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Posts from the ‘Recession’ Category

People and Businesses in Recessions

The stubbornly high unemployment following the last recession, coupled with corporate profits reaching record levels, can create a picture in the minds of people that businesses are having it easy at the expense of workers. This picture may be misleading. Recessions are also tough on businesses and business owners, but the data that reflect this are not nearly as prominent as the unemployment statistics.

The way we measure unemployment is fundamentally different from the way we measure businesses. Businesses can appear and disappear in response to economic conditions, but people tend to stick around no matter what.

There is no equivalent of a long-term unemployed worker in data on businesses. People can remain unemployed for months or years, and we will have data about these numbers. Businesses usually cannot remain without customer orders for many months and survive. Such businesses close their doors and disappear from data – data about sales, data about business profits, and other data.

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U.S. Manufacturing Activity Slows in January

amazon warehouseThe Institute for Supply Management (ISM) Report on Manufacturing Purchasing Manager Index declined sharply from 56.5 in December to 51.3 in January. While the index is still expanding, it registered the lowest level since May 2013. The survey of purchasing managers gives an overview on the factory floor.

New orders and production slowed significantly but are still expanding. In a reversal, back-logged orders began contracting as firms found time to play catch up. Inventories declined for second straight month. Despite the run up in Q3 inventories, real-time management has caused a long-term decline in inventory levels. It may seem unbelievable, but Amazon is exploring shipping goods before they are ordered.

Managers blamed cold weather for slower input deliveries in January. Although no commodities were reported in short supply, input prices trended higher. Employment in manufacturing increased, but at a slower rate, offering little help to stubbornly high unemployment.

The ISM  is not hard data, but rather the views of managers in the trenches. The index does not account for firm size or magnitude of variable increase/decrease. AIER continues to monitor an array of indicators in the monthly Business Cycle Conditions Reports to gain a comprehensive view of the economy.

[Photo: Flickr]

The Regulation Argument: Auto Loans Up, Credit Cards Down

Two recent articles from Quartz look at how lending and credit have changed since the 2007 recession and show how government regulation can impact (or not impact) American consumer economics.

The first article, which looks at sub-prime auto lending trends in the last few years, found that independent lenders are giving more car loans to U.S. customers with bad credit. Nearly 27 percent of all auto loans in the past five years were to consumers with credit scores of 500 or less. A loophole in the Dodd-Frank financial reform act of 2010 is seen as a cause of this trend.

From Quartz:

“That law had created the Consumer Financial Protection Bureau (CFPB) to act as a watchdog for retail lending, but had explicitly carved out auto dealerships from supervision. This made consumer advocates nervous but had investors seeing an opportunity to charge high costs for loans at a time of low yields.”

While regulation (or lack there of) has made it easier (if not safer) to get a car loan in 2013, it has had the opposite impact on credit cards. The second story looks at the way credit card debt has decreased in America since implementation of the US Credit Card Accountability, Responsibility and Disclosure Act (CARD) in 2010.

From Quartz:

“The CARD ACT … blocked credit card companies from extending credit without assessing the customer’s ability to pay … implemented rules on marketing to people under the age of 21 to crack down on abuse at college campuses … limited a credit card company’s ability to levy penalty fees … and restricted the circumstances in which the company could jack up interest rates.”

The results of CARD, according to the story, include a 2 million decrease in the the number credit cards issued to Americans under the age of 21 since 2007, and that credit card companies have “just stopped giving cards to people on the bubble.”

You can read both stories on Quartz by clicking the links below.

More Bad Borrowers are Getting Car Loans

The U.S. Has Kicked its Credit Card Addiction

What Do the Second Quarter GDP Numbers Mean?

The U.S. Department of Commerce released its third and final estimate for the country’s second quarter Gross Domestic Product (GDP) Thursday morning, setting it at an unrevised 2.5 percent growth rate.

Here’s a quick look at what some media outlets are saying about the GDP numbers:

  • The Washington Post is citing the 2.5 percent rate as a factor in rising stock futures, saying the number “reaffirms … economic growth during the second quarter.”
  • Nasdaq.com called the 2.5 percent rate a “sign of an economy slowly improving, though at a slower pace than it has historically,” and quoted Fed Chairman Ben Bernanke’s comments at a press conference last week: “Economic growth has generally been proceeding at a moderate pace, with continued—albeit somewhat uneven—improvement in labor market conditions. The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market.”
  • Business Insider said the 2.5 percent estimate “missed expectations,” citing an “expected uptick to 2.6 percent in the final reading,” and added that “Personal consumption growth was also unchanged from the BEA’s previous reading at 1.8%, and was also expected to tick up to 1.9% in the final reading. The number marks a slowdown from Q1’s 2.3% pace of growth.”
  • Bloomberg.com took a positive outlook on the 2.5 percent (while still mentioning that the number came in lower than its 2.6 percent estimate), saying “the economy expanded at a faster pace in the previous three months,” and citing a decline in the number of unemployment claims the government has received in the short term as a positive sign of recovery.
  • Businessweek called the number discouraging. “Consumers spent more cautiously in July as their income barely increased. The government spending cuts have weighed on defense spending and business investment. And higher mortgage rates now threaten to slow a housing recovery that had a solid contributor to growth in the first half of the year.”

The Commerce Department’s full Q2 GDP release is here. 

Our Uneven Recovery

The recession hit a lot of Americans hard. But it didn’t affect all people equally. A new study from the Federal Reserve Bank of St. Louis reports that the worst-hit groups were families under 40, those without college degrees, and African-American or Hispanic households.

