Boom2Bust.com

Why Ethanol Sucks

“So ethanol is bad for taxpayers, bad for consumers, bad for the environment, and bad for the world poor. Does anyone benefit from ethanol?”

Wall Street Journal Online Video Link

Source:

“Ethanol: Silly Senator, Corn Is for Food!”
reason.tv
Wall Street Journal Online, August 14, 2008

Say Goodbye To Your Pay Raise

Think you’re getting a raise in 2009? Think again. According to the Wall Street Journal’s Sarah Needleman last week:

Despite the weak U.S. economy, employers nationwide are expected to raise workers’ salaries next year at the same rate as they did this year, a new survey shows. But the increase may be offset by rising inflation rates and lower 2008 bonuses tied to company performance.

Rank-and-file workers can expect to see their base pay rise by an average of 3.5% in 2009 — the same amount they received this year, reports Watson Wyatt Worldwide Inc., a global human-resources consulting firm. High performers are projected to fare better, gaining an average of 4.4% in base pay, while mediocre performers are likely to see their paychecks increase by 2% or less…

But even with a 3.5% raise, most workers will likely find that extra cash consumed by rising costs for everything from food to gasoline. The latest report from the U.S. Labor Department showed inflation rising at a brisk 5% in June — more than the raise most employees will receive in 2009.

“Inflation has crept up to a pace where even your better-performing employees won’t make up the difference,” says Laury Sejen, global director of strategic rewards consulting at Watson Wyatt. “They’re going to be losing ground relative to inflation.”

Quicksand Scene, “Blazing Saddles” (1974)

The situation looks even worse if you’re like me and don’t buy the government’s inflation data. On May 22, MarketWatch’s Rex Nutting noted that PIMCO’s Bill Gross discussed the flawed data in his June “Investment Outlook” on the PIMCO website. Nutting wrote:

Gross argued that inflation rates in the rest of the world have averaged nearly 7% over the past decade, while the U.S. official inflation rate has averaged 2.6%. “Does it make any sense that we have a 3% to 4% lower rate of inflation than the rest of the world?” Gross wondered…

The consumer price index is being understated by at least 1% per year because of these factors, Gross said. And if inflation is understated by 1%, then gross domestic product has been overstated by that same 1%. Other critics have put the error much higher.

Other critics like John Williams, an economic consultant who publishes the monthly newsletter Shadow Government Statistics. Ted Rall noted in a Yahoo! News piece last week that Williams calculates inflation is actually running at an annualized rate of 9.95%, when you factor out all the tinkering that’s been done to the data over the years.

But what about bonuses? The news isn’t much better. Robert Trumble, professor of management at Virginia Commonwealth University and director of the Virginia Labor Studies Center in Richmond, told the Journal that bonuses tied to company performance will likely be significantly less this year than last. He said:

Bonuses are definitely going to be down. The economy as a whole is down and most [bonuses] are performance-related.

Sources:

“Inflation May Offset Pay Increases in ‘09”
Sarah E. Needleman
Wall Street Journal, July 25, 2008

“U.S. inflation understated, Pimco’s Gross says”
Rex Nutting
MarketWatch, May 22, 2008

“RECESSION, YEAR 8”
Ted Rall
Yahoo! News, July 24, 2008

Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending

Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:

He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:

The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.

“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.

“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”

Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.

Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”

Dr. Shilling told Newsmax:

Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….

I look for the biggest decline in consumer spending since the 1930s.

Next up? Phase four, where recession spreads throughout the world.

