Sandy's Aftershocks Hit the Economy

The Wall Street Journal reported this week that the U.S. economy expanded at its fastest rate since 2011 in the third quarter of 2012. The nation's gross domestic product grew at a revised annual rate of 2.7 percent between July throughout September. This rate was revised up from the predicted 2 percent due to growing inventories, strong federal spending, and more consistent exports - all good signs that the economy is growing. 

Unfortunately, this rate will most likely decline in the fourth quarter because of the destruction caused by super-storm Sandy which struck the Northeast shoreline late October. Sandy's force closed many businesses in the Northeast and demolished others. Dallas Fed President, Richard Fisher, says despite the negative effects from Sandy "there's a rebuilding process and we'll have a positive impact in subsequent quarters." 

In addition to Sandy's backlash, fears of the fiscal cliff - a slew of tax increases and spending cuts on track to hit in January - are still looming. Congress has yet to come to up with a solution to attack this fiscal cliff which, if put into action, could send the nation into another recession causing businesses and consumers to hold back spending. 

Federal Reserve chairman Ben Bernanke announced this week that the Fed will enact another round of bond buying in 2013 as a buffer for the looming fiscal cliff. Fed officials have been encouraged by the increased housing market and decreased unemployment rate, but the fiscal cliff is leaving uncertainty in the markets which is stunting economic growth. The Fed acknowledges that these programs aren't as affective as they were during the financial crisis but they do help, especially in the housing markets, and these programs come with manageable risk. Hopefully Congress can come up with a powerful solution to this fiscal cliff which will deter the Fed from purchasing more bonds. This will help businesses and consumers alike feel more confident with the economy and encourage them to spend more. 

Inside Job

In class this week we viewed Sony Pictures’ Inside Job, a documentary about the systemic corruption within the United States’ financial system and how it caused the 2008 market meltdown.

Over the course of the semester, it has become clear that there were many factors, which caused the 2008 market meltdown. However, all of the problems stem from an unregulated financial system. When Ronald Reagan took over the presidency in 1980, he began a deregulatory policy that would continue for 30 years. This policy created a “free-for-all” in the markets. Investment banks bundled mortgages with other loans and debts into collateralized debt obligations (CDO’s), which they sold to investors. In turn, commercial banks began approving loans for anyone that wanted one because either way they were getting paid. People also began investing heavily in over the counter derivatives because they were advertised as a good investment, but in reality they were incredibly toxic.

Isaac Newton’s laws of physics states every action, has an equal and opposite reaction. Even though he used this law applies to physics, it also explains how the financial markets function. Whenever the market heads positively in one direction, it eventually will peak and head equally in the opposite direction.

In 2008, the financial market kept with this trend by correcting itself. However, since the economy had grown so positively large that when it peaked and headed in the negative direction, it had an enormous negative effect. There were some people, like Brooksley Born, who predicted this detrimental market correction and attempted to stunt it. Born discovered how toxic over the counter derivatives were and moved to regulate them.  Unfortunately, Alan Greenspan and others on his team were adamant about keeping the markets unregulated and blocked every attempt Born made to regulate any part of Wall Street. If we want to avoid another financial crisis like this in the future, we need to regulate the markets.

The phrase “too big to fail” applies to the interconnectedness of the investment and commercial banks on a global level. It means that these banks have grown so large that if they fail, they will stall the global economy and therefore the government is forced to bail they out. This is an unsafe public policy, especially without any type of regulation, because then the banks have no moral standard to live up to. Banks can assume that if they’re large enough, it does not matter how many mistakes they make since the government will bail them out if they get into trouble. Policy makers should really look into an effective way to regulate the financial market.

Derivatives played a huge role in the financial crisis of 2008. They are a good example of excessive, over-speculation that needs to be regulated. Investment bankers and investors alike did not fully understand their complexity and sold them off as a sure thing when in reality, they were incredibly toxic.

In theory an unregulated market makes sense, but unfortunately when you add in human emotion the system falls apart. As we have seen through readings, this video and other videos we’ve viewed throughout the semester, investors become easily blinded by greed and therefore overlook potential problems within the system. They also neglect to share information in order to get ahead of others which is why it is necessary for the government to enact some form of regulation. 

