figures were revised to 304,000 new jobs. The unemployment rate dropped to 6.1%, the lowest since 2009 and the labor force participation rate remained constant at 62.8% for the 3rd month in a row. But get this, the long term unemployed (those unemployed more than 6 months), dropped by 293,000. This is a function of an improving economy and the cessation of extended unemployment benefits (being able to collect unemployment for 99 weeks) in January. The real unemployment rate (which includes marginally attached and part-time workers) dropped to 12.1%, also the lowest since 2009. However, there are some storm clouds on the horizon in the form of the Federal Reserve raising short term interest rates, however, inflation, so far, hasn't been a problem (under 2%) and the increase in rates is expected possibly by the 2nd quarter of 2015. The concern is, with jobs increasing faster than expected, more people are working, making money, and prices (inflation) could rise faster than expected. Notice how expectations pay a major role in the economy.
Commentary on Minimum Wage
There is currently a debate in the state of NH on whether to increase the minimum wage to 8.25 from 7.25. The main argument is that it will help to alleviate poverty. That is clearly not the case. As you can see from the chart at the left, the poverty rate dropped dramatically in the 1960's. This was a function of great society legislation; specifically, increase in Social Security benefits in addition to the inception and implementation of Medicare and Medicaid. Since then, the poverty rate has fluctuated between 9-15% and is highly correlated with the unemployment rate. The vertical grey area's in the graph represent periods of recessions in the US. As can be expected, unemployment rises during recessions and peaks at the end (unemployment is said to be a lagging indicator). As you can also see from the chart, so too does the poverty rate. There is no indication whatsoever that the poverty rate is affected by increases in the minimum wage. Generally, this is quite the contrary. As can be evidenced from the below left chart, increases in minimum wage can contribute to unemployment and as we can infer from the above chart, as unemployment increases so to does poverty. If you look at NH, they have the lowest state poverty rate in the nation and it generally parallels the national unemployment rate. By raising the minimum wage, you increase business costs. As a result; businesses either pass these costs onto the consumer (in which case inflation nullifies any wage increase), substitute capital for labor, or simply go out of business. If you look at the chart below right, UAW (United Auto Workers) membership has decreased in the late 1970's from 1.5 million to 350,000 in 2009. The reason for this is simple. Detroit isn't making fewer cars, they are making more, but they have made their assembly lines more robotic and have substituted capital for labor, which became cheaper in the long run. This can also happen to those fast food workers who want a $15 minimum wage. There is currently a machine on the market that can make 300 burgers/hour. In other words, capital can be substituted for labor. Someone please e-mail me and explain how someone is better off unemployed at $8.25/hour as opposed to being gainfully employed at $7.25/hour
You cannot legislate equality. If you want to decrease poverty, implement policies to insure that higher level education is available to all.
The Congressional Budget Office predicted this week that more than 2 million people will leave the labor force because of Obamacare. Specifically, more people will leave the labor force or reduce their hours, to stay under the cap for federal subsidies. If you are a family of 4, and household income is under, WAIT FOR IT, $94,000, you are eligible for a federal subsidy. The number of part time/temporary workers has already increased by 35% since Obamacare was passed in 2010; and yes it will get worse, wait until 2015 when it becomes mandatory for businesses.
For a good laugh on Obamacare, go to this web site and watch this video; http://www.youtube.com/watch?v=qpa-5JdCnmo. It shows the president on 36 different occasions stating that if you like your healthcare plan you can keep it. Obviously there are 1 of two explanations for this misunderstanding. He was ill advised on the 2700 page, 4500 provision Affordable Care Act, or he knew about it and lied. According to a study by Forbes magazine, the ACA will increase premiums to men under 27 by 77%, 40 year olds, 37% and 64 year olds by 37%.
When Obamacare was 1st released, The Congressional Budget Office predicted that it would cost $900 billion over 3 years. At the time, I made a prediction to my students that I estimate the final cost would be closer to $3 trillion. Three years later, the CBO has raised it's estimate to $1.6 trillion. At this rate, we are on pace to reach the $3 trillion mark. www.healthcare.gov, the official website to sign up for Obamacare had an original cost of $100 million. That cost is now up to $292 million dollars and rising. If the government can't manage the costs on a web site, and these costs have trippled since it opened on October 1, how can it possible manage a 2700 page, 4500 provision bill. The words of Nancy Pelosi (see above) are acting as a harbinger of doom: "We have to pass the bill, so we can find out what's in it."
The United States has amongst the lowest savings rate for all technological nations. The iOMe challenge is a nationwide competition between Colleges where teams submit a 10,000 page essay on how Americans can improve their savings rates. In addition, teams must produce an approximate 60 second video which complements the essay. If you click on the iOMe logo above, it will take you to Bentley University's 2012 video submission. The faculty adviser for the challenge is John Tommasi and is offered during his Fall EC 351 course, Contemporary Issues in Economics. I'm pleased to announce that on February 15, Bentley was declared the winner of the iOMe video portion of the contest. Congrats to the team members and great job!
EC 3900 Energy Economics
EC 3900, Energy Economics and International Markets, is a 3 credit, Short Term Program, that is offered during Spring semester. After 7 weeks of lecture, the class takes a 10 day educational/cultural tour to France where 80% of their electricity is produced by nuclear power. During the 10 day trip, students travel to, and tour various nuclear facilities Last year's class visited; Marsailles, Aix en Provance, Lyons, Brest and 4 days in Paris.
If there were ever words that can strike fear into the hearts of any man women or child, it's: "I'm from the Government and I'm here to help". On a monthly basis my blog, from an economic standpoint, will explore government laws, decisions and actions, which while well intentioned, had inadvertent results that were either disastrous, or made a bad situation worse. It wouldn't surprise me if you reached the conclusion that congress does two things well, nothing and overreact; and you may ask yourself, do Congressional members vote for what is best for the economy, or what will get them re-elected.