Oh joy…

Sources:

“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008

“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008

How Irish Tourists Saved The U.S. Economy

“There’s someone I want you to meet this weekend,” my girlfriend told me in June. Her relatives were coming in from Ireland for a family reunion in Chicago. “He’s travelling with his wife and her sisters. Maybe you guys could hang out and talk some football [soccer].” I met Connor that Friday night at the Water Tower Place in Chicago (from what I could understand, he wasn’t married, yet he did travel with a young lady and her sisters). While the conversation revolved mostly around the “beautiful game” and my plans for the “Great Escape” the next day to watch some of Euro 2008, he happened to mention that since he’d been in United States, he and the “Walsh girls,” as they came to be known by reunion participants, had shopped, shopped, and shopped some more. It seemed that every time I asked about Connor’s whereabouts, “he and the Walsh girls went shopping” was the response I got. On Sunday, the reunion shifted to Arlington Park Racetrack for thoroughbred racing. I saw the Irishman at the start of the day after he had just won a race, but didn’t see him later on. More shopping, perhaps? In the days that followed, my girlfriend joked to her sister that the Walsh girls single-handedly saved the U.S. economy. She also mentioned that she felt bad for Connor, as did I, as he was forced to endure the seemingly-endless spending sprees at the Chicagoland malls. However, this remorse was short-lived when her sister informed her that Connor bought just as much stuff as the Walsh girls did.

Robin Sparkles, “Let’s Go To The Mall”
YouTube Video Link

Anyway, I read a blog post by CNN’s Jack Cafferty earlier today that reminded me of our “economic rescue” by these visiting tourists from the Emerald Isle. Cafferty provides commentary and insight for CNN’s political program “The Situation Room.” He wrote:

The U.S. dollar just isn’t what it used to be. In fact, the dollar has been declining in value for 6 years now against other major currencies.

And, if you look around, it’s hard not to see the signs: hordes of vacationing Europeans are picking up bargains in the U.S., while Americans traveling overseas are hit hard with sticker shock. Canadians now flock here for shopping bargains, instead of the opposite. A Belgian company is attempting a hostile takeover of Anheuser-Busch, the largest brewer in the U.S. If the takeover goes through, it might be the first of many foreign takeovers of American companies.

While everything made in the U.S. is so much cheaper to foreigners, Americans are paying more for imported goods, while most are also grappling with rising food and energy costs. Since oil is bought and sold in dollars, the devalued dollar makes gasoline that much more expensive for Americans.

Some even suggest the continued decline of the dollar could one day lead to it being replaced by the Euro as the so-called “primary reserve” currency. There are stores right here in New York that now accept euros as payment.

Meanwhile, the message from Washington doesn’t seem to change much. President Bush has often talked about his support for a “strong dollar”, just last week saying “We’re strong-dollar people in this administration.” Really, Mr. President? You have presided over the most precipitous drop in the value of our currency in our nation’s history.

Source:

“Concern about sharp decline of dollar?”
Jack Cafferty
CNNPolitics.com, July 2, 2008

Morgan Stanley’s Chief U.S. Economist Says Recession Is Here

Richard Berner, Morgan Stanley’s chief U.S. economist, said yesterday at a public finance and pension fund conference in Illinois that the United States is in a mild recession. Berner added that the U.S. housing crisis still has “a long way to go” because of excess supply and caution by both lenders and potential homebuyers. The 2007 winner of the William F. Butler Award for excellence in business economics also warned of an elevated inflation threat which should pressure corporate earnings, contribute to market volatility, and feed a relatively steep yield curve, according to Reuters’ Karen Pierog. She wrote:

U.S. consumers are facing a perfect storm of eroded housing prices, higher energy and food prices and a weaker employment picture, Berner said…

As for energy, Berner said finite supply in the face of rising global demand will keep the price per barrel of oil high.

“My guess is in the next two to three years the equilibrium price will still be north of a hundred bucks,” he said.

Gray’s Papaya, NYC
Source: The Baltimore Snacker

Source:

“Mild recession, modest recovery for US - Morgan Stanley”
Karen Pierog
Reuters, June 2, 2008

Quote For The Week

Last Wednesday, the U.S. Department of Labor reported that the consumer price index, or CPI, rose a moderate 0.2% in April. Excluding “volatile” food and energy prices, the “core” consumer price index increased only 0.1%. Over the past 12 months consumer prices are up 3.9%, with “core” inflation running at 2.3%.

