Friday, October 28, 2016

Trade Deficit Slowly Bleeding the U.S. of Money and Jobs

A primary topic in this year’s election cycle has been trade.

Former Democratic presidential candidate Bernie Sanders and Republican presidential nominee Donald Trump have vigorously denounced past trade agreements, noting that they have hurt American workers. Both have taken a strong stance against the Trans Pacific Partnership (TPP).

Their condemnations have resonated with millions of voters.

While serving as Secretary of State, Hillary Clinton praised TPP as a deal that “sets the gold standard in trade agreements."

However, last fall, once the trade pact was finalized after years of negotiations, Clinton said she opposed it. Her change of heart may have been nothing more than political expediency.

Clinton’s history on free trade is mixed. She spoke in favor of NAFTA when her husband signed it into law in 1993, but called it a "mistake" during her 2008 presidential campaign. She voted both for and against trade deals during her eight years in the Senate.

Her running mate, Tim Kaine, recently said that finding more American export markets would “add workers” and result in “more jobs and higher wages.”

That has always been the promise of free trade agreements, but the reality has been something different, as I highlighted previously.

The median household income in 2015 was $56,516, an increase of 5.2 percent over the previous year — the largest one-year rise since at least 1967, the Census Bureau reported in September.

Median household incomes finally rose across virtually every American demographic after years of stagnation or decline, according to the latest government data.

However, the median income is still 1.6 percent lower than in 2007, before the Great Recession. Most troubling, it also remains 2.4 percent lower than the peak reached during 1999.

Consider that for a moment: the typical American household now has less income than in 1999. That’s stunning!

Meanwhile, Americans pay more today for needs like health care and higher education than they did in 1999.

Rents, health insurance, prescription drugs and tuition have all risen -- and are still rising -- much faster than the general rate of inflation and, more importantly, much faster than median family income.

Anyone arguing that current trade policies somehow benefit America or it’s workers is either woefully ignorant or hopes that he/she is speaking to the woefully ignorant.

The U.S. has run a persistent trade deficit every year since 1976 — yes, for four decades.

As I noted in 2013:

The U.S. has consistently run a gaping trade deficit for decades because we import more than we export. In fact, the U.S. has led the world in imports for decades and is also the world's biggest debtor nation.

Countries with big, persistent trade deficits have to continually borrow to fund themselves. The problem for the U.S. is that we don't export nearly enough to continue paying for all those cheap foreign goods that we've grown so accustomed to.

Our greater oil production and independence was supposed to diminish the trade gap, but that hasn't happened.

The U.S. trade deficit in goods and services totaled $351 billion through August, the latest data available. With four months to go this year, that figure will continue to rise and will likely reach $500 billion once again.

As you can see below, half-a-trillion dollar annual trade deficits have been the norm for many years.

U.S. Trade Deficit, past decade (source: U.S. Census Bureau)

2005 - $714 billion
2006 - $762 billion
2007 - $705 billion
2008 - $709 billion
2009 - $384 billion
2010 - $495 billion
2011 - $549 billion
2012 - $537 billion
2013 - $462 billion
2014 - $$490 billion
2015 - $500 billion

Year after year, the trade deficit sucks hundreds of billions of dollars, and millions of jobs, out of the U.S. as we continually buy products from overseas that could instead be made here at home.

Yes, we get cheaper goods at the local Walmart as a result, but is it really worth the lost jobs and the lower paying ones that have replaced those in manufacturing?

Manufacturing employment in the United States fell by 9 percent from 2008 through 2014, according to the Congressional Research Service (CRS). However, the CRS also notes that Canada, France, Italy, Japan, Sweden, and the United Kingdom all saw similar declines over that period.

The United States’ share of global manufacturing activity declined from 28 percent in 2002 to 16.5 percent in 2011. Since then, the U.S. share has risen to 17.2 percent, according to the CRS. Yet, the evidence shows that manufacturing still contributes significantly less to our economy today than it did in 2002.