Top 5 11/4/12 - 11/10/12

New Households Sprout Up: As Recession Era Fears Ease, Confident Consumers Take Steps to Rent or Buy by Robbie Whelan, November 7, 2012, Section 1 Page 3, www.wsj.com Americans are renting or buying homes at the fastest rate in more than six years indicating recession anxiety is subsiding. The U.S. added 1.15 million households over the past year according to the Census Bureau's September report. Household information is tied tightly to employment growth which means more students are finding jobs post college graduation, more adult children are leaving their parent's homes, and more couples feel confident about their future to get married and purchase a home. However, the overall growth rate is due mainly to renters, mostly recent college graduates. The number of homes lived in by renters has increased by more than five million since 2006 to 39.6 million. 

Focus Shits to "Fiscal Cliff": After Obama Victory, Political Leaders Strike Conciliatory Tone; Dow Falls 312 by Naftali Bendavid, Damian Paletta, and David Wessel, November 8, 2012, Section 1 Page 1 www.wsj.com With the election behind us, focus has shifted to the "fiscal cliff" - automatic federal-spending cuts and tax increases - which will hit in January unless congress and President Obama can agree on another way to reduce the budget deficit. There is great concern over the fiscal cliff because if these spending cuts and tax increases are implemented, many economists and investors fear it will lead the U.S. back into a recession and would intensify anxiety about the functionality of the U.S. political system. Uncertainty over political turmoil could lead to more stock market trouble which we saw on Wednesday when the Dow Jones Industrial Average fell 312.95 points, or 2.4%. This was the largest decline in both points and percentage terms since June. It shows how investors are still weary about trusting the markets.

Greek Lawmakers Pass Austerity Deal by Alkman Granitsas and Gordon Fairclough, November 8, 2012, Section 1 Page 16, www.wsj.com Greek lawmakers narrowly passed a multibillion-euro austerity package this past Thursday with a 153-128 vote. The package is an effort to win more bailout funds from the European Union but these measures also threaten deepening the country's already severe recession. Controversy surrounded the austerity package which would cut pensions and public-sector wages, forcing federal businesses to lay off thousands of civil servants. Less people in the work force will discourage people from spending money either out of fear of being laid off or those who already have been laid off and no longer have a source of income.

Blue Chips Finish in the Black by Alexandra Scaggs, November 9, 2012, online, www.wsj.com The Dow Jones Industrial average made investors and business nervous earlier in the week when it dropped 312.95 points, or 2.4% after the conclusion of the election. This was the largest decline in both points and percentage terms since June. However, the Dow rose 4.07 points, less than 0.1% throughout the week to finish on the positive end. President Obama has said there will be a conclusion about the fiscal cliff by the year end, but any deal would result in higher taxes on high-income households. Despite the fluctuating markets, the rest of the economy looks promising with high consumer confidence and positive readings on wholesale inventories indicating a spike in spending during the holiday months. 

Fed Releases "Stress Test" Instructions by Dan Fitzpatrick, November 10, 2012, Section 2 Page 2, www.wsj.com  On Friday, the Federal Reserve began the next round of annual "stress tests" for big banks. These test began in 2009 at the peak of the financial crisis. This process allows the Fed to supervise the "health" of the nation's largest banks in order to insure they are not investing in toxic investments. The new round of stress tests also included is a new opportunity for banks to change their proposals to pay dividends of buyback shares before the Fed decides to approve or reject their capital plans. After the Fed conducts these tests they will release summary results - including capital rations, losses and revenues - for the nation's 19 largest banks. This information will allow investors to see where their investment bank stands an whether or not it is healthily investing, forcing banks to hold themselves accountable as to not loose clients.

The Economy's Reaction to Another Obama Term

Before the presidential election many businesses and investors worldwide watched the debates with unease. Depending on who was elected would determine which spending, taxing, and health care policies would be put into place. The two candidates - Democrat, Barack Obama and Republican, Mitt Romney - held vastly different fiscal plans for the nation and businesses and investors were concerned with how each policy would affect them. 

Generally after the conclusion of a presidential election, the stock markets see a jump the next day. This would make sense since an election decision would dispel previous uncertainty. However, I was confused when this article appeared in the Wall Street Journal Wednesday morning after President Obama's re-election: Economic Unease Looms After Election 

The U.S. economy has shown improvements in recent months. Unemployment finally dropped below 8 percent to 7.9 percent (it originally dropped to 7.8 percent but rose again as more people started looking for work), stock prices are up, and the housing market is starting to grow. However, the system is still fragile with many European countries fighting their own recessions. 