In response to this “official” data, Joel Naroff, president of Naroff Economic Advisors Inc., told MarketWatch on May 14:

If you believe that inflation is under control, I have a bridge that spans the East River that I can sell you for a really good price.

Naroff was referring to the Brooklyn Bridge, and the fact that since its opening in 1883 several “salesmen” have attempted to sell the structure even though it has always been the property of the City of New York.

Consumers Buying What They Need, Not What They Want

This afternoon I read an interesting article by the Associated Press’ Jeannine Aversa about consumer spending at a time when the U.S. economy is slowing and prices for items such as food and gas are rising. According to a recent government report on retail sales, clothing stores, furniture and home furnishing retailers, electronics and appliance stores, building materials and garden supply places, and health and beauty shops were among those merchants who saw their sales drop last month. Sales at bars and restaurants posted a modest increase from the previous month, as did sporting goods, hobby, book and music stores.

Aversa noted how consumers are changing their spending habits:

• 60% of the American public say they are now less comfortable buying a big-ticket item, such as a home or a car, than they were just 6 months ago, according to the RBC Cash poll conducted by Ipsos, an international polling firm, earlier this month. 12 months ago, 48% said they were less comfortable about making a major purchase.
• 53.6% of people surveyed focused more on what they needed, rather than what they wanted, when they went shopping over the last 6 months, according to BIGresearch, a firm that tracks consumer behavior. Pam Goodfellow, a senior analyst at BIGresearch, says the focus is more on smart shopping and bargain hunting.
• Because declining home prices and rising prices at the pump cannot be controlled, consumers are “controlling the little things… filling up the cart and putting things back at the check out,” said Candace Corlett, principal at consulting firm WSL Strategic Retail. She warned, “They are learning restraint and that is deadly for commerce.” Although, most Americans aren’t giving up things like medications, cell phones, and cable TV.

Photo by Ruth Elkin, stock.xchng

The research firms pointed out specific areas that were suffering from the pullback in consumer spending. 35.2% of people polled were scaling back vacation plans, according to BIGresearch. WSL Strategic Retail said fashion accessories, home decor items, premium brands of food and specialty coffees, eating at restaurants and take-out foods, and tickets to entertainment, are the top areas where consumers are cutting back.

Marshal Cohen, chief retail analyst at consumer and retail research firm NPD Group said video games, toys, and skin care products are the three areas he believes are least likely to see spending cuts.

Source:

“People’s decisions to cut back add up to weaker economy”
Jeannine Aversa
Associated Press, April 25, 2008

Signs Of The Time, Part 13

Remember those days when you would go to a local eatery like Chili’s or Applebee’s, and leave feeling like Violet from Willy Wonka & The Chocolate Factory? They may be gone for quite some time. David Segal of the Washington Post wrote Sunday:

Pinched by soaring food costs on the one hand and a recession-fearing public on the other, the restaurant industry is getting crafty. Chefs are tinkering with recipes, swapping out expensive ingredients for cheaper ones. Managers are using behavioral science research to retool menus—putting high-profit items in the top right-hand corner, for instance, where diners tend to look first.

And many restaurants are putting the great American portion—a monstrosity by international standards—on a diet, as surreptitiously as possible. Many restaurants are buying smaller plates to make the reduced servings look just as large, or lighter silverware so that even if there are fewer bites per serving, each bite feels heavier than usual on the fork. A la carte portions of high-priced dishes are getting pared back and surrounded by low-cost starches and vegetables.

Segal explained that restaurants aren’t doing this on behalf of their patrons’ health. Rather, they’re cost-cutting measures. He wrote:

There is little risk that portion shrinkage will cause anyone to lose weight any time soon. That’s because the point isn’t to slim us down or lower our cholesterol. It’s to save money in a business that many think is already in recession. A recent National Restaurant Association survey found that 46 percent of members reported declines in traffic in February over the previous month, not to mention “a record-low reading in restaurant operators’ outlook and expectations.”

Great. I hate waiting to be seated anyway…

“How much for one rib?”
YouTube Video Link

Source:

“Using portions to keep control of bottom line”
David Segal
Washington Post, April 20, 2008

Next Stop, Depression?