As the CRS notes, “Part of the decline in the U.S. share was due to a 23% decline in the value of the dollar between 2002 and 2011, and part of the rise since 2011 is attributable to a stronger dollar.”

While manufacturing’s share of GDP in the U.S. stood at 24.3 percent in 1970, it now contributes less than half that amount.

Manufacturing amounted to just 12.1 percent of total U.S. gross domestic product in 2014, according to United Nations calculations.

To be fair, even the U.S. Chamber of Commerce refers to this trend as “a global phenomenon,” noting that this issue is plaguing advanced economies around the world.

The Chamber observes that, “The decline in manufacturing’s share of U.S. GDP over the last forty years is nearly identical to the decline in world manufacturing as a share of world GDP, which fell from 26.6% in 1970 to 16.2% in 2010."

That’s because Big Business (i.e., capital) always seeks cheap, or cheaper, labor, which developing economies provide.

This has created undesirable outcomes for the U.S., since lost manufacturing has led to greater importing of the things we no longer make, which hurts our economy.

While exports add to GDP, imports subtract from it. Quite simply, a trade deficit creates a drag on the economy.

Every $1 billion of a larger deficit subtracts about 0.1 of a percentage point from the annualized GDP growth rate. That's bad news for an economy that is currently struggling to eek out a mere 2 percent annual growth rate.

Ultimately, America’s greatest export over the past few decades has been its own jobs. This is a terribly self-destructive trend.

America needs to produce more, export more and save more. For more than four decades, we've done exactly the opposite.

No nation can continually buy more from abroad than it sells. It's simple arithmetic. Where will the money for all these purchases come from?

It’s a very simple logic: You can't buy more than you sell indefinitely.

Saturday, October 08, 2016

Brazil and Venezuela: from Bad to Worse

Brazil has South America’s largest economy (and the second largest in the Western Hemisphere, behind the U.S.), with an output of $3.26 trillion for its roughly 200 million citizens.

Venezuela has South America’s second largest economy, with an economic output of $953 billion for its roughly 30 million citizens.

The two Latin American nations are now facing economic situations ranging from crisis to chaos.

Brazil has been mired in recession since early 2014, its longest since the 1930s.

However, the IMF estimates the country may finally return to meager growth next year. The Brazilian economy shrank 3.8% last year and the IMF now forecasts it will fall another 3.3% this year.

If so, it will mark the first time the Brazilian economy has contracted by more than 3% for two consecutive years in more than a century.

In the second quarter, Brazil’s economy contracted 3.8% and that was after it already shrank 5.4% in the first three months of the year. This has crushed tax collections.

As a result, the government’s budget deficit was the largest ever recorded in the 12 months through February.

About 12 million Brazilians are now out of work, up from 8.8 million a year ago. The unemployment rate has soared to 11.8%, up from 8.7% a year ago and 6.8% two years ago.

Even those who have jobs are suffering; wages declined 3% in August.

The country is currently embroiled in wildly turbulent political upheaval.

Brazil’s president, Dilma Rousseff, was removed from office in August following an impeachment vote in the Senate. Her dismissal came on the heels of a corruption scandal involving the state-controlled oil company Petrobras.

An investigation found that Brazil’s biggest construction firms overcharged Petrobras for building contracts. Part of their windfall would then be handed to Petrobras executives and politicians who were in on the deal.

Billions of dollars are said to have been diverted or swindled. Former President Luiz Inacio Lula da Silva was also implicated in the scandal.

Yet, as bad as things are in Brazil, they are even worse in Venezuela, which is in the midst of a full blown economic collapse.

The plunging price of crude oil, the country’s primary export and means of income, has crippled Venezuela. The country relies on oil and gas for 95% of its export revenue. This means the nation cannot fund desperately needed imports and businesses cannot not replenish their inventories.