U.S. stock futures have fallen and the dollar has weakened since Obama's re-election on Tuesday. Many businesses are concerned about what the new administration plans to do about the "fiscal cliff" - more than $600 billion in tax increases and spending cuts to go into effect in 2013. Businesses believe that if this plan goes into effect it could send our economy into another recession. Many businesses have decided to hold back on capitol spending and hiring plans until a deal is made to disband this fiscal cliff. 

On Tuesday, the Dow Jones Industrial Average jumped 133 points, but after the election concluded the Dow dropped again by 312.95 points, 2.36%. This was the biggest point and percentage decline since November 9, 2011. The decline is directly correlated with concern over the fiscal cliff. Hopefully, congress will be able to set aside their differences soon in order to come up with a solution to avoid another market meltdown.

Sandy Leaves Millions Without Power and Some Worrying About the Economy

From the Wall Street Journal article "Sandy Hits Coast, Floods New York" by Jamila Trindle, Michael R. Crittenden, and Michael Howard Saul

Hurricane Sandy hit the East Coast hard on Monday flooding streets in lower Manhattan and wiping away the New Jersey shoreline. Approximately 5.2 million people were left without power across the region Monday night. This is the largest power outage seen since the New York blackout in 2003. Officials predict it will take at least a week to return power to all residents.

A record breaking 13-foot seawater surge flooded New York's Brooklyn Battery tunnel, a major traffic area, as well as portions of the city's subway system. Officials say it will take at least a week for the subway to be up and running again. The subway is a crucial form of transportation for New Yorkers. Many people rely on the subway so much that they do not even have driver's licenses. With the subway down it will be extremely difficult for many people to attend work. 

With businesses, homes, and roads destroyed up and down the coast line, there is concern on how badly the aftermath of this super storm will affect the U.S. economy. According to catastrophe-risk modeling firm EQECAT, damages are expected to affect 20% of the population, which is approximately 62 million people.

The cost of these damages will range from $10 billion to $20 billion compared to Hurricane Irene which cost $10 billion in damages last year. This will add more strain to an economy that is struggling to improve. Even though the disaster will create construction and electrician jobs, many others will be out of work because their companies' buildings no longer exist.

State and local governments will need to use their savings to help pay for repairs to government property such as buildings, national parks, roads etc. Repercussions of this government spending may lead to tax increases in the Northeast to cover repair costs. However, if people are out of work and not making money then they will not be able to afford a tax increase.

In situations like these it is always good to look for the silver lining. Thankfully, damages from Sandy will not be as expensive as Hurricane Katrina which cost $110 billion dollars back in 2005. Hopefully local, state, and federal governments can put their differences aside to work together in an organized and efficient manner to get this crisis behind us as soon as possible.

Inside the Meltdown

In class this week we discussed the Federal Reserve and watched the Frontline production, Inside the Meltdown. The film uncovered how the economy crumbled so fast after the housing bubble burst in 2007 and why Fed chairman Ben Bernanke and Secretary of Treasury Henry Paulson were forced to take action.

The film posed a puzzling question: should the banks have been allowed to fail - causing another great depression - or did the Fed do the right thing by intervening?

I am a firm believer in people taking responsibility for their actions so part of me is in favor of a policy involving moral hazard. However, when the consequences of those actions are so large that they will be detrimental to millions of innocent people, intervention is necessary. Even though the Fed and government eventually got involved they did not approach the situation in the best possible way.

I think there should have been a complete audit of the banking system - investment and commercial - once the Fed realized how much trouble Bear Stearns was in. I realize it was a rather chaotic time and quick decisions were necessary, but if the Fed and the government had a better understanding of the crisis then they could have attacked it more effectively. 

The Fed believed that by bailing out Bear Stearns they would fix the entire toxic system. However, that was not the case and bailout after bailout pushed Henry Paulson to enact a policy of moral hazard with Lehman Brothers. Unfortunately for the market, Lehman Brothers was in worse shape than Bear Stearns and their failure caused the stock market to stall which stalled the entire economy. Banks lost confidence with the market and were refusing to lend any money. When people and businesses cannot get loans to buy houses, cars, start a business, etc. then they aren't spending money and in turn are not stimulating the economy. Also, when there is lack of confidence in the stock market then people want their money out quickly and stop investing which also hinders the economy. Maybe if Paulson had compared Bear Stearns' problems to Lehman Brothers at the beginning they would have let Bear Stern fail instead, or decided to bail out all of the banks with systemic risk, lessening the negative impact on the economy.