Back on March 29, ABC News’ David R. Francis talked about the economic forecast of Robert Parks, a finance professor at Pace University and former chief economist at three Wall Street firms. So, what’s so special about Parks that ABC News would be covering him? According to Francis, Parks is predicting that there is more than a 60% chance the United States will enter into an economic depression.

Even though the Federal Reserve has been cutting interest rates to stimulate the economy, Francis wrote:

Mr. Parks, however, doubts the cuts will do much to boost the economy. Rather, he sees a further steep fall in housing prices, continued major deficits in the federal budget and in the international trade balance, a tumbling dollar, and a weak stock market leading to a genuine depression with 30 to 35 percent unemployment, greater poverty, more loss of homes, plunging bond and stock prices, even some starvation.

Mother and child during Great Depression

Source: FDR Presidential Library & Museum

He also noted that Parks says he has never predicted a depression before.

The economist thinks that it’s a mistake to rely on money supply growth to help alleviate present economic conditions. Francis wrote:

As Parks sees it, Washington and Wall Street are mostly counting on Fed additions to the money supply to revive the free market and right the economy.

“Automatic recovery is in no way a reliable concept,” he warns, especially if deflation (falling prices) has begun. He recalls warning of the economic damage that the bursting real estate and stock market bubbles would wreak in Japan: That nation suffered stagnation from 1990 to 2001.

Source:

“Are We Heading Into a Depression?”
David R. Francis
ABC News, March 29, 2008

Are Americans Bio-Fools?

Anyone read Time? I have a gift subscription, and while my first choice of reading material these days is predominantly financial, when I saw the cover of the latest issue I felt compelled to pick up the magazine and take a closer look. On the cover, an ear of corn is pictured with leaves that have been replaced by $100 bills. The accompanying headline reads “The Clean Energy Myth.” Time’s Michael Grunwald states at the outset:

The Clean Energy Scam. Hyped as an eco-friendly fuel, ethanol increases global warming, destroys forests and inflates food prices. So why are we subsidizing it?

Ouch! The U.S. farm lobby must be going bananas right now. Grunwald explained the drawbacks of ethanol, whose viability as an alternative fuel is being increasingly questioned:

But several new studies show the biofuel boom is doing exactly the opposite of what its proponents intended: it’s dramatically accelerating global warming, imperiling the planet in the name of saving it. Corn ethanol, always environmentally suspect, turns out to be environmentally disastrous. Even cellulosic ethanol made from switchgrass, which has been promoted by eco-activists and eco-investors as well as by President Bush as the fuel of the future, looks less green than oil-derived gasoline.

Meanwhile, by diverting grain and oilseed crops from dinner plates to fuel tanks, biofuels are jacking up world food prices and endangering the hungry. The grain it takes to fill an SUV tank with ethanol could feed a person for a year. Harvests are being plucked to fuel our cars instead of ourselves. The U.N.’s World Food Program says it needs $500 million in additional funding and supplies, calling the rising costs for food nothing less than a global emergency. Soaring corn prices have sparked tortilla riots in Mexico City, and skyrocketing flour prices have destabilized Pakistan, which wasn’t exactly tranquil when flour was affordable…

But the basic problem with most biofuels is amazingly simple, given that researchers have ignored it until now: using land to grow fuel leads to the destruction of forests, wetlands and grasslands that store enormous amounts of carbon.

Deforestation accounts for 20% of all current carbon emissions. Grunwald used the example of the Amazon in Brazil. He wrote:

U.S. farmers are selling one-fifth of their corn to ethanol production, so U.S. soybean farmers are switching to corn, so Brazilian soybean farmers are expanding into cattle pastures, so Brazilian cattlemen are displaced to the Amazon…

…resulting in Paulo Bunyan

Apparently, there is hard science to back up Grunwald’s claims that biofuels are harmful. He wrote:

The environmental cost of this cropland creep is now becoming apparent. One groundbreaking new study in Science concluded that when this deforestation effect is taken into account, corn ethanol and soy biodiesel produce about twice the emissions of gasoline…

“People don’t want to believe renewable fuels could be bad,” says the lead author, Tim Searchinger, a Princeton scholar and former Environmental Defense attorney. “But when you realize we’re tearing down rain forests that store loads of carbon to grow crops that store much less carbon, it becomes obvious.”