Venezuela is suffering through shortages of basic food and basic medicine; virtually everything is in short supply. The nation is presently facing a widespread famine. Lines at state-run supermarkets begin at 3 a.m., yet sometimes there is no food at all. The government introduced food rations at its grocery stores in 2014.

In June, the NY Times reported the following:

A staggering 87 percent of Venezuelans say they do not have money to buy enough food, the most recent assessment of living standards by Simón Bolívar University found.

About 72 percent of monthly wages are being spent just to buy food, according to the Center for Documentation and Social Analysis, a research group associated with the Venezuelan Teachers Federation.

In April, it found that a family would need the equivalent of 16 minimum-wage salaries to properly feed itself.

The nation is facing a humanitarian crisis of a magnitude that is unprecedented in the Western Hemisphere.

But the country also suffers from political corruption, which has led to widespread civil unrest.

The government refuses to accept humanitarian aid. Instead, it denies there is any economic or humanitarian crisis at all. It claims there is nothing wrong and that stories to the contrary are a plot by outside forces hoping to take down the socialist government.

For president Nicolás Maduro, to admit the existence of the crisis would be to admit that the revolución has failed.

Meanwhile, Venezuela has the highest inflation rate in the world, a staggering 470%.

The International Monetary Fund has predicted that, if current trends continue, inflation could reach 1,700% this time next year.

Though the oil price crash – from more than $100 per barrel in 2014 to roughly $50 today, after reaching a low of about $30 per barrel earlier this year – has played a role in Venezuela’s misery, the government’s policies are largely to blame.

This shouldn’t be happening in a country with the world’s largest proven oil reserves.

A new revolución appears inevitable.

Sunday, September 11, 2016

Soaring Student Loan Debt and Tuition Costs are Hindering U.S. Economy

I’ve long argued that debt is holding up consumer spending, which in turn is holding back the US economy.

Many households have four types of debt: credit card debt, mortgages, auto loans and student loans.

For those with all four, the combined average is $263,259. That translates into an average of $6,658 a year in interest payments alone.

According to the U.S. Census Bureau, the median household income for the United States was $53,657 in 2014, the latest data available.

That means these households are spending 12% of their gross income on interest payments alone.

Though household debt fell after the Great Recession, it is once again on the rise.

According to the New York Fed:

Aggregate household debt balances increased in the first quarter of 2016. As of March 31, 2016, total household indebtedness was $12.25 trillion, a $136 billion (1.1%) increase from the fourth quarter of 2015. Overall household debt remains 3.3% below its 2008Q3 peak of $12.68 trillion.

In other words, household debt is now just $43 billion below its all-time high, set eight years ago.

Among the above four types of consumer debt, mortgage debt, at $8.37 trillion, is by far the biggest. This makes sense; everyone needs a place to live and mortgage payments can be fixed so that inflation makes them relatively smaller through the life of the loan. Additionally, a homeowner can eventually pay off a mortgage and live “rent” free.

Moreover, homes generally increase in value over time, allowing owners to gain some profit if they hold their homes long enough, maintenance and repairs notwithstanding.

The price of new homes increased by 5.4% annually from 1963 to 2008, on average, according the Census Bureau. That period includes the enormous price bubble of the last decade.

However, taking a longer view, the average annual home price increase in the U.S. from 1900 - 2012 was only 3.1% annually. So, the bubble years were truly an anomaly.

The two fastest growing segments of debt are auto and student loans, which have climbed to $1.1 trillion and $1.4 trillion respectively -- both record highs.

Debt payments leave consumers with little else to spend, which is why consumer spending has fallen.

In other words, borrowing in recent years has impinged consumers' ability to spend today. And borrowing today will impede spending in coming years.

The rapid rise in student loan debt is particularly troubling, since it keeps college graduates from buying cars and, more importantly, homes. That is affecting the entire housing market.

“The muted housing recovery in recent years can be traced in part to slower household formation among young adults,” notes the Federal Reserve Bank of San Francisco.