It seems throughout this financial crisis that a lack of knowledge is what continues to get the market into trouble. I can appreciate and understand why Wall Street does not want to be regulated, but if they aren't willing to share information then I don't believe they have earned that privilege. As we saw in the article "Swallowed by the London Whale", Ina Drew lost $6 billion dollars for JPMorgan and Chase because she was investing in these risky investments. Unfortunately, Drew and her team were unaware how toxic these investments were because they weren't given all of the details.

People like Alan Greenspan are huge advocates for an open, unregulated market. In theory this system makes sense, but unfortunately when you add in human emotion the system falls apart. Investors become easily blinded by greed and therefore overlook potential problems within the system. They also neglect to share information in order to get ahead. This is why it is necessary for the government to enact some form of regulation. I do not believe the system should be completely nationalized, but regulations with policies of full disclosure are necessary for the prevention of another market meltdown. 

The Warning, "Swallowed by the London Whale"

In class this week we watched the PBS production The Warning, which focused on the lack of regulation on Wall Street, particularly in the area of over-the-counter (OTC) derivatives. We also read the New York Times magazine article, “Swallowed by the London Whale”, which showed how investing in these OTC derivatives negatively affected JPMorgan and Chase.

As defined by the International Swap Dealers Association (ISDA), a derivative is a risk transfer agreement in which the value is determined by the value of an underlying asset. This underlying asset could either be an interest rate, a physical commodity, a company’s equity shares, an equity index, a currency, or any other tradable instrument parties can agree upon.

Derivatives fall into three categories: OTC, listed derivatives or futures, and cleared derivatives. An OTC derivative is negotiated privately between two parties and then booked directly. OTC derivatives are private swaps that take place in secrecy. As we saw in The Warning and in the New York Times article this posed a huge problem for investors. Even though OTC derivatives appeared to be a good investment, investors did not have all of the facts and ended up taking on too much monetary risk without fear of consequences. An open market is key to trading in order for investors to make knowledgeable and responsible trades. However, this wasn’t - and still isn’t - the case. Instead what remained was an accepted belief among investors that the markets were honest. Wall Street had too much freedom and they took advantage of that freedom which cost many companies and banks a lot of money.

There are many different views towards the regulation of Wall Street. People like Alan Greenspan believe government intervention in the markets will hurt the markets more than help them. This means sometimes allowing companies to fail in order for them to learn from their mistakes. Greenspan and his followers remained adamant about blocking all forms of governement regulation, including fraud. The then chair of the CFTC, Brooksley Born, had a different opinion. She looked heavily into OTC derivatives and saw how detrimental that time bomb would be if it went off.

Born uncovered the massive amounts of money flowing into and out of these OTC derivative trades and the lack of transparency within these black boxes. She was fearful of how risky these trades were and how much money they were handling. When the OTC derivatives market reached $595 trillion, Born was forced into action despite the resistance of big leaguers like Alan Greenspan. She petitioned for more regulation but unfortunately no one headed her warning and Born resigned.

JPMorgan and Chase is just one example of secret trading gone wrong. The company lost $6 billion dollars because they were taking great risks without completely weighing the consequences of those risks. However, blame is not to be placed purely on JPMorgan. Markets were holding back key information that investors at JPMorgan overlooked.

I believe some middle ground needs to be met. Greenspan's belief makes sense, but it does not account for human emotion. When people are given too much power, especially when it comes to money, people can get greedy and selfish. Companies do need to take some risk in order to receive reward, but they cannot effectively take those risks without all the facts. It would be like throwing a dart at a dark board you've never seen with your eyes closed.

Global Inflation on the Rise

The annual rate of inflation across developed economies rose for the first time in a year this August. The inflation rise can be credited to sharp increases in energy prices. Stimulus measures by international banks were considered in fear of a global economic slowdown, but this positive development may lead the central banks away from additional stimulus measures as long as the inflation rise is sustained. Refraining from a bailout is ideal because it does not guarantee long term economic growth. However, economists have predicted that inflation might be higher in these next few months solely because of the price hike in energy and will eventually level out within by the end of the year.

A worldwide increase in inflation means prices are rising across the board. In the United States, gasoline prices have continued to climb despite a decrease in crude oil prices. The European Union is also seeing an increase in the energy market. Eurostat, the European Union's statistic agency, says producer prices rose 0.9% in August from July due to energy cost. The last time prices rose at a faster rate was in January 2011. Consumer confidence is also on the rise, encouraging markets to raise their prices because they know their consumers are willing to foot the bill. 

