The last few weeks we have been discussing what's coming in 2010. We've covered GDP, interest rates and finally the banking crisis. Today, we are going to discuss jobs!
Jobs. They are important to all of us. The national unemployment rate is currently at 10%. It has slowly risen this year and is projected to continue rising into the first half of 2010. Could we see 12%? Maybe. Hopefully not.
Locally in the state line area, we have seen our unemployment rate skyrocket way past 15% in both Rock and Winnebago Counties. I recently read an article that said that the national unemployment rate formula was changed in the early 1990's. The article went on to say that if we still used the old formula, we would already be at a national unemployment rate in excess of 15%. The change in the formula dealt primarily with no longer counting people who have given up looking for a job. This is a large part of the currently unemployed. These people have lost their jobs, are on unemployment and have at least temporarily given up looking for a new job. As they have given up, they are still unemployed. Jobs have now become our #1 economic problem.
Let's hope as the economy slowly comes out of the Great Recession jobs will grow and the unemployment rate drops. Jobs are essential to economic growth, and these jobs need to be private sector jobs, not government jobs!
We've been talking about what's coming in 2010. We covered GDP, or the strength of the economy. Then we looked at interest rates. This week we are going to look at the ever increasing problem in our banking system. As of today, we have had over 100 bank failures nationwide this year.
A bank failure essentially occurs when bank's troubled assets exceed their capital. Troubled assets are generally defined as:
- 1. Loans at least 90 days past due
- 2. Loans where the bank is not accruing interest, and
- 3. Loans that have already been foreclosed on.
As you can see, none of these are good. If you add all these areas together and they are more than the bank's capital, you have a formula for failure. What caused these problems?
Essentially, they have been the result of three main areas:
- 1. A severe decline in real estate values
- 2. Over zealous lending on the part of the banks, and
- 3. The results of this terrible recession that we have just broken through.
When you combine these factors, we see the results of a perfect storm that is causing a strain on the banking system. Should you worry? NO! The FDIC insures your deposits up to $250,000.00 and usually when a bank does fail, the FDIC finds a buyer that takes over operations of the bank. Bank failures could exceed 200 for the 2010, so get ready.
We're looking at what 50 top economists are looking at for 2010. Last week we looked at GDP. This week we are going to look at interest rates.
The Federal Reserve Bank has the ability to set or have input into short-term interest rates. They meet several times per year and set a target for fed funds, which is the rate that banks are paid for their excess cash. The Federal Reserve targets that rate and also controls the discount rate which is the rate that the fed lends money to banks.
Long term rates are governed by the market, or essentially, what buyers and sellers of bonds are willing to pay. This market is similar to the stock market in that it trades on a bid and ask system. When the economy is heating up, or expanding, higher interest rates are prevalent, which causes the economy to slow down. The reverse is true when we are in a slow economy, or a recession. Interest rates go down. So, if our group of 50 economists think that the economy will improve next year, then interest rates will have to go up!! Not dramatically, but they should be about 1% higher a year from now.
That means a number of things for the economy:
- 1. First, it means that mortgage rates will be higher than they are now, which will most certainly hurt an already crippled industry.
- 2. Second, it means that struggling businesses will have to pay higher rates for their business loans, and
- 3. Third, consumers will have to pay higher rates for personal loans, like car loans.
Good news? Probably not.
With 2009 coming to a close, and possibly, the Great Recession, running its course, let's look into our crystal ball and see what's coming in 2010. It has to be better than 2009!
If we look at what 50 of the top economists are saying, 2010 looks like we might be able to breathe a sigh of relief. Let's start with GDP, or the measure of goods and services in the country. Good news here! We are seeing positive numbers, which means further economic recovery. Not a huge recovery, but the numbers are positive. We saw a huge contraction in the fall of 2008 and the first 2 quarters of 2009. In 2010 we should see a slow recovery but at least it's movement in the right direction.
Their predictions, by the way, are also showing some relief this quarter. We are not looking at a rosy Christmas season but one at least as good as last years. Maybe Santa has been checking his list and at least it's not shorter than last years! Our economic forecasters see some hope here!
The housing tax credit will probably be extended and there may even be some credits for household appliances in an effort to jump start a very weak economy. Preliminary results for the $8,000 tax credit show that it is helping home sales. The real estate industry is only beginning to show some life.
That's GDP. Next week we will look at interest rates and even look at this behemoth of a problem, the banking crisis.
"Now what do I do?" is the question many have asked as they try to move forward in our rebounding economy. In last week's segment we touched on creating a budget to help save money and stay out of debt. But what if you are already in too deep?
Some debt is good. Good debt includes anything you need but can't afford to pay for up front, like buying a home, or saving for college or retirement.
Bad debt includes debt you have taken on for things you don't need and can't afford. The worst form of debt is credit-card debt, since it carries such high interest rates.
According to a recent article, the average American household has at least one credit card with nearly $10,700 in credit-card debt, and the average interest rate runs in the mid-to high teens to even in the 20% range. What do you do if you have too much credit-card debt?
Step #1: Be honest with yourself. Add up your balances and see where you stand.
Step #2: Try to consolidate your credit cards to one with the lowest interest rate and best terms.
Step #3: Don't be late with your payments and don't go over your allowed limit.
Step #4: STOP charging! This is the cause of your problem. Correct it at its root.
Credit cards have turned into evil plastic. They are tools to be used and not abused. Use a debit card instead, that way you will only spend money if you have it. Let's become financially responsible.
We have been exploring the question, "Now what do I do?" What steps do I take to ensure I will never be as affected by a financial setback again like the one we have just suffered? One of those steps is to make a spending plan, or budget.