The San Francisco Fed notes that for nearly five decades, the pace of household formation exceeded population growth about 0.2 percentage point per year, on average. But from from 2007 to 2015, household growth fell relative to adult population growth fell by an average of –0.5 percentage point annually.

In essence, even as the population of young adults has increased over the past nine years, their ability to form their own households has fallen each year.

The consequences have been rather obvious and ominous.

Researcher Harry Dent recently had this to say on the matter:

More 18- to 34-year-olds are now living with their parents than at any time since 1960, when the number hit an all-time low of 20%.

It’s now jumped up to 32.1%, and is as high as 36% for those with a high school education or less. The number jumped to 28% in 2007, with the Great Recession catapulting it to 32% in just seven years.

For the first time in history, living with parents has surpassed living with a spouse or partner, with over 30% of children now living with parents, as the chart below from Pew Research shows. Fourteen percent live alone or as a single parent, with more women at 16% than men at 13%.

There was only one time in modern history where a higher percentage of kids lived with parents and that was 35% in 1940 – in the late years of the Great Depression.

Student loan debt, and the inability to afford a high-priced college education, is driving this troubling trend. Kids who can’t afford college must accept low-paying jobs, which prevent them from moving out on their own to start their adult lives.

While student loan debt is limiting the ability of young graduates to buy homes and autos, it’s also affecting the choices of millions of American kids, who are deciding to forego college altogether due to the cost.

“College enrollment has declined every year since peaking in 2011.” notes Bloomberg. “The reasons include an aging population, rising tuition costs and a healthy rate of hiring that lessens the demand for learning.”

Though graduates earn, on average, about 90 percent more than non-graduates, only about a third of Americans get degrees.

Just 60 percent of college students in the U.S. completed a four-year degree within the six-years through 2014, according to the National Center for Education Statistics.

This is bad news for the country as a whole. The jobs of the 21st Century demand higher and greater education levels. People with only a high school diploma are no longer competitive in the modern, globally connected economy.

We may not like it, but it’s true.

The fact that higher-education costs are playing a role in keeping young people form pursuing more education is awful and intolerable. We are heading toward a dystopian situation in which only the children of the most wealthy parents have the privilege of a college degree.

While vocational degrees from technical colleges are honorable, vital and highly useful, they can produce students who are really good, or skilled, at one single thing, whereas a college education can produce a more broadly educated young person who has (hopefully) developed some critical thinking skills.

Everyone has a stake in this: all employers -- from big corporations to small businesses -- the government (which collects more tax revenue from higher earners and hopes to avoid the costs of social welfare) and even those who don’t have children but want to live in an educated, productive, globally competitive society.

The Organization for Economic Cooperation and Development (OECD) calculated in 2012 the proportion of residents in 34 countries that had obtained a college degree or an equivalent, determining the top 10 “most educated” countries. The U.S. ranked No. 4.

If we want to remain there, much less improve, we must take great steps toward relieving student loan debt and reversing the irrepressibly high cost of a college education.

It’s not just our young people that depend on this; our entire economy depends on it.

Tuesday, August 02, 2016

Oil Caught in Vicious Circle

The price of oil on Tuesday closed below $40 per barrel for the first time since April. Rising oil supplies are putting downward pressure on prices once again.

Oilfield services firm Baker Hughes reported that drillers increased the number of rigs operating in U.S. fields for a fifth straight week.

Rising prices in recent months made drilling more economical than at the beginning of the year. However, increased drilling has also led to increased supplies.

The U.S. Energy Information Administration reported last week that inventories and production both rose, which is driving down prices.

You can see the vicious circle at play.

Oil companies are grappling with rising debts due to the collapse in prices over the past two years.

From 2010 through mid-2014, world oil prices were fairly stable, at around $110 a barrel. However, persistent oversupply pushed the price of oil down to $27 per barrel in February, before rising above $50 in late May and June. But the price fell back below $40 today.

