Echo

Foreign tourists in Boston are helping to keep the U.S. out of recession

Sunday, June 29, 2008

As I have told you all, I am an economist in the financial services industry and I work in the Back Bay; specifically, I work in the Prudential center. Two days ago, I took a run around the Charles river and noticed a German family that was visiting Boston (bottom photo). I stopped and spoke with them using my broken German, asking if I could take their photo to post on my blog. After I finished my run, and on my walk home, I saw a Swiss mother and son duo (top photo). Before I knew that they were foreign, I noticed that they were walking around with many shopping bags; specifically, she had a striped Rugby bag from the Ralph Lauren store at Copley Plaza. I stopped and spoke with them, and they allowed me to take their photo as well. These international tourists are pushing up export income, which is keeping the economy afloat.
The U.S. has suffered through unprecedented shocks to the housing, financial, and energy markets. We are in troubling economic times, and it is remarkable that the economy is growing at all. In fact, the Bureau of Economic Analysis estimates that the economy is growing at a rate of 1.0% per year. One primary reason that the U.S. is able to stay afloat is international tourism and export income.
A bit on the economics of foreign trade
Foreign exchange can be a bit tricky to understand, but all in all, if a foreign currency gains strength (appreciates) against the U.S. dollar, then if nothing else changes, U.S. goods become cheaper. Foreign economies will purchase more of our goods: agriculture, electronics, banking services, real estate, restaurant meals, clothing, and really anything that you can think of. These goods that are made in the good old US of A and shipped to a foreign economy are called exports. We like exports. More exports, more income, and higher U.S. economic growth.
Many countries target exports as the primary driver of economic growth. China, Japan, India, Malaysia, Singapore, and many other economies across the globe grow by focusing their production efforts for sale to foreign economies like the U.S. So much so, that many are coupled to the U.S. That is where the current account comes in. A U.S. current account deficit (negative value) is the method by which the U.S. satisfies its insatiable hunger for foreign goods. We take out loans (sell government bonds) in order to buy more goods today, but we must pay interest on the loans that we secure. So, as the U.S. takes out loans in order to buy more and more foreign goods, our interest payments rise, and a current account deficits result.
Phrases often used to describe the U.S. international balance of payments (flows of goods and services, and flows of investments across borders): perpetually negative current account balance (current account deficits) and exports shipments that are much smaller than what we buy from foreigners (imports). However, recently the U.S. dollar has been losing value and the following are happening: the current account balance is rising, and exports are rising. Both are good for economic growth.
Enough on the economics of foreign trade
I will stop boring you with the economic technicalities of the international balance of payments accounts, but we did need the terminology.
The photos of these two international families show exports in action. The two families visit the U.S. because it is cheap for them to do so. The figure below shows that both currencies, the Swiss franc and the Eurozone Euro (German currency), are gaining strength against the U.S. dollar. It becomes extremely affordable for the Germans and Swiss to visit the U.S., and more importantly, spend their money here. When they spend their money – no matter what they buy – they are contributing to U.S. export growth.
Keep the exports flowing because America is struggling. Home values are plummeting, financial wealth is tumbling, floods in the Midwest are devastating, and on top of that, employment is falling. We need all of the help that we can get, and I for one am willing to take it from the Germans or the Swiss.
So, next time you are walking through your city, Denver, New York, San Francisco, Portland, or wherever you live, encourage the foreign tourists to spend more. Be nice to them – they are keeping the U.S. from entering a recession.

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Boston taxi drivers do not deserve the rate hike – they are dangerous!

Saturday, June 28, 2008


Boston taxi drivers are some of the poorest drivers in the United States. Every time I ride in a Boston taxi (no matter what company), I feel unsafe and only take a taxi under circumstances of severe peer pressure. Currently, Boston cab drivers are calling for rate hikes in order to cover the rising price of gas. Given the sub-standard service of the Boston city cab drivers, a rate hike should only be allowed with additional training and license requirements.

The taxi system is an integral part of the Boston transportation network. As is common in most urban settings, traffic in Boston is slow and congested. Public transportation and taxi cabs provide an important service to locals and tourists alike: the means to get around the city. However, the taxi system is under attack in Boston and all other urban areas with the recent surge in gas prices.