Why create a budget? A budget allows you to see where your money is being spent, how much you are spending and how much you have leftover to save. By creating a budget are you able to determine what you can really afford.
Along with keeping track of your finances, a budget allows you to plan for short- and long-term goals. You can learn how to save for your vacation in one year, a bigger house in five years or your retirement in twenty years; it's all there in black and white so there will be no surprises later on.
Creating a budget is simple: It involves comparing your total income to your total expenditures. There are three steps to creating a budget:
- 1. Identify how your money is currently being spent.
- 2. Evaluate that spending to see if it meets the financial priorities you have established, and
- 3. Track your spending to make sure it stays within those guidelines.
When projecting the amount of money you can live on, don't include dollars that you can't be sure you'll receive, such as year-end bonuses, tax refunds, or investment gains.
If your budget tells you that you are spending more than you earn, you need to make adjustments, fast. Continuing to do so is a surefire way to engross yourself in debt. Eliminate any unnecessary spending on personal items, entertainment, and luxuries you can live without.
Stick to your budget-it is the essential tool for ensuring that your money gets used the way you need it to.
Last week we focused on moving forward as the recession ends and posed the question, "Now what do I do?" If you do not have the experience or knowledge of how to invest your money, the first step to success is to choose a financial advisor.
Qualified advisors are trained help you set financial goals and priorities, and then recommend specific steps to meet them. They will give advice on how you should allocate your investments, and explain how certain moves may affect your taxes or estate.
Choosing a financial advisor is an important step. There are a few things you should consider and be aware of when making your decision:
- 1. Experience matters. Ask about credentials. Check out your advisor!
- 2. Back up. What happens if your advisor dies or leaves?
- 3. Get a solid recommendation from someone in similar financial circumstances to yours. Ask your friends.
- 4. Ask how your advisor is getting paid. It is a conflict of interest when an advisor profits from putting you in or taking you out of an investment.
My advice to you: get close to your money. Educate yourself on investing. This is your money and your future. Make sure you understand what your risks are and be comfortable with them.
Let's face it: making financial decisions is hard. There's a lot you can figure out on your own, but we can all use help when it comes to something as important as how to save, invest and plan for the future.
As we hear experts talking about the economic recovery, many of us are left with the realization that we need to recover too. In the coming weeks, we are going to discuss the question we are all asking, "Now what do I do?"
How do I get good advice? How do I invest my money? Should I live on a budget? How much debt is too much? Where do I turn for help? If you have topics, email me. Or comment here. The economy has suffered the worst recession since the Great Depression. Many of us, as a matter of fact, most of us were not around during the Great Depression. Unemployment was at a disastrous 25%! We're now coming out of this latest mess. We should learn from this so we don't have to experience it again.
Today, let's look at three factors that contributed to the recession:
1. Debt--Banks are partially to blame here. Corporate America as well as individuals has borrowed too much money and banks have accommodated them in their zest for growth.
2. Real Estate-We all felt that real estate values would continue going up. Does anything go up forever, other than our age?
3. Greed-We all want more, but at what cost? People like Bernie Madoff are extreme examples but many others crossed the greed line.
Here is what contributed. Let's learn from these factors and prevent this economic mess from happening again during our lifetimes.
This week we are going to cover some positive and negative points in the economy.
Let's start with some positive trends that are occurring:
- Consumer sentiment has slowly risen from its low in November 2008. This means that we, as consumers, are feeling better about the future than we were a year ago.
- Jobless claims, although high, have been declining over the summer months. A few months don't make a trend but they are headed in the right direction.
- Interest rates- We remain at historically low levels and until the economy recovers, they will remain low.
Now, let's look at the barriers that currently exist:
- Federal spending, which I have covered in the past and will discuss again next week, is a huge problem. This deficit will cause future problems if we don't get it under control. Inflation will be an obvious problem as a result of runaway spending.
- The banking crisis is not going away and will continue for some time. We have had 92 bank failures as of last Friday, though not the record yearly total of 181 in 1992; this remains a problem. There are currently 416 problem banks in the FDIC's watch list, up by 117 from the same time last year. Stimulus money has helped but it will not solve the problem. This banking problem means that credit will remain tight for quite some time.
- The third issue is still jobs. Unemployment on a national scale is hovering in the 9% range and is expected to hit double digits by year end. For the job picture to improve, we need the economy to improve.
Some good news and some not so good news. Hang in there, business cycles will occur and the economy will improve.
I want to cover some reasons for optimism in my next few posts. We have been in a terrible recession for the last year, but there are some faint signs of recovery. Let's look at them and be optimistic.
Economic stability, and our perception of what that means, has taken a beating during this recession. But just as people can get overly optimistic in good times, they can become too pessimistic in bad times. Bernanke's reports of green shoots may not have been enough for all of us to perk up our heads, but there are other reasons to think positively in times like these. It is prudent to prepare for all possible outcomes including positive ones.
Recessions can be good for growth in the long-term. Old dying businesses are swallowed up forcing people to focus on growing sectors. Recessions are a necessary part of the business cycle. Over the last year, the American consumer has changed. We are no longer taking extreme overleveraged risks and paying for unaffordable lifestyles with IOU's and debt. And we are actually starting to save money. There is even hope for the housing market. Sales of existing homes have risen for three straight months, the inventory of unsold homes has decreased, and more homeowners are selling at or near their asking price.
The Cash-for-Clunkers program has jump-started real personal consumption expenditures, which wasn't expected to break into positive territory until the fourth quarter. And new estimates for GDP predict a 1% growth in the third quarter followed by a 2.2% growth in the fourth. Instability leads to stability. We will get there.