Knowing all this, we must return to the question of why we are subsidizing it. The answer? Biofuels are politically-popular. Grunwald wrote:

Members of Congress love biofuels too, not only because so many dream about future Iowa caucuses but also because so few want to offend the farm lobby, the most powerful force behind biofuels on Capitol Hill. Ethanol isn’t about just Iowa or even the Midwest anymore. Plants are under construction in New York, Georgia, Oregon and Texas, and the ethanol boom’s effect on prices has helped lift farm incomes to record levels nationwide.

Someone is paying to support these environmentally questionable industries: you. In December, President Bush signed a bipartisan energy bill that will dramatically increase support to the industry while mandating 36 billion gal. (136 billion L) of biofuel by 2022. This will provide a huge boost to grain markets…

… and, quite possibly, global warming, the destruction of forests, and food prices as well.

Source:

“The Clean Energy Scam”
Michael Grunwald
Time, March 27, 2008

Americans See Real Earnings Fall

This past Wednesday, Associated Press business writer Ellen Simon wrote “Workers see inflation-adjusted earnings fall 1.2% for year” in USA Today. Simon reported that inflation-adjusted earnings for the average American worker have fallen 1.2% over the last year, according to the Bureau of Labor Statistics. Higher food and fuel costs have contributed to this erosion in purchasing power, she said. According to the BLS, real earnings (earnings adjusted for inflation) fell in 8 of the last 13 months and were down 0.5% in January compared to the previous month. Dean Baker, co-director of Washington-based research group the Center for Economic and Policy Research, said:

A lot of people have lost a huge amount in their homes, jobs aren’t being created at a rapid rate and wages are falling behind inflation. Workers, in this environment, can’t keep up their consumption. It’s bad for them as far as their living standards, but this is also a serious source of drag on the economy.

Baker told the AP reporter that a consumer pullback in spending could offset Washington’s economic stimulus plan, “But we’d be in even worse shape without it,” he added.

According to Ms. Simon:

Average weekly earnings were $592.74 in January, or roughly $30,800 a year. While that’s about $1,000 a year more than workers averaged in January 2007, inflation has increased at a rate of 4.3% for the same period, outpacing the 3.2% earnings gain.

At the same time, I am not a fan of the “official” consumer price index (CPI) measure because it was heavily manipulated over time (especially during the Clinton administration), with methodological changes that understate inflation. I prefer using the “traditional” measure of inflation (pre-Clinton), which can be calculated by adding 7% to the “official” CPI number (per John Williams’ Shadow Government Statistics), and leaves us with “real” inflation of around 11.3%. This high rate of inflation could explain why I am encountering comments like the following on a much more frequent basis in my everyday research:

I’m confused, everybody keeps telling me the economy is great and I’m not suffering by paying 50% more for my food, clothing and everything else while my pay stays the same. Who should I believe, all those experts or my empty bank account?

-Reader comment, USA Today, February 22, 2008

Goodbye, Middle America

As 2007 comes to a close, President George W. Bush wished the United States a Happy New Year today from his ranch in Crawford, Texas, and reassured Americans that the U.S. economy remained vibrant as we enter the new year. According to the UPI, the President’s message said that the economy had strong underpinnings and that his administration would continue to encourage economic growth “so Americans have more money to invest in their businesses, spend on their families and put aside for the future.”

The President’s greeting reminds me of a saying they use in Texas that goes like this:

“All hat and no cattle”

These past few years I’ve dedicated a significant amount of time studying the U.S. economy and where it’s headed. Regular readers of Boom2Bust.com know where I think this is going. As the storm creeps in, I keep hearing the same things from the same people. “We’re in a goldilocks economy,” according to Wall Street, the government, real estate agents, and just about anyone else who makes a living off of a “vibrant” economy. Just remember that where you stand often depends on where you sit.

