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.