Gas prices have reached unprecedented levels in Boston, New York, San Francisco, and Denver (for example). Across the U.S., taxi fares are rising, and Boston fare hikes are lagging already set in place movements in New York and Denver. It does make sense that the taxis should pass some of the added costs, the +47cents/gallon rise in Massachusetts’ gas prices in just three months, to the consumer. However, before the Boston government allows the rate increase, it should consider the quality of the taxi service in Boston.

I have ridden in taxis in all three cities, Boston, Denver, and New York, and in my opinion, Boston drivers are the worst. Every time I ride in a Boston taxi, one of the following occurs: the car is experiencing some technical difficulty, the taxi driver is screaming on his telephone headset, the taxi driver fails to turn on the meter, the taxi driver takes a ridiculously long route, or the taxi driver blatantly fails to signal when turning or changing lanes. Given the quality of the service, the current rate, $2.75 initial plus $0.30 per 1/8th mile is too high, and the proposed rate hike to $3.25 initial plus $0.45 per 1/8th mile is highway robbery. The Boston taxi system, as it is, is a social cost to the city: there are too many bad drivers on the road.

As the Department of Labor states, “Drivers must be alert to conditions on the road, especially in heavy and congested traffic or in bad weather. They must take precautions to prevent accidents and avoid sudden stops, turns, and other driving maneuvers that would jar passengers.” According to the Massachusetts Department of Motor Vehicles http://www.dmv.org/ma-massachusetts/special-licenses.php , Boston taxi drivers are not required to fulfill any requirements that indicate their capacity to be alert, especially in heavy and congested traffic or in bad weather, except to get a class D license like the rest of us.

I propose that a new license system be enacted with the rate hike. Boston taxi drivers should be required to fulfill extra training and certifications that prove their ability to handle urban driving conditions. The city will be safer and the social cost will diminish. Further, the new law would set a precedent for other cities across America.

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McCain’s plan, while scoffed at, may help drivers in Boston traffic

Thursday, June 26, 2008


The candidates are plowing full force straight into November with their oh-so-important visions for a new America. Recently, Barack Obama and John McCain are concocting plans left and right to sway the misinformed voters.

  • Obama is pushing unions
  • McCain is pushing technical progress

The article, Obama Plea to Tesco on union membership, in the Financial Times reports how Obama is pleading with Tesco to allow union representation for workers. As workers in Tesco would benefit with higher wages and benefits, more would suffer.

Barack Obama fights for the middle-class worker in order to secure prized endorsement by some of the big dogs in the world of unions – lots of money. However, if Obama thought more carefully about what he is doing, then he would realize that he is essentially firing workers and raising expected inflation rates.

First, Obama is firing workers. In a related blog, The Irony of the Threat to Boycott the CBS Debate, I explain how unionized industries offer workers the chance to earn higher wages and benefits, but fewer workers can keep their jobs (a.k.a., unemployment). The U.S. employment reported 5 consecutive months of job loss – what do you think would happen if Barack Obama got his way with mass unionization? Yup, more workers would lose their jobs. Second, Obama is creating inflation. Unionization creates higher wages and firms raise prices in order to afford the higher cost of production (wage hikes). Guess what results? Yup, higher inflation bears its mean face. When the U.S. is experiencing 4.2% inflation, which is low by historical standards but problematic compared to the last 10 years, why would the Presidential candidate fight for union membership when the result would be higher inflation?

Obama’s union efforts as economically harmful; he is not focusing on the future of America. On the other hand, McCain, as strange as his idea sounds, has a brighter America in mind.

Boston traffic is a mess. Like in New York, San Francisco, Denver, or really any urban center, traffic is a drag - especially when the price of gas is $4+/gallon. While Obama is focused on labor party issues like a deer in headlights, McCain’s focus is out of the box.

The article, McCain’s $300M lure for new, ‘green’ car battery sparks buzz, in the USA Today reports how McCain will offer $300 million as a reward to the inventor of a car battery strong enough to be a car’s sole power source. As many Democrats, like Adaora Udoji on the TAKEAWAY, scoffed at the idea, it will stimulate new technology…at least it is designed to do so.