As President Bush tells us that the U.S. economy has strong underpinnings, all around me I see the signs to the contrary. A quick glance down the street and it looks as if the lawns are sprouting “for sale” and “for rent” signs instead of plants. No one dares talk about real estate at social gatherings these days, whereas a few years ago I told my girlfriend that if one more person brings up the housing market and how much their home’s value has gone up (because of their investing genius, of course), I’d go ballistic. Then there’s talk of growing financial problems with the City of Chicago, Cook County, and the State of Illinois, as revenues aren’t keeping up with expenditures. I could go on for quite a while. But, don’t just take my word. Consider two articles I came across today in The Times (UK) and the Chicago Tribune. According to the London-based paper:

While the forecasts of some of Wall Street’s top number-crunchers suggest that America may avoid a nasty recession, it is unlikely to feel that way for many families across the United States. Americans, who for the past two years have spent more than they took home for the first time since 1933, are arguably at their most financially vulnerable for generations. The risk that Americans may be forced to tighten their belts, dampening consumer demand, is a real one, now that they are confronted with a decreasing value of their homes, rising fuel prices and uncomfortably high food costs.

According to today’s Chicago Tribune, U.S. food prices have risen this year at more than twice the rate of 2006, and at a pace not seen since 1990. The outlook doesn’t look any better, as many economists believe this year’s estimated price increase of about 5% may be part of a trend that threatens to ratchet up food costs for years. The Chicago-based paper points to the rise of ethanol and strong economic growth in developing nations as the catalysts for higher prices. The Tribune concludes:

If this year’s rise in food prices is indeed part of a long-term trend, lower- and middle-income consumers in particular will feel a pinch in years to come. And U.S. economists might have to rethink the way they view food inflation, which is predicated on the view that food price swings are inherently cyclical and therefore less worrisome than long-term changes.

Benjamin Senauer, co-director of the University of Minnesota’s Food Industry Center, told the paper that, “The days of cheap food may be over.”

Going back to The Times piece, the situation faced by a Nebraska ice cream parlor owner illustrates how the odds are stacked against Middle America:

The milk price has doubled this year, to keep pace with the soaring cost of maintaining a dairy herd. Corn prices used to feed dairy cattle have doubled because of the rising demand for corn to ferment to make ethanol, the biofuel. Amy Green, the proprietor of the Ivanna Cone Ice-cream Emporium in Lincoln, Nebraska, has raised her ice cream prices by 37 per cent in the past 18 months. “Everything has gone up. All the raw materials that I need to run my business have risen – the butterfat, the milk, the sugar and the fuel. I had to pass on the rising costs,” she said.

The Times noted that according to research compiled over the past three years by Harvard University, Middle America is experiencing the most severe financial hardship for more than five decades. Edward Wolff, Professor of Economics at New York University, told the paper that the squeeze on the middle class would get tighter as banks tighten lending criteria in the wake of this summer’s credit crisis. He said, “These families are just not going to be able to take out additional debt. Credit-card companies and auto-loan groups are just going to start saying no.” Contrary to the belief that Americans can’t control their spending habits, the economics professor said “they’re not expanding consumption, they are just trying to tread water.” He pointed out that median household income has nose-dived by 7% between 2000 and 2004, while increasing only 6% between 1983 and 2004.

In retrospect, while President Bush wished us all a “Happy New Year,” perhaps “Goodbye, Middle America” may have been more appropriate, considering the circumstances.

Two-Thirds Of Americans See 2008 Recession

According to a Bloomberg/Los Angeles Times survey taken of 1,209 adults between October 19-22, 65% of those polled say they expect an economic recession in 2008. 51% of respondents said the economy is doing poorly at the present time, as opposed to 46% who are more upbeat about our economic health.