The CPI which increased 0.6% on a seasonally adjusted basis in August indicated an increase in inflation. Since about 80% of that increase came from the gasoline index, it makes sense that energy is the main cause of this increase. 

A higher inflation rate may also help lower unemployment. As the dollar regains its strength and consumer confidence continues to rise, consumers will spend more money which will cause manufacturers to create more supply and expand their companies. This will in turn create more jobs. Many reports say approximately 8.8 million jobs were lost when the economy started to recede. This number does not encompass the amount of people that were already unemployed at the time (5%). In order to return to full employment the United States would have to add more than 12.5 million jobs to bring the employment rate from 8.1% back to 5% as it was in 2006.

Top 5 for 9/23/12 - 9/29/12

Oil Futures Drop, Gas Rises After Explosion by Jerry A. Dicolo, September 27, 2012, Section 3, Page 4, www.wsj.com Crude-oil prices declined while U.S. gasoline futures surged 3.8% to $3.0874 a gallon in the wake of an explosion at a major refinery in Canada. Damage was minimal but the explosion turned the focus to low U.S. fuel supplies. Jerry Dicolo of the Wall Street Journal says, "U.S. Fuel stockpiles in the Northeast U.S. are their lowest since November 1990, according to the Energy Department." The explosion reminded the markets that supplies are low for this time of year. In order to compensate for the decreased supplies, prices will need to be raised in an attempt to discourage people from purchases large amounts of gasoline. 

Data Suggest Trouble Ahead by Josh Mitchel and Ben Casselman, September 28, 2012, Section 1, Page 6, www.wsj.com The U.S. economy remains shaky despite positive gains in the housing market. Orders for durable goods dropped 13% in August from July, the biggest monthly decline in over three years. These goods are used to manufacture long-lasting products such as cars and televisions. Reports from the Commerce Department show a downward revision to the gross domestic product (GPD). The GDP was estimated at 1.7% but was seasonally adjusted to 1.3%. This revision is a reflection of cautious consumer spending and exports coupled with depleted farm stockpiles caused by the Midwest drought. Even though gains have been made in job creation and the housing market, progress is still not strong and quick enough to offset our economic slump. Increasing the consumer price index (CPI) is crucial to this process because when consumers are spending more money, manufacturers will need to produce more of their product.

Stocks Snap Losing Streak by Matt Jarzemsky, September 28, 2012, Section 3, Page 4, www.wsj.com U.S. stocks rose the most they have in two weeks. The Dow Jones Industrial Average great 0.5% in its largest daily increase since September 13, the day Federal Reserve announced a new bond buying program in an attempt to stimulate the economy. The gains are mainly due to global market strength, not because the U.S. economy is making significant gains. The amount of Americans applying for jobless benefits fell to the lowest levels since July, but durable-good orders plummeted 13% in August. There have been slight increases in the labor and housing markets, but not enough of an increase to offset the economy. 

Higher Gas Prices Drive Up Spending by Conor Dougherty, September 29, 2012, Section 1, Page 2, www.wsj.com Depleted fuel stock piles in the U.S. has lead to higher gas prices forcing consumers to spend more on a necessary good. Unfortunately their income has not increased which will force consumers to cut back on other goods. As colder months approach, more people will also purchase gasoline to heat their homes. This will increase demand for gasoline which would bring down prices however if the supply is not there then prices will increase further to deter people from purchasing gasoline. The national average retail price of gasoline increased 47 cents a gallon since the start of July which is about 0.1%. Consumer spending accounts for 70% of economic demand, but with an unemployment rate above 8% and a decrease in annual household income many Americans are keeping their spending on a tight leash. 

U.S. Steal, Union Make a Deal by John W. Miller, September 29, 2012, Section 2, Page 3, www.wsj.com The United Steelworkers union authorized a new three-year labor contract with U.S. Steel Corporation this Friday which will increase wages and decrease strikes. The contract includes a 4.5% wage hike over the next three years plus bonuses, no-strike provisions, and increased contributions from retirees toward their health-care plans. This deal comes despite difficult economic conditions, however U.S. Steel's CEO John Surma says the agreement is "in the best interests of our company, our employees and all of our stakeholders." 

Consumer Confidence on the Rise Despite Economy's Weak Outlook

The Wall Street Journal released an article this morning which showed a bleak economic future. Demand for long-lasting manufactured durable goods, such as cars and televisions, fell 13% in August from July. This is the biggest monthly drop in almost 3 years. Businesses will not have a need for as many employees with factory production this low which will continue to leave the economy at a standstill. 