The U.S. is an economy built on technical change and innovation. Why do you think that the U.S. patent system is so well developed? It is expensive to develop new ideas – planning, supplies, education, testing – that the government rewards the inventors of new technologies the right of sole production for 10 or 20 years. That is a plan! McCain’s plan offers an incentive for inventors to take the time and skill to produce a battery that is strong enough to fire up a zero-emission car.

At $4.25/gallon, and if I was one of the drivers sitting in the pictured traffic off of Storrow drive in Boston, I would certainly appreciate a car that was less expensive to drive (battery versus gas). McCain’s idea offers a brighter future for drivers in Boston traffic and across the U.S. Obama’s idea affects a select industry and will ultimately result in unemployment. I leave it to you to decide who’s idea is more progressive.

Please leave a comment. Best, Nontruths

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Are we in a recession? M&M's and jetBlue say no

Wednesday, June 25, 2008

I look around and notice that firms have not cut back on their advertising and promotions. During a recession, the economic slump would feel quite pronounced, i.e., incomes would be falling, people would be losing jobs left and right, corporate profits would be tanking, and the economy would feel, well, depressed. In a recession scenario, it would not be the best time to throw advertising dollars to the wind in order to promote products like candy bars and plane travel.


I deduce that since many firms are engaging in heavy advertising schemes, then we are likely not in a recession.


As you know, I live and work in Boston, MA as an Economist. I enjoy walking around town in search of clues that tell me about the health of the economy. Today I was sitting outside of the Prudential Center eating my lunch when I noticed a large crowd. Everyone was walking around with M&M ice cream bars – orange, red, blue, you name it – they all had one. M&M was giving out the bars for free as in order to promote the bars. Then, I spied a rather grand eye sore that was a JetBlue advertisement plastered across the side of the building above the M&M truck. Immediately, I thought that advertising is wasted money when the economy is doing well, but extraneously wasted money when the economy is in a slump.


As an economist and based on my anecdotal evidence of the continued flow of advertising dollars, I deduce the U.S. is not in a recession.


Econ 101 teaches us that advertising is a sunk cost. It does not buy anything except possible market share, or new customers, but that is certainly not guaranteed. You will see big giants like jetBlue advertising incessantly in order to steal customers from Southwest. Certainly if corporate profits were falling precipitously, then managers would be more concerned with paying their employees, rather than buying advertising rights.


Oh, oh, I shan’t forget the Democrats…of course. I think that this is a great opportunity for some good old government intervention led by John Kerry, the Chairman of the Senate Committee on Small Businesses and Entrepreneurship. He should be appalled that the small guys, JP Licks (local Boston ice cream shop) and Cape Air (New England airline), are losing market share from the needless advertising by corporate advertising on behalf of M&M and jetBlue. Just like limiting speculation in the oil markets (see related blog The Saudis know their limitations, why don’t the Democrats?), John Kerry should definitely spend time and effort drafting a bill that would reduce the amount of corporate advertising in any city with small business competition.



I wish to hear your thoughts and opinions, so please leave a comment. Best, Nontruths



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The Saudis know their limitations, why don’t the Democrats?

Tuesday, June 24, 2008

Led by John Dingell, Congress is proposing to limit the amount of speculation in the oil markets by reducing the incentive to do so. The Wall Street Journal reports that the House Energy and Commerce Committee said that investors of oil futures should be required to pay up to 50% in collateral in order to make a trade in the oil futures market. Some analysts report that this move could reduce oil prices up to $60/barrel. Better put: at the current trading price of roughly $138/barrel, the House believes that under their new bill (code for government intervention), oil would be sitting at just $78/barrel. The Democrats obviously believe that any price above $78/barrel is simply speculation.

Not according to the Energy Information Administration

In their short-term outlook, they forecast that the average price of crude oil in 2008 and 2009 will be $122/barrel and $126/barrel, respectively. And that is all accounted for by supply and demand – you know, too much demand (U.S. and China) chasing a limited supply of oil (Saudi Arabia) – rather than speculation. It is inconceivable to think that the EIA got it so wrong. Don’t they know that the House of Representatives has reported that the price of oil should be $78/barrel?

Compared to the House, the EIA has vast data on oil fields and infrastructure regarding the ability of key economies, like members of OPEC, to supply sharply rising global demand coming from insatiable giants like the U.S. and China. Further, the report is based solely on supply and demand, and not on speculative pressures.