This isn’t merely a problem for U.S. oil companies; it is also affecting entire countries that rely on oil for their budgets and economies.

Low oil prices have led to huge Saudi budget deficits, which led to near-record oil pumping, which led to greater supply, which led to even lower prices. It’s a vicious circle.

The Saudis, like all other major producers, are afraid of losing market share, so they won’t cut production. Iran has re-entered the global oil market after a long absence and Libya is not far behind.

Many oil producing countries are facing huge budget constraints and sinking economies. They simply can’t afford to cut production with the hope that it will lead to price increases. So, they keep pumping at breakneck speed, determined not to let other producers cut into their slice of the pie.

Even the OPEC-member countries — the global cartel for oil — cannot agree to production cuts. That’s raised an obvious question: If it’s every man for himself, what’s the point of the cartel? It seems to have lost its unity, power and effectiveness.

Some analysts now predict that oil will fall back to $35 per barrel this year.

This is happening even though Venezuela’s production has collapsed due to a crippling economic crisis. If Venezuela ever recovers its production capacity, who knows how far the price of oil could fall?

U.S. drivers won’t complain, though we’re now driving less than at any time in the last 60 years, according to a study by the Frontier Group:

The Driving Boom – a six decade-long period of steady increases in per-capita driving in the United States – is over.

Americans drive fewer total miles today than we did nine years ago, and fewer per person than we did at the end of Bill Clinton's first term. The unique combination of conditions that fueled the Driving Boom – from cheap gas prices to the rapid expansion of the workforce during the Baby Boom generation – no longer exists. Meanwhile, a new generation – the Millennials – sees a new American Dream that is less dependent on driving.

That’s bad news for oil producers and refiners alike.

Dozens of energy companies have gone bankrupt in the last couple of years. This has resulted in tens of thousands of layoffs in the energy sector (99,000 directly and indirectly in Texas alone) and billions in bad debt for the banks that backed them.

Law firm Haynes and Boone reports 83 energy industry bankruptcies have been filed since the beginning of 2015, with an aggregate debt of more than $13 billion.

Back in January, I wrote that all of the energy sector failures would ultimately result in bank failures, and the pressure has only mounted since then.

You can bet on this: energy companies are desperately working to service their debts and remain operational. So, they will keep pumping. Any momentary increases in the price of oil will suddenly make some idle fields and wells profitable to operate.

However, that will only lead to more pumping and increased supplies. Simply put, higher prices spur more output, which pushes prices back down again.

In a world that continues to struggle with weak economic growth, disinflation, deflation, negative interest rates and central banks actively devaluing their national currencies, demand for oil will remain weak, as will the price of oil.

All of this currency devaluation has served to strengthen the dollar and since oil is priced in dollars, oil prices will remain depressed.

In essence, a strong dollar has greater purchasing power, meaning it can buy more oil.

We are in a secular (long term) cycle of low oil prices, which is a boon to American consumers and drivers.

However, these are desperate times for energy companies and the banks that funded them.

It may be years before supply and demand are able to rebalance.

Yet, by that point, electric cars and renewables may have irrevocably altered oil’s hegemony in the energy sector, as well as its influence over our lives.

Friday, July 29, 2016

We've Stepped to the Precipice of Debt and are Staring Into the Abyss

Debt levels around the world are absolutely enormous. This is particularly troubling because these massive levels of debt are choking off economic growth.

Borrowing money to pay for something today leaves less available money for future purchases. Of course, there’s also the matter of interest, which makes whatever you’re borrowing for today more expensive in the long run.

Debt enables future consumption to be brought forward, which means that debt essentially denies future consumption. Borrowed money must be paid back in the future, meaning there will be less money for future purchases.

There is presently less money to pay for today’s needs due to the cost of servicing our past debts. This applies to both households and governments. Debt payments for past spending leave less money to spend on the things we would like to purchase today. In a manner of speaking, debt steals from the future.