The GDP grew at 1.3% as opposed to the predicted 1.7% in the second quarter. This adjustment reflects more cautious consumer spending and less company exports along with the diminished farm stockpiles from the Midwest drought this summer. 

These reports come in despite other slow improvements in the economy, such as the housing market. Consumers are still more confident than they have been in a while which will encourage them to spend more. However, if we do not see a greater increase in consumer spending and a decrease in unemployment soon, consumers may quickly become discouraged again. 

Josh Mitchell and Ben Casselman of The Wall Street Journal say, "Adding jobs is key because with exports and business spending hurting, economic growth in the remainder of the year will hinge largely on how much consumers are willing to spend." An increase in hiring, compiled with the rising housing market and higher consumer confidence could raise consumer spending which will help expand the economy.

From The Wall Street Journal article "Data Suggests Trouble Ahead" by  Josh Mitchell and  Ben Casselman

Top 5 for 9/16/12-9/22/12

Crude Oil’s Quick Fall Leaves Trail of Queries by Jerry A. Dicolo and Carolyn Cui September, 18, 2012, Section 3, Page 4 www.wsj.com A plunge in crude-oil prices rippled through financial markets early this week leaving many consumers and investors confused. Oil prices dropped over $3 in less than a minute at the end of the trading day on Monday, just as trading volume spiked. The drop dragged down the prices of gold, copper, and even the euro. This dramatic shift sparked discussion of an erroneous trade due to technological glitches. A shift in oil prices might bring down prices of gasoline for consumers as long as there is a high demand.

Alpha Natural to Shut Coal Mines, Shed 9.2% of Jobs by Kris Maher, September 19, 2012, Section 2, Page 3 www.wsj.com Alpha Natural Resources Inc., the biggest producer in Appalachia, will cut nearly 10% of its workforce and shut down mines across West Virginia, Virginia and Pennsylvania in an attempt to withstand the worst industry downturn in decades. They will now focus on expanding their metallurgical coal operations since there is more demand for this market. Cutting down the workforce will increase the employment rate and will cause those employees to become more cautious in their spending which will keep the economy from growing.

Crude Tumbles Below $92 by David Bird, September 20, 2012, Section 3, Page 4 www.wsj.com Crude-oil prices fell 3.5% due to a sharp increase in oil inventories and a continued listless demand. Crude oil for October delivery settled at $91.98 a barrel, the biggest drop in a single day since July 23 which put prices at their lowest level since August 3. Saudi Arabia, the world’s biggest oil exporter, said it is hoping to see lower prices and will maintain high output. Unfortunately, U.S. oil demand has slipped to its lowest levels since June 1. These lower demands mirror the weak economy and high fuel prices.  

Gold Miners Are Over a Barrel by Liam Denning, September 20, 2012, Section 3, page 12 www.wsj.com Gold mining industry is looking into changing how it operates because of the lack of gold deposits found and how difficult they are to develop. Liam Denning of The Wall Street Journal says miners “have literally dug themselves into a hole.” Denning’s comment infers gold companies are paying their employees to basically dig holes, which does not produce a profit. A merger among mining companies might be a good way to enhance the metal mining industry as a whole by mitigating cost inflation and boosting margins. 

DOW Ends Lower in Late Selloff by Matt Jarzemsky and Steven Russolillio, September 22, 2012, Section 2, Page 5 www.wsj.com Blue chips suffered their first weekly loss in three weeks after a late market selloff. The Dow Jones Industrial Average slipped 0.1% minutes before the closing bell. Investors are concerned that this rally won’t be able to uphold itself without help of the European Central Bank and the Federal Reserve. The Dow Jones Transportation Average slumped to its largest weekly decline since November 2011 to 5.9%. This still shows how risky it is to be investing in these markets and that consumers are still cautious about spending. 

Consumer Price Index Update

As part of this blog, I will closely be following the Consumer Price Index (CPI) and monitoring consumer confidence. This is important because if people are not comfortable spending money, demand will go down, causing companies to produce less and make budget cuts, which will increase the unemployment rate. All of this combined will slow down the economy, and it stems from consumer confidence. 

As defined by the Bureau of Labor Statistics, Consumer Price Index (CPI) is "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services." The Bureau of Labor Statistics has deemed 1,967 goods make up this basket, ranging from apparel to transportation to education. The CPI is the most widely used indicator for inflation and is sometimes looked at to determine the success of a president's economic policy.