It is so like the Democrats to try and intervene where they should not intervene.

But why not? A related article in the Wall Street Journal, Saudis Promise More Oil
To Curb World-Wide Fears
, reviews some of the goings-on that occurred in Jeddah, Saudi Arabia, over the weekend. The article maps out the inherent supply issues the globe is faced with if Saudi Arabia is to supply the majority of the oil going forward (like it already does). After agreeing to boost oil production by 200k/day in the short term, the King Abdullah agreed to increase capacity to 15million barrels/day by 2018. Some experts believe that this is too lofty a goal, given that most of the Saudi oil fields and infrastructure are old and archaic. More to the point: even if they wanted to produce at the 15mill/day target, new machines and infrastructure must be set in place.

At this point, I see two problems:

  1. Curbing speculation is a short-term fix that doesn’t seem to be a viable fix at all.
  2. In the long term, it is supply that must rise if we are to see energy prices subside at all.

This brings me to my final point: why are the democrats against drilling offshore in the U.S. if that is what we desire? Let’s face it demand is demand. If everybody really wanted to reduce emissions and clean up the environment, then we would. But the fact is that energy is still demanded and customers are willing to pay a high price for it ($4/gas). Going forward, there must be a plan to supply the insatiable demand.

One viable option may be allowing offshore drilling for natural gas and oil. Obama and Bush’s aids are right – offshore drilling will not affect energy prices in the near term, but what about 10 or 20 years from now? If we do not invest in the future of the fossil fuels supply, then we will most certainly pay through the nose in the decades to come. China is not slowing, India is not slowing, and the industrialized economies need energy, too.

Some Californians are against further offshore drilling. Have you ever been to Long Beach? In the NY Times article, Californians Object to McCain’s Drilling Plan, one really sees how short-sited people can be:

“It makes me nervous to think about those who are proposing to drain America’s offshore oil and gas reserves as quickly as possible in the hopes of driving down the price of gasoline,’’ said the panelist, Michael Feeney.

Sure, I don’t want to see a big oil spill off the coast of Florida or California, but I also don’t want to see world growth suffer because we need fossil fuels that are in short supply. Let’s face it, the time to switch to alternative energy has begun, but there is still a lot of technical progress that must be made in order to afford alternative energy sources.

We must bide our time and increase drilling for fossil fuels. It is a matter of survival – if supply does not keep up with demand, then a lot of people across the globe will be really cold in the middle of winter. For now, offshore drilling is a good option for setting in place new supply lines that we can draw on in 10 years or so.

At any rate, the Democrats should allow the offshore drilling simply to provide new frontier for government intervention!


I would like to hear your comments and feedback. Best, Nontruths

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Stagflation: a figment of America’s imagination

Sunday, June 22, 2008

We are not returning to the infamous Stagflation era of the 1970’s and 1980’s. Sure, it feels like the energy crisis is plowing through the economy, but the data shows that inflation is contained, and if the energy markets stabilize, the prices for most goods will not rise at all. Actually, Stagflation never really occurred in the 1970’s nor in the 1980’s.


Previous to the recession of 1973-1975, inflation was at uncomfortably high levels following a decade of strong growth in the 1960’s. The Fed started to raise interest rates in order to contain inflation, and when the oil shock of 1973 hit, the Fed did not lower interest rates enough to combat rising unemployment and falling income. The combination of high inflation and negative growth (what would be called stagflation) was not really stagflation at all, and just bad policy on the part of the Fed. Previous to the recessions of 1980 and 1981-1982, inflation was still at uncomfortably high levels, and the second energy shock hit in 1979. In his famous era of disinflation, or lowering of inflation rates, Paul Volcker raised interest rates that caused a recession, but inflation fell drastically. Again, there was no stagflation, but simply high inflation (that was falling) and low growth derived from Fed policy. We are one step ahead this time around. When the energy shock occurred, and the real price of oil (price without inflation) has exceeded that from the 1970’s and 1980’s, the U.S. was experiencing the great era of disinflation: 15 years of low inflation.

  • The Fed is starting from a point of low inflation, and can help the economy through rising unemployment and falling income. So, since growth is still very positive, we will not see rising prices and falling growth (the definition of stagflation) as the Fed was able to drop interest rates to fuel the economy.