For example, last year the federal government spent $402 billion on debt service, according to the Treasury Dept. That money was used to cover past spending and could not be utilized for things such as infrastructure spending this year. Infrastructure ultimately increases economic activity and pays for itself in the long run.

There is a large and considerable difference between productive debt and non-productive debt.

Debt that allows for an increase in productivity and/or income is useful when it is easily serviced. For example, education or infrastructure not only generally pay for themselves, but allow for even greater income-generating capacity.

Simply put, debt that ultimately generates more than enough cash flow to repay itself is productive.

Unnecessary or redundant military spending (including fighting our recent wars) or providing tax breaks to highly profitable industries are examples of non-productive debt. They do not add to add to the productive capacity of the economy, much less pay for themselves.

The U.S. national debt has now reached $19.4 trillion and will surpass $20 trillion next year. But the U.S. government is not unique or alone when it comes to debt.

Though excessive debt sparked the worst global financial and economic meltdown since the Great Depression in the fall of 2008, quite incredibly, overall world debt is even bigger today than it was then.

Just eight years later, total outstanding government debt worldwide has since doubled to $59 trillion, according to Economist Intelligence.

The next recession — and we all know it’s coming because they always do — will make servicing those huge debts crippling or impossible, which would set off a domino effect of global defaults.

However, government debt is just one portion (albeit a huge one) of the total global debt pie. When household, corporate and bank debt are added to the tally, the total sum reached a staggering $199 trillion in mid-2014, amounting to a 40 percent increase in just seven years, according to a study last year by McKinsey Global Institute.

The overall effect has been to stifle growth rather than promote it.

Real global growth averaged just 2.4% a year from 2012 through 2015. By contrast, growth averaged a robust 3.7% from 2001 through 2010, including the Great Recession years.

The sum and rapid expansion of global debt are stunning. Debt caused the crisis in 2008, yet it’s now significantly larger. In fact, government debt has doubled — and this has occurred during a time of alleged austerity.

Not only does debt service rob from more productive uses, it also results in more debt-spending to pay for budget items that can’t be covered due to debt service. It’s a vicious cycle.

The GDP numbers don’t lie: global growth has slowed to an anemic rate and all of this debt is a direct causation.

You can’t help but think this will not end well.

As BlackRock’s Jeffrey Rosenberg told the L.A. Times, some kind of global debt blowup has occurred roughly every seven or eight years since the early 1980s. That means 2016 would be right on schedule.

That’s a scary notion, and it does indeed seem that we’re continually creeping closer to the precipice.

The central banks are owned by private banks, whose mission is to indebted others — particularly sovereign nations, since they are the biggest borrowers. These bankers want perpetual debt that can never be paid off. It seems they have finally achieved that goal.

Government debt is unsustainably high in some countries. Unsustainable means this situation can’t last indefinitely.

“China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007,” wrote McKinsey. “At 282 percent of GDP, China’s debt as a share of GDP is larger than that of the United States or Germany."

McKinsey went on to say the following:

Rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007.

Debt-to-GDP ratios have risen in all 22 advanced economies in the sample, by more than 50 percentage points in many cases.

Government debt in some countries has reached such high levels that new ways will be needed to reduce it.

As the L.A. Times recently noted, “The concept of a modern debt jubilee [wiping out borrowers’ debts] has been finding its way into some mainstream financial market discussions.”

What would that do to the global financial system? Could it cause a total implosion? When debt goes away money goes away, since money is debt.

Again, it’s not just governments that have a massive debt problem. Household debt is reaching new peaks.

McKinsey also said:

Only in the core crisis countries—Ireland, Spain, the United Kingdom, and the United States—have households deleveraged. In many others, household debt-to-income ratios have continued to rise. They exceed the peak levels in the crisis countries before 2008 in some cases, including such advanced economies as Australia, Canada, Denmark, Sweden, and the Netherlands, as well as Malaysia, South Korea, and Thailand.