According to the most recent report from the Bureau of Labor Statistics, the CPI has increased by 1.7% since last August. This means that consumers are more confident with the state of the economy and are spending more money on goods. It could also mean that President Obama's economic policy is working, even if it is working slowly.

The Wall Street Journal published an article this past Thursday which showed a gain in the housing market, the highest jump seen in two years. Not only are more people buying homes, but they are also looking to build and renovate homes as well. In August, 535,000 construction projects began, helping to get people back to work. Overall, housing starts were up 2.3% and sales on homes were up 9.3% from last year. The housing industry is part of the market basket measure by the CPI. This article shows that people are more willing to spend money on real estate, which will continue to increase the CPI's percentage as well as our overall economic standing.

Top 5 for 9/9/2012-9/15/2012

Weather Woes Sow Worry on Wheat by Liam Pleven and Biman Mukherji, The Wall Street Journal, September 13, 2012, Section 3, page 1, www.wsj.com Significant droughts this summer devastated corn and soybean crop production in the United States and now the concern has shifted to wheat. However, this problem is not solely manifested within the U.S. It has grown on a more global scale. This past Wednesday, the U.S. Department of Agriculture lowered its previous estimates of global wheat production by 5.2% in 2012-2013. If the weather continues to remain dry, this could mean a global hike in wheat prices, which will translate to a hike in all food products that use wheat. Since wheat is a staple food around the world and major source of nutrition for the poor, a price spike could increase the number of people who go without food. This will also have a negative impact on the economy because less and less people will be purchasing wheat products. 

Fed Acts to Fix Jobs Market by Jon Hilsenrath and Kristina Peterson, September 14, 2012, Section 1, page 1, www.wsj.com In the wake of the recent decline in annual household income, the Federal Reserve has decided to take action in order to help boost the economy. They have launched an aggressive bond buying program which will consist of open-ended commitments to buy mortgage-backed securities and a promise to keep interest rates low for years. This will hopefully lessen the burden on lower-income families and encourage them to spend that money saved on other products in the industry. 

Crude Oil Climbs to 4-Month High by Dan Strumpf, September 15, 2012, Section 2, Page 4, www.wsj.com After the Federal Reserve announced their new bond buying program, oil prices reached a four-month high and briefly topped $100 a barrel. The Federal Reserve's announcement caused the dollar to slide, which hiked up the price of dollar-denominated commodities, such as crude oil. Oil prices rose 2.6% this month in anticipation of the Fed's actions. Oil is a product that will always be in demand, unless green energy becomes more popular. If oil prices do not decline soon, this will cause an issue for many companies and consumers because prices of products will rise. It will also hurt the automobile industry because if oil is so expensive, less people will be encouraged to drive. 

Consumers Offer Upbeat Outlook Despite Toll of Rising Gas Prices by Josh Mitchell and Shelly Banjo, September, 15, 2012, online, www.wsj.com Despite the rising gas prices, the overall consensus of Americans towards the economy is positive. A gauge of consumer confidence was released Friday which showed its highest reading since May. However, separate government reports on price inflation and retail sales were not as enthusiastic, revealing that the increase in gas prices was still a concern. Obviously, our economy is not completely in the clear, but it definitely has improved from where we were a few years ago. There is definitely improvement to be had, but a seemingly positive attitude towards the economy will promote consumers to purchase more goods which in turn will help further our economy's progress.

Number of the Week: Top 20% of Earners Take Home 51% of All Income by Conor Dougherty, September 15, 2012, online, www.wsj.com Annual household income dropped this week and reports have been released showing that 51.1% of all income is going towards the top 20% of earners. This is widening the gap between the middle class and the upper class. As more families more into lower income categories, another possible cause are the baby boomers who are beginning to leave the work force and move into retirement. Since this is such a large group, the negative impact on average household income will continue to decline. As Medicare grows, this will place a burden on the younger generation and the government since this is a government and tax supported program.

Income, Poverty, and Health Insurance...Where does this leave our economy?

This week the Census Bureau reported that annual household income sunk to levels not seen since 1995. Average annual income currently is an inflation-adjusted $50,054, a 1.5% decline from the 2010 median. Due to the drop in income, there was a rise in people eligible for Medicaid, the state and federal program that covers health care for the needy. Medicare also grew as the baby boomers begin to turn 65. This is a bittersweet situation.

Even though the reason for more citizens being covered by healthcare is because their annual income has decreased, at least if a medical emergency were to occur they would not be turned away. However, since the government funds Medicaid and Medicare, the government will have to figure out a way to pay for the increase. With a national dept over $16 trillion, this potentially could result in a tax increase which will end up harming families with a decreased incomes even more.