A bit on inflation


First, inflation (the percentage-change in prices each year) is a natural process. The Fed prints money each year, and inflation is always greater than zero. Consumers are used to rising prices, but rising too quickly is a bad thing.


Second, there are two common measures of inflation. Headline inflation is the annual percentage-change in prices for all goods. Core inflation is the annual percentage-change of prices for all goods except food and energy. Food and energy prices often fluctuate quickly, and their price changes are usually short-lived. The central bank of the United States, the Federal Reserve Bank (Fed), usually tries to control core prices since they are better stabilized by standard monetary policy (changing interest rates).


As the graph illustrates, recently headline inflation sits above core inflation, but in the ‘70s and ‘80s, core inflation was above headline inflation. This time around (2008), food and energy prices are rising faster than the prices of other goods. The most recent headline inflation was 4.2%, while core inflation was just 2.3%, and core inflation remained essentially unchanged for four months. Simply put: only food and energy prices are really on the rise.


As long as food and energy prices stabilize (stop rising) before firms start charging higher prices for all goods, then headline inflation and core inflation will soon be the same, and the inflation threat will be history.


As I mentioned in a previous blog, energy prices are set to stabilize, or even fall, with reduced global demand for oil. This means that we will not see inflation, headline or core, hitting double digits (12%) like it did in the 1970’s and 1980’s. Don’t worry, stagflation will not emerge. The Fed will not allow prices to rise indiscriminately.


I appreciate your comments or suggestions. Best, Nontruths

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The Democrats’ quandary: free markets reducing energy consumption

Friday, June 20, 2008

The price of gasoline in the U.S. is now $4.06. That means for the driver of a 16-gallon tank sedan, it now costs $17 more to fill up since last year. The added cost of gas has forced consumers to buy fewer of the goods that they want in order to buy goods that they need, like gas. That means fewer movies seen, fewer clothes bought, fewer nights out, but the same (or less) amount of gas purchased. This has consumers feeling squeezed and policy makers in D.C. on a rampage.

The Democrats, in their quest to help middle-class America, have taken this energy crisis as an opportunity to push agenda. First, and foremost, they want to reduce gas prices for American drivers since $4/gallon gas is simply too much. But at the same time, they are driving climate change, windfall profits taxes, conservation plans, and energy bills. The problem is: market forces are already at work, and no new bills are needed to enforce the outcomes that the Democrats desire.

The quandary for the democrats: market forces are working, and energy consumption is falling.



Consumers are using less gas. Going forward, as gas consumption falls, demand falls, and the price will eventually fall. Even with oil prices above $130/barrel, reduced demand will cause the price of oil-related energy products (heat, gas) to fall…or at least not rise anymore. So, stick around for a while because gas prices are not going to rise too much above the level that they are now. Economies other than the U.S. are also reducing gas usage, or soon will in the future. China just announced that it will raise the price of gas 15%-20% (gas prices are set by the government in China). Globally, countries are reducing energy usage, which eventually will put downward pressure on the price of gas all on its own – without the help of the Democrat agendas.

So what are the Democrats to do? Windfall profits taxes and the tradeable permit program (to reduce emissions), and other agendas that target emissions, are unnecessary when market forces are reducing energy consumption. This must have Nancy Pelosi in a fit because government intervention is now unnecessary. In a world of freely floating energy prices, consumers and firms are forced to find more energy-efficient products and production methods (cars, appliances, computers, etc). That means that on its own, and without the help of the Democrats in Congress, the U.S.A. will be a greener nation. If climate change is a serious agenda for the Democrats, then the substitution away from buying and producing products that use a lot of energy is a good thing.

It is perplexing why Democrats continue to push government intervention in the energy markets in order to drive climate change and emission reduction. The simple fact is that market forces are doing all the necessary work. The Democrats would likely make a mess of what is a completely natural process: high oil prices → high energy prices → reduced energy consumption → greener America.

I am happy to receive any comments. Best, Nontruths

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Health care prices got you down? Vote for McCain

Saturday, June 14, 2008

The main candidates of the Presidential election, Barack Obama and John McCain, are vocalizing their plans regarding fundamental issues such as the economy, climate change, immigration, Wars, and health care. Listening to the candidates on the radio or reading the issues on their websites is often confusing. In regards to health care, here is the bottom line: McCain’s plan costs less and stimulates competition, while Obama’s plan costs more and reduces competition.