The present outlook is the gloomiest since February 2003, according to Bloomberg. As recent as June did 57% of survey respondents think the U.S. economy was doing well. Poll respondent Roger Sharp, a 63-year-old retired procurement analyst from Milwaukie, Oregon, said, “I’m starting to think there’s a good possibility of recession. The housing industry is driving the economy down and people are starting to get laid off from jobs that have been around for a long time.”

Such negativity was reflected in today’s release of the Reuters/University of Michigan consumer index, which indicated consumer sentiment fell in October from the prior month, reaching its lowest level since May 2006. Richard Curtin, director of the Reuters/University of Michigan Surveys of Consumers, told MarketWatch today, “Each downward step in confidence increases the probability of recession, which is still below 50%, but not comfortably so.” Falling home values, higher food prices, and higher fuel prices are expected to make consumers “much more cautious spenders,” according to the survey.

Will The Real Consumer Please Stand Up

Today the Bureau of Economic Analysis reported that consumer spending grew at its fastest pace of the year at 0.6% in August, up from a 0.4% increase in July. According to the BEA, real consumer durable goods spending, which includes big-ticket items such as cars, refrigerators, and flat-screen televisions, jumped 2.8%, also the highest level this year. Bernard Baumohl of The Economic Outlook Group told the Financial Times (UK) earlier today that there is a “remarkable dichotomy taking shape in the economy. Month after month we have seen nothing but dismal news coming out of the housing sector… But this is not to say that household finances are under stress.” Baumohl added, “Today we get fresh evidence that people are still comfortable enough with the economic outlook to spend, and spend liberally.”

I’ll admit that I was surprised by today’s positive report. Recent consumer sentiment studies suggested a pullback in spending was likely. In Wednesday’s post I talked about how the Conference Board, a business membership and research group, announced just this week that U.S. consumer confidence had declined to its lowest level in nearly 2 years in September due to a weaker job market and uncertain business conditions. Even their August Consumer Confidence Index, with a cutoff of August 22, indicated that consumer sentiment was eroding significantly. It left me thinking, are consumers saying one thing and doing another?

I still believe that we’re going to see a significant slowdown in consumer spending. And it will be sooner rather than later. Peter Dunay, an investment strategist at Leeb Capital Management, told Forbes today that the rising costs of food and gasoline will divert capital away from other areas. Grain prices are surging, partly due to increased ethanol use and demand from emerging economies. Just yesterday U.S. wheat prices hit all-time highs, with some analysts fearing that a bubble might be in the making. Crude oil prices are hovering above the $80 mark. Accordingly, U.S. retail gasoline prices jumped 2.5 cents last week to $2.81 per gallon. Government reports show the national price for regular gasoline is up 43 cents from one year ago. Guy Caruso, who heads the Energy Information Administration (EIA), recently told Reuters that if crude oil prices stayed near their current high levels for the next few weeks consumers would pay more for gasoline. “We’ll start seeing a little bit of that (higher oil price) passed through” at the gasoline pump, Caruso said. As a result of these rising costs, Peter Dunay predicted that the additional money spent on food and gasoline will force consumers to draw from their savings (if any is left) for weekly bills. By the way, personal savings fell to $72.5 billion last month, compared with $89.5 billion in the previous month. Personal savings as a percentage of disposable income fell to 0.7% in August from 0.9% in July.

On Friday the latest Reuters/University of Michigan Survey of Consumers was released. The report echoed what the Conference Board had said earlier in the week. In addition, high food and fuel prices remained a major concern in September, especially for families with lower incomes, according to the survey. Richard Curtin, the survey director, said consumers are expected to become “more cautious spenders” in the year ahead. In a statement, Curtin added:

When asked to explain in their own words how their financial situation had recently changed, one-third of households with incomes below $50,000 said that higher prices had already devastated their family’s budget, and half of these families expected prices to increase faster than their incomes during the year ahead, reducing their living standards even more.

Consumer spending is the backbone of our economy. August’s report was positive despite negative consumer sentiment. A case of “actions speak louder than words,” perhaps? Maybe this time. Yet, my gut feeling tells me the words will soon turn into screams.