Boom2Bust.com

Sunday Edition: September 23, 2007

Reminiscing
Wow! Can you believe that today is the first day of autumn? Summer always seems to go so quick (especially as you get older). The season is especially short in the Chicagoland area as the weather has gone from winter to summer and back again (bypassing spring and fall altogether) these past few years. I always try to venture north to Wisconsin (specifically, Burlington in the southeastern part of the state) in order to get my fall fix. Nicest people in the planet in Burlington- last week while I was in town preparing my boat for winter storage I drove to the McDonalds to grab a fast breakfast and almost ran over one of the workers in the drive-thru, who just smiled and wished me “good morning”. If the same thing had happened in Chicago, I’m sure his colleague would be telling me where to stick my Egg McMuffin…

Being the first day of fall, it also marks the end of the first season of Boom2Bust.com, which debuted Memorial Day Weekend. Since its unveiling, I’ve sensed a few more Americans are starting to question the economic health of the United States. I know… the government, the Fed (a private bank, in case you didn’t know), and Wall Street keep telling us everything’s fine. But that’s their job, and quite frankly, they’re very good at it. However, if you look beyond the rhetoric you may see some significant threats to our economic well-being:

• Inflation- If you believe the “official” data, then the latest inflation number is around 2%. But if you’re like me, you’re a little suspect of this number when prices for everyday items seem to indicate otherwise. According to the formula used prior to the Clinton administration the headline rate of inflation is running around 5.5% as of last month. If we use the CPI formula that was in place back in 1980, headline inflation is significantly higher.
• Employment- Employers cut 4,000 workers from payrolls in August, which was the first time in four years. Look back farther and you’ll see that U.S. employment growth has been trending downwards for more than a year. Especially worrisome is that since the beginning of 2007 more than 40,000 mortgage industry workers and 20,000-plus construction industry workers have lost their jobs, according to Chicago-based global outplacement firm Challenger, Gray & Christmas Inc. Also, the number of temporary workers hired fell in each of the previous 6 months, and was down 2% in July from the start of the year. Economists believe that businesses cut temporary workers first before turning to full-time employees.
• Housing- Considering housing-related employment accounted for about 1 in every 10 jobs in 2006, this sector must be followed carefully. The National Association of Realtors recently admitted that the worst housing slump in at least 16 years will extend into 2008 as tighter loan standards cut into home sales. The group has already cut its home-sales forecast 9 times this year. The NAR may report on September 25 that home resales declined 4.5% to an annual rate of 5.49 million, the lowest in 5 years, according to a Bloomberg survey. Two days later, the Commerce Department is projected to report new homes sales fell to an 828,000 pace, 4.6% less than in July. The National Association of Home Builders/Wells Fargo index of builder confidence for September dropped to 20, matching the January 1991 reading as the weakest ever. Levels lower than 50 mean most respondents view conditions as poor. The Case-Shiller U.S. National Home Price Index revealed U.S. home prices in the second quarter of 2007 fell 3.2% compared to the same period in 2006. The price drop marked the largest year-over-year decline ever recorded in the 20-year history of the index. The Case-Shiller index, which tracks multiple sales of the same homes, is considered by many observers to be the best gauge of national and metro real estate values. According to RealtyTrac Inc., in August the total number of U.S. foreclosure filings, including defaults, scheduled auctions and bank repossessions, rose 115% from a year earlier.
• Dollar- The greenback is broke, but probably not down and out- yet. Regardless, as of Friday the U.S. currency stood near a 31-year low against the Canadian dollar while the euro has continued to set new record highs against the dollar, climbing above $1.41 for the first time ever. If the dollar continues to weaken, as many analysts and traders expect, imports sought by U.S. consumers could cost more. A weaker U.S. currency, besides pushing up the price of foreign goods, also drives up the price of commodities priced in dollars, such as oil, and has a big impact on consumer spending (which accounts for around 70% of U.S. gross domestic product). Should the dollar decline sharply, we may see foreign investors dump their U.S. dollar-denominated assets, which would mean major trouble for the U.S. economy.
• Consumer Debt- Consumer and mortgage debt is running at over 120% of disposable income. U.S. consumer debt rose in July at a 3.7% annual rate to $2.46 trillion. The amount of revolving credit, such as credit cards, carried by consumers rose in July at an annual rate of 6.6%, or by $5 billion, which was the third straight month of significant gains. Revolving credit was up 6.4% in June and a whopping 10.9% in May. The U.S. personal savings rate was only 1% and 0.5% for the first and second quarters this year.
• National Debt- Last week Treasury Secretary Henry Paulson informed lawmakers that the U.S. government would hit its current debt ceiling of $8.96 trillion at the end of the month. The national debt is the total accumulation of annual budget deficits, which must be financed with borrowed money. Unless Congress votes to raise it, the country would be unable to borrow more money to keep the government operating and to pay debt obligations coming due. The proposed boost of $850 billion would be the fifth since President Bush took office in 2001.

Are you uneasy knowing all this? I sure am! Yet, these are just some of the economic threats that come to mind as we say goodbye to summer. I will be particularly watching derivatives in the coming months, as I fear these financial instruments have the potential for wreaking havoc in spite of their “reputation” of minimizing risk.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com