Listed below are the health care plans listed on each candidates official website.

Obama - Obama will make available a new national health plan to all Americans, including the self-employed and small businesses, to buy affordable health coverage that is similar to the plan available to members of Congress.

· The text goes on to use the following words: Guaranteed eligibility, Comprehensive benefits, Affordable premiums, Subsidies, reined in health costs, and Quality and efficiency.

McCain - While still having the option of employer-based coverage, every family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance.

McCain’s plan costs less and stimulates competition. This is a good plan for two reasons.

First, the expected costs are fairly straight forward and easy to understand. The program is not a complete overhaul of the current health care system and its associated costs are more or less fixed. The plan will cost the government (tax-payers, really) the tax credit $5,000/family * number of families in the U.S. (roughly speaking).

Second, by transferring the subsidy payments (the tax incentives) from the firm where they currently are to the household or individual, health care costs will fall and competition will rise. The current health care system subsidizes firms to supply health insurance to workers. Each worker, regardless of his/her health or age, has access to the same insurance at the same cost. Simply put, younger or healthier individuals pay the same as older or less health individuals. The insurance companies charge higher rates per person because they cannot screen potential insurers on an individual basis. Under McCain’s plan, the subsidy is transferred from the firm to the worker, and each individual will look for insurance based on his/her needs. The American population will be searching for insurance with the best price that fits individual requirements, and the insurance companies will be forced to act more competitively. Insurance costs will fall, and each person will get the health care that they need.

McCain’s plan, of course, is not without its caveats. Certainly, individuals with a pre-existing health condition will be forced to pay higher insurance premiums than individuals without a pre-existing health condition. Therefore, the credit will need to be higher for those with a pre-existing health condition. That kind of detail can be hammered with relative ease.

Obama’s plan costs more and reduces competition. This is a poor plan..

First, the plan is difficult to understand, having many layers in need of attention. Obama promotes universal health, while at the same time, the government will regulate the private insurance industry for those who want to stick with private insurance, will insure all children, expand the eligibility of Medicaid, and allow for flexibility across states. I look at this hodgepodge of a list and am confused.

Second, the expected costs are not clear. The universal health care plan will likely cost more than any projected cost. In Massachusetts, the projected costs in July 2007 for its universal health care system fell short of the actual costs in 2008, resulting in a budget deficit that must be covered. American tax-payers will pay in full the excess costs of the universal health care.

Third, costs will be higher because the system is highly regulated by the government. It is impossible for any one individual or group, i.e., Congress, to regulate an industry with efficiency (hit the right price). Only shifts in supply (new technical development) and demand (customers looking around) can determine the proper price of health care. In the end, Congress will meet behind closed doors and attempt to decide the proper price, cost, and rules and regulations associated with universal health care. It will likely undershoot the target and the American tax-payer will be paying something higher than the efficient (best) price. Further, the government will decide the procedures and technologies allowed under the program according to the population’s needs. Those of us who are different from the average will be again over-insured or under-insured.

I highlight the following words from Obama’s web page: subsidies, reined in health costs, and quality and efficiency.

· Subsidies cannot reign in health costs, and regulation is highly unlikely to yield the best quality and efficiency.

Insurance is certainly important and a key issue in determining quality of life. Those who are insured are better off; the expected lifespan of an individual with insurance is higher than an individual without insurance. Insurance is good, but the plan that costs less is the best plan for the American tax-payers. That is McCain’s plan.

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May retail sales good for economy and the Republicans

Thursday, June 12, 2008

The retail sales data came out today. The media would have you believe that this news was a genuine surprise – how could consumer possibly spend more in the dire economic times that we live? Well, that is what the rebate checks were designed to do….hence, a stimulus.

The New York Times: “Tax Checks Yield Surprising Growth in Retail Sales”

Retail sales grew 1.0% in May, and excluding auto sales, grew 1.2%. Usually Economists refer the ex-auto number as indicating strength or weakness in the sales statistics because auto sales are very volatile, with big shifts each month. The main drivers of the retail sales figures was growth in sales at gasoline stations (to be expected), but better yet, growing strength in auto sales, clothing sales, and department store sales. Overall, it is a good report.