These groups are economically vulnerable in general. Two financial factors compounded their losses during the crisis. First, younger and less-educated families had large shares of their wealth tied up in housing. This put them on unsteady ground as the market tanked. Second, younger households and African-American or Hispanic families tended to have high debt-to-asset ratios. “Thus,” authors Ray Boshara and William Emmons write, “the very families most exposed to the economic fallout of a deep recession—fallout that came in the form of job loss or reduced income—possessed the weakest and riskiest balance-sheets.”

Not only was the recession particularly painful for these groups, the recovery has been more difficult. On average, younger, less educated, and African or Hispanic families are much worse off financially than they were before the crisis, according to a May Fed report by William Emmons and Bryan Noeth. Young, white or Asian families without high school diplomas have regained just 21 percent of the wealth they had before the economy crashed. Young, college-educated African-American families have recouped only 31 percent. By contrast, families headed by someone who is college-educated, white or Asian, and between the ages of 40 and 61 have recovered about 98 percent of their former net worth.

The Boshara-Emmons study also paints a bleak picture of wealth recovery for the majority of Americans. Earlier this year, the Fed estimated that households had regained about 91 percent of the wealth lost during the recession. But Boshara and Emmons say that number is misleading. Adjusting for inflation and population growth, the average household has recovered only 45 percent of its pre-crisis wealth. They also point out that two-thirds of the rebound in household wealth since 2009 comes from the stock market. That disproportionately benefits the wealthiest 10 percent of Americans, who own 80 percent of all stocks.

For further reading: If the Economy’s So Strong, Why Don’t We Feel Better?

The Kids May Or May Not Be All Right

Ten years ago, over a third of people with student loan debt owned a house by the time they were 30. The educated millenials of today occupy a different economic landscape, according to a new study from the Federal Reserve Bank of New York. In fact, for the first time in at least a decade, young workers with student loans are less likely to purchase cars or houses than non-borrowers in the same age group.

This result might seem obvious: Of course people who have educational debt will delay taking on a mortgage or buying a new set of wheels. But in fact, it’s a reversal of the norm. Between 2003 and 2009, 30-year-olds with student loan debt were more likely to own homes than their non-borrower peers. That’s because student loan debt tended to mean that graduates had higher levels of education and income.

Homeownership rates tanked for both groups when the recession hit. Since then, for the first time in at least 10 years, people without student loans have become more likely to have a mortgage than people with educational debt. The same pattern is true when it comes to auto loans.

The study identifies two possible reasons for the shift. First, given today’s tough job market, recent graduates may have dimmer views of their future earning potential. That could make them proceed with caution when it comes to making big-ticket purchases. Second, student loan borrowers also have worse credit scores than non-borrowers, thanks to stricter debt-to-income ratio requirements and a rising student loan delinquency rate. That makes it harder for them to qualify for home and car loans. Read more

When Times Are Tough, Why Pay Down Debt?

Since the recession hit in late 2007, Americans have been paying down debt. U.S. households spent just 10.4 percent of disposable personal income on debt payments in the fourth quarter of 2012, according to data from the Federal Reserve. That’s the lowest level since records began in 1980. The Federal Reserve also reports that the percentage of families holding credit card debt declined by 6.7 percent between 2007 and 2010, while the median balance on credit cards fell 16.1 percent. Clearly, the downturn made people eager to get out of the red–or at least get more pink.

DebtServiceUseThis

Federal Reserve Board

Whacking away at debt during tough times might seem counter-intuitive. When people are worried about unemployment and economic uncertainty, shouldn’t they prioritize saving? What’s more important–less debt, or a bigger financial cushion?

The answer is that it’s hard to have the latter without the former. “The problem with having debt is that you have to pay interest on it, so you can’t dig yourself out of a financial hole until you reduce it,” says AIER Director of Research and Education Steven Cunningham. He explains that building a financial cushion is a tall order when unemployment levels are high and wages are stagnant. “In the face of a slow recovery,” Cunningham says, “people don’t have a lot of options for increasing their cash–what, with the jobs they don’t have? But they can, with what money they do have, work to pay down debt. That will reduce their exposure and leave more money for day-t0-day cash flow.”

Cunningham adds that while Americans have been shedding debt over the last few years, part of the reduction in debt payments comes from refinanced mortgages and varied-interest loans. Foreclosures and bankruptcies have lowered debt levels too. “Sadly, some people got out from under debt the hard way,” he says.

It’s also worth noting that saving and paying down debt aren’t mutually exclusive. Between 2007 and 2009, household savings rates rose sharply. In the depths of the recession, Americans got rid of debt, saved more, and spent less. Now, Cunningham says, “people are getting toward the bottom in terms of reducing debt load, and they’re starting to spend.” And since consumer spending is a key engine of economic growth, that’s good news for the recovery.

Back to Basics: Understanding Inflation, Debt, and the Great Recession

Now we’ve hit the big time: Personal Finance for Dummies recommends that beginning investors read up on AIER’s economic research before taking the plunge into the stock market. Here’s what they have to say:

Understand basic economics

The average citizen is incredibly ill informed about economics. Yet knowledge of economics is extremely important to everyone’s investment goals. In fact, plenty of financial advisors and stock experts have lost a lot of money for themselves and their clients because they were woefully uninformed about basic economics. Concepts such as supply and demand aren’t distant, arcane abstractions; they affect your money and financial success every day.

If you do read up on economics, look for authors who are well versed in free market principles, which lie at the heart of sound investment decisions. Some of the better economists that the serious stock investor should read are Ludwig von Mises, Mark Skousen, and Kurt Richebacher. Some Web sites that offer excellent economic research are Puplava Securities, Inc., and American Institute for Economic Research.

We’re thrilled to have our research recognized for offering readers accessible information about how the economy works. In honor of the occasion, here are three AIER articles that can help educate readers about the financial world we live in now and how it got to be that way. Read more