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Some Projected Growth for 2011

December 15, 2010 | Filed Under Finance | Comments Off

The outlook for US economic growth for 2011 has grown more optimistic, according to the latest Wall Street Journal forecasting survey of 55 responding economists. Meanwhile, the odds of a double dip recession have been reduced to 15% from 22% in September. “The majority of respondents said there is a better chance the economy will outperform their forecasts than that it will underperform.” (Wall Street Journal, December 13, 2010, “Economists Predict Growth in 2011”) The data used to make these forecasts appears to be looking better. This data includes trade, retail sales, consumer sentiment and manufacturing. Economists are also encouraged by the news of the tax-cut compromise expected to pass the Senate in the near future. The extension of the Bush tax-cut in combination with the payroll tax cut is expected to provide further stimulus to the economy and boost growth, as well as jobs. However, there are still problems that can hold growth at bay: the unemployment rate ticked up for the first time in three months and the housing market is in trouble with excess foreclosures and very restrictive lending parameters for potential home buyers.

Lenders Still Tightening Credit in the Housing Markets

December 15, 2010 | Filed Under Finance, Investment, Real Estate, Retirement Savings | Comments Off

The housing market may be headed for another downturn, according to some economists, because mortgage lenders continue to tighten the already restrictive lending standards for home loans.

Earlier this year, the housing market was buoyed by the home-buyer tax credits, but sales have plunged in the second half of the year after the tax credits expired. New and existing home sales were down by more than 25% in October from a year ago.

Even though mortgage rates are at the lowest in 60 years, mortgage applications are hovering near their lowest levels in more than a decade. Housing economists are very concerned that tight credit at the bottom of a housing cycle could result in continued retardation of the hoped for recovery. An expanding housing market will usually help lift an economy as it exits a recession, but in this current market, it appears the glut of foreclosures will continue to hit the market without buyers who can qualify for home loans due to restrictive lending parameters. Because the lending standards have increased significantly, the housing market will not be propping up the economy in the near future. Economists say lending standards typically ease at this point in the business cycle as banks look for new business. Banks are not looking for new business at this point, could it be because they are flush with cash from the Troubled Asset Relief Program (TARP monies)? If banks were not in possession of the TARP cash, would they be looking for new business? Did the TARP money to banks interrupt the normal business cycle which will lead to prolonged financial difficulties for consumers? It appears the more big government spends, the more consumers experience financial woes.

European Debt Crisis and Inflation

December 8, 2010 | Filed Under Uncategorized | Comments Off

News media and the general public have been closely watching the European debt problems, especially those countries in crisis like Greece and now Ireland. However, the debt crisis, banking problems and currency valuation issues are not the only concerns. There are serious worries about inflation that could spread to global concerns, if the economies in specific Asian countries continue to keep interest rates inappropriately low. The following countries have these inflation rates, according to the Wall Street Journal:

India 8.6%
China 4.4%
S. Korea 4.1%
Thailand 2.8%
Philippines 2.8%
Indonesia 5.8%
Malaysia 2.0%
Singapore 3.5%
Australia 2.8%

By comparison, the United States has an inflation rate of 1.2% for 2010. The US government went so far as to declare the reason that there is no increase in Social Security payments in 2010, for the first time since 1975, is because the index upon which increased payments are based had a negative inflation factor. Will the low interest rates controlled by the Federal Reserve Bank in the US, also cause similar inflation as what these other countries are experiencing? Couple inappropriately low long term interest rates with the massive printing of currency in our country and imagine where the inflation will be next year at this time.

Big Banks Recovering and Profiting While Small Banks Still Struggling

December 2, 2010 | Filed Under Finance | Comments Off

“A report released by the Federal Deposit Insurance Corporation (FDIC) showed that the nation’s largest financial institutions are recovering from the financial crisis at a far faster pace than that of their smaller rivals…  The number of banks on the FDIC’s list of problem institutions climbed to 860 at the end of September, the highest level since March 1993, while the average size of those banks dropped to $440 million from the $486 million.” Wall Street Journal November 24, 2010.

There are diverging fortunes between small and large banks, which could have long term consequences for the banking industry.  Only a few national banks dominate the industry with mortgages, small business loans and checking accounts.  For example, Wells Fargo Company’s acquisition and merger with Wachovia Bank, has recently resulted in Wells Fargo Company reporting third quarter profits of 19%.  The larger banks are not necessarily depositor friendly, as they tend to pay lower interest rates to keep their costs to a minimum.  Some smaller banks are seeking out mergers as they struggle to survive financially.  The FDIC chairman, Sheila Bair, recently said that “commercial real estate continues to weigh heavily on community banks’ balance sheets.”

Some of the dominant banks have recently passed a new round of regulatory stress tests administered by the Federal Reserve.  This could result in the banks returning to dividend payouts to shareholders in the near future.

Spending Increase May Not Be a Savings Grace

December 2, 2010 | Filed Under Finance | Comments Off

Consumer spending has had a slight increase in the third quarter of this year, over last year at this time.  October and November are showing signs of increased spending by consumers, but at what cost?  According to a recent article in the Wall Street Journal on November 24, 2010, “the personal savings rate is expected to fall in October for the fourth consecutive month, to below 5.3%.  That means consumers are spending more of their incomes and saving less.”

One of the positive outcomes of the recent recession is that it has caused people to “tighten their financial belts” which resulted in less spending and more saving.  Putting money in savings is a good habit that former generations of Americans practiced regularly.  The Baby Boomers and Generation X have been much less diligent in their savings habits, that is until the recent recession.  Hopefully, if there is an upturn in the economy, it will be because consumers are both spending, as well as saving,  as this would be the best possible outcome.  We can learn a lot from the financial habits of former American generations that lived on less, saved more and did not rely on credit for daily living.