Much, if not most, of that debt is non-productive. It is just a ball and chain, and the world now finds itself in rapidly rising waters.

Meanwhile, total U.S. household debt rose $136 billion in the first quarter (a 1.1% increase), climbing to $12.25 trillion. It now stands just $430 billion below the $12.68 trillion peak reached in 2008, during the Great Recession.

U.S. household debt has risen for seven consecutive quarters and it won't be long before we reach a new peak.

Although household debt relative to GDP is still below the 2008 level (for now), it remains higher than it was in almost all of postwar history.

All debts must eventually be reconciled. There is a reckoning coming, and it will likely arrive sooner than later.

Brace yourself.

Sunday, June 19, 2016

As Economy Continues to Wither, Fed Remains Powerless to Stop It

As of June 17, the federal funds rate stood at 0.38 percent.

The funds rate is the Fed’s benchmark rate — the one that affects other interest rates. When you hear about the Federal Reserve raising or lowering interest "rates," it is just raising or lowering this single rate. Other rates simply follow the funds rate.

For perspective, the funds rate has averaged 6 percent since 1971, meaning is extraordinarily low at present and has been since December 2008, when the Fed dropped it to zero in response to the Great Recession.

Two years ago, former Fed Chairman Ben Bernanke commented that he didn’t expect to see the federal funds rate above 4 percent again in his lifetime.

Bernanke was age 60 at the time. I’ll bet he expects to live into his eighties. That’s a mighty long time for the funds rate to remain so historically low.

Lowering the funds rate so drastically was supposed to lift the economy out of its doldrums. That hasn't really happened.

Though we are no longer gripped by the specter of the Great Recession, the economy remains weak by normal standards.

The economy expanded just 0.8 percent in the first quarter, the weakest growth rate in two years. That followed a weak 1.4 percent growth rate in the fourth quarter of 2015.

For all of 2015, the economy grew at a 2.4 percent pace, which isn’t very good from a historical perspective.

From 1947 through 2015, the annual GDP growth rate in the US averaged 3.26 percent.

Yet, last week, the Federal Reserve lowered its forecast for U.S. economic growth in 2016 to 2 percent, down from an earlier 2.2 percent projection. It was the second time this year that the Fed lowered its expectations for economic growth — the projection in December was 2.4 percent.

In other words, the economy is expected to be weaker this year than last year, when it wasn’t all that strong anyway.

The Fed also slightly decreased its projection for economic growth in 2017. This is an ugly pattern.

The U.S. economy added just 38,000 jobs in May, the worst monthly gain since 2010. It shocked many economists and speaks to the trouble that may lie ahead.

Additionally, the labor force participation rate – those with jobs or looking for one – declined again to 62.6 percent. That makes the unemployment number appear better than it really is. People not actively looking for work aren’t counted as unemployed. The last time the participation rate was this low was October, 1977.

Consumer spending accounts for about two-thirds of the U.S. economy, and consumers simply don’t have enough income to lift the economy.

According to the U.S. Census Bureau, the median household income for the United States was $53,657 in 2014, the latest data available (2015 Census data will be released in September).

Real median household income peaked at $57,936 in 2007 and is now $4,279 (7.39%) lower.

Since falling to a post peak low of $52,970 in 2012, real median household income in the United States has grown by just $687 (1.30%).

Most striking, household income is now about the same as it was in 1996 — 20 years ago!

Rents, health insurance, prescription drug costs and tuition have all risen -- and are still rising -- much faster than the general rate of inflation and, more importantly, much faster than median family income.

So, let’s circle back to the federal funds rate, where we began.

Banks make their money by lending money and collecting interest payments. They hate interest rates being this low.

The Federal Reserve doesn’t want rates this low because it exists to serve the interests of the private banks that own and control it.

But it can't raise the funds rate because the economy is too weak to handle it.

When the next recession or financial crisis strikes, the Fed will want to be able to lower the funds rate in response as a means of stimulus.