These factors may end up causing deflation. If families have less money to spend, they will be more cautious about their spending. In order for businesses to sell their product they will need to lower their prices. That may mean more layoffs for businesses and an expansion of unemployment. Deflation could help strengthen the dollar, but if people are not working then they aren’t making money, which means they aren’t spending money. This will not help our economy grow, so in the long run, our country as a whole loses.

Image from Wall Street Journal, "Household Income Sinks to '95 Level"
by Conor Dougherty and Anna Wilde Matthew

Top 5 for 9/2/2012-9/8/2012

Drought’s Grip is Wide, Deep, by Neil Shah and Conor Dougherty, The Wall Street Journal, September 5, 2012, Section 1, Page 3, www.wsj.com. Heavy rains from Hurricane Isaac helped to dispel some of the nation’s worst drought, but not before negatively affecting everything from hay prices to barge operators. Consequences of the drought were most prominent on farms. This led to an increase in food prices, especially corn, which is a main ingredient used in feeds for chickens, hogs, and cattle. This domino affect will also lead to the increase of chicken, pork, and beef. All of these combined could potentially slow economic growth if consumers aren’t willing to pay for the increase in food.

Dow Drops on Fresh Fears, by Chris Dieterich, The Wall Street Journal, September 5, 2012, Section 3, Page 4, www.wsj.com. The Dow Jones Industrial Average sank 0.4% as over the Labor Day weekend showing that the economy is continuing to deteriorate. If the economy does not improve, it could lead to a stall in our economy. When investors loose money in the stock market, they become more conservative in their spending, which causes business to make pay cuts, which then makes unemployment rise. The Dow is especially sensitive because it encompasses materials, industrial and energy stocks, that are most tightly connected with global stimulation.

Blue Chips Grind Out a Gain, by Jonathan Cheng, The Wall Street Journal, September 6, 2012, Section 3, Page 4, www.wsj.com. The Dow Jones Industrial Average gained 11.54 points due to a slowdown in European manufacturing. This indicates that not as many consumers are purchases goods manufactured in Europe. The gain was also occurred because FedEx lowered its first-quarter earning prediction. Since FedEx plays such a large roll in transporting goods for businesses, it is a good indicator of the activity in our economy nationally and internationally. 

Wheat Falls as Buyers Eschew U.S. Experts, by Owen Fletcher, The Wall Street Journal, September 6, 2012, Section 3, Page 4, www.wsj.com. Wheat in the United States dropped 2.3%, a three-week low for the industry, due to less of an export demand and lower corn prices. Eqypt, one of the world's largest wheat importers, recently turned their sights towards Russia. Other countries are also passing over the United States as an importer of wheat due to the recent hike in prices. This will hurt our economy because there is product, but not as great of a demand for the product. Companies that sell wheat will be forced to slash prices in order to sell their goods, which may also lead to cutting their payrolls to cover the costs. Thus, increasing our unemployment rate.

Stocks Close at Multiyear High, by Matt Jarzemsky, The Wall Street Journal, September 8, 2012, Section 2, Page 4, www.wsj.com. Stocks closed this week at a multi-year high with the Dow Jones Industrial average closing at 14.64 points, its highest finish since December 2007. This increase shows that the economy might be looking at an upswing. Not only were United States stocks up, but so were Europe's and China's. An improvement in the economy will add a more positive outlook for consumers and may encourage them to invest more or spend more money.

Introduction

My name is Elyssa DiRaffaele and I am a senior and DePauw University. I am an English Writing major with a minor in Classical Civilizations. Even though I attend college in Indiana, I am originally from a small town in Connecticut. I have two younger siblings; Alli who is a senior in high school and Nick who is in eighth grade. Being away from them and my parents is the only thing I don’t like about the Midwest (and that there isn’t a substantial body of water within a fifteen minute drive). Post-graduation, I am hoping to attend law school and eventually become an attorney for a large international business.

My interest was sparked in the business field after taking an Investigative Journalism course with Mark Tatge. Currently, I am enrolled in his Economic Writing course which is where this blog stems from. Since my educational background in economics is extremely limited (I have only taken an introductory course) I am intrigued to expand my knowledge on the inner workings of our economy. I always hear people saying that economics is easy. Maybe what they mean is the concepts are easy to understand. But if economics were easy, I don’t think the United States would have over $16 trillion in debt.