The uptick in clothing and department sales is particularly encouraging because the rebate checks are going to purchases other than gas and food. Forecasters were expecting only a minimal (if any) boost from the rebate checks and clearly understating the potential benefit of the stimulus program. Going forward, expect a continued upward trend in retail sales that will drive economic growth over the next few months and keep the economy out of a recession.

On the political front, according to the Wall Street Journal/NBC poll, Obama has a narrow lead over McCain: 47% to 41%. John McCain should get a short-term boost from the retail sales numbers. The Bush-approved rebate checks stimulus is certainly helping the economy get through what would have been a very rough economic patch, and the trend is likely to continue through September. Rising food and energy costs are not eroding the stimulus from the rebate checks, and it is unlikely that they will over the next 6 months.

Each month that the economy continues to expand is another month that Obama cannot claim that the Economy is in desperate need of change. As the economy improves over the next few months, many voters will migrate toward the McCain side of the arena.

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The U.S. saving rate has hit rock bottom...or has it?

Sunday, June 8, 2008

The U.S. personal saving rate is shocking. In April 2008, the average consumer saved 0.7% of his/her disposable income (income minus taxes). And with incomes rising at a slower pace than the American lifestyle, saving really does look dire.

Over the last three months, average real income (the amount that income rises taking out the natural upward-trend in prices) rose 1.5% per year, while average real consumption rose 1.75%. The math is simple: saving must be falling. In fact, since the late 1980s, personal saving has been on a downward spiral. In order to eat at the same restaurants, drive the same car, buy the same groceries, insurance, furniture, appliances, entertainment, and vacations, Americans are saving an almost-zero share of their disposable income.

However, this is just one measure of saving. Saving measured on a national, or even international, scale tells a different story. It is important to understand that America dissaving is different from the American consumer dissaving. The personal saving rate, 0.7%, does not include firm investment in machinery nor government saving or dissaving (surpluses or deficits). The national saving function, personal saving plus investment plus government saving/dissaving, is a better indicator of saving in America.

Investment must be included in national saving because it is an important determinant of future economic growth. As a nation, Economists include buildings, computers, and machinery in the definition of saving because when they are built (it takes time), income rises with higher production, and the country is better off. Government saving/dissaving must also be included. When the government issues a bond in order to pay for a public service or program (ex: universal health care) that is not covered by regular tax receipts, American tax-payers must pay off the debt in the future. National saving falls and brings future economic growth with it.

As a nation, national saving has fallen with rising government deficit spending, but is being sustained by firm investment and sits at 13% of total income (GDP). When compared to the personal saving rate (0.7%), national saving (13%) is not so alarming. Firms (and the government) are building up the infrastructure of the economy, which will produce higher economic growth in the future.

We are not out of the woods yet

If the U.S. economy did not trade with other countries, then the article would stop here. However, the economy is wide open to international transactions, and the current account measures U.S. saving/dissaving with other countries. The U.S. current account has maintained a similar downward spiral as the personal saving rate. Several factors contributed to this, but a negative and falling current account balance indicates that American is insatiable when it comes to buying international goods and services today, and opts out of saving for tomorrow. In other words, America (including the U.S. government) is willing to borrow from China in order to spend more on education, health care, eat at the same restaurants, or drive the same car.

The current account is the most troubling of all saving measures. Fact is fact: American consumers are big spenders and currently borrowing from the rest of the world in order to keep the spending going.

There are arguments as to why the current account is not really as bad as it seems; perhaps this is worth a future blog entry. However, the light at the end of the tunnel is still shining with all the umph of a 40-watt light bulb. The falling value of the U.S. dollar is good for the current account. Exports rise relative to imports, and U.S. stocks and bonds can be less attractive to foreign investors. If foreign investors are not attracted to U.S. financial instruments, then future interest payments will fall. Both factors, rising exports and fewer interest payments, raise the current account and drive up international saving.

So there is hope yet. The correction of the current account is a natural economic process. It is okay to keep consumption steady, but not at the cost of becoming increasingly indebted to the rest of the world. Further, it is always good to remember that the saving rate reported in the media is only a small part of the whole story.

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