But with the funds rate at 0.38 percent, there is little room to maneuver.

The Fed is out of answers and out of ammunition in its fight to stimulate and invigorate the economy. The lack of results has got to be very frustrating, and frightening, to the central bankers.

History and the economic text books say this isn’t supposed to be happening. After all previous recessions, the economy took off like a rocket.

The Fed has its hands on the wheel, but it has no control. Events have gotten ahead of it, and it is simply along for the ride.

Sunday, June 05, 2016

Dwindling Lake Mead Should be a Wake Up Call to Southwest

Lake Mead reached an all-time low in May, falling below the previous record set in June 2015.

Why does this matter?

Well, Lake Mead is the largest reservoir in the United States, in terms of water capacity.

Most critically, Lake Mead provides water to the states of Arizona, Nevada and California, as well as Mexico, serving nearly 20 million people.

Lake Mead was established in 1936. At the time, the populations of the cities it serviced were rather meager.

In 1940, Phoenix had a population of just 65,414 people.

In 1940, the population of Las Vegas was just 8,422, and Clark County had only 16,414 residents.

There are whole lot more people living in those cities today.

According to the Census Bureau's 2015 population estimates, Phoenix had a population of 1,445,632, and the Valley had 4,574,351 total residents, making it the 12th largest metropolitan area in the nation by population.

As of the 2015, Las Vegas had a population of 628,711, and the larger metropolitan area had 2,147,641 residents.

Los Angeles County had a population of 2,785,643 in 1940, but it had reached an estimated 10,170,292 by 2015.

The point is, the populations of the regions served by Lake Mead have grown exponentially since the reservoir was created. Meanwhile, the lake's water level has declined precipitously.

Lake Mead receives the majority of its water from snow melt in the Colorado, Wyoming, and Utah Rocky Mountains, via the Colorado River.

However, flows have decreased during 16 years of drought.

In fact, the lake has not reached full capacity since 1983, due to a combination of drought and increased water demand, and is now only about 37 percent full.

As a result, there are valid concerns that the federal government will declare a shortage in 2018, which would trigger cutbacks in the amount of water flowing from the reservoir to Arizona and Nevada.

Lake Mead fell below 1,074 feet for the first time on May 31, 2016 and continues to drop.

If the lake’s level is projected to be below 1,075 feet at the start of next year, the Interior Department will declare a shortage.

California, which holds the most privileged water rights from the Colorado River, would be the last to face reductions. The earliest and most significant cutbacks would be felt by Arizona and Nevada.

The three states will eventually need to reach an agreement on sharing in the cutbacks to prevent an even more severe shortage.

The United States and Mexico also need to negotiate a new agreement on water sharing from the Colorado River.

A water shortage in the region is a really big deal since Lake Mead, nearby Lake Powell and the Colorado River provide at least part of the drinking water supply to nearly 40 million people in the western United States.

The water system also allows for agriculture and energy production.

The current drought and the bleak status of Lake Mead should be of great concern to everyone in Arizona, Nevada, and the entire desert Southwest. This problem is not going away; it will only worsen. It will affect migration, business and property values.

Population growth and heavy demand for water have run head on into a dwindling Rocky Mountain snowpack and a rapidly changing climate.

Supply and demand are divergent and incompatible.

Neither the government or scientists can magically create more supply; they can’t control the weather. All they can do is attempt to lessen demand.

But that is an enormous, perhaps impossible, challenge in the Southwest, which scientists say has millions more inhabitants than nature intended, or for which it can provide.

Eventually, millions of residents, as well as the businesses that serve and support them, may be confronted with an inability to continue living in the arid, parched desert of the American Southwest.

This isn't farfetched or extremist.

A 2008 paper in Water Resources Research stated that at current usage allocation and projected climate trends, a 50% chance exists that live storage in Lakes Mead and Powell will be gone by 2021.

That’s just five short years from now.