Saturday, July 27, 2013

Savings Crisis Leaving Americans Unprepared for Emergencies/Retirement

For many years, Americans have shown a consistent inability to put money into savings, be it for emergencies, retirement, or the larger, necessary purchases that may arise.

In fact, the savings rate has been declining for decades, notwithstanding a brief uptick during the Great Recession. Here's a look at where the savings rate stood at the start of each of the last six decades, according to the Commerce Department's Bureau of Economic Analysis:

1960: 7.2%
1970: 9.4%
1980: 9.8%
1990: 6.5%
2000: 2.9%
2010: 5.1%

In 2005, the savings rate actually turned negative for the first time since the Great Depression, and it stayed that way for about two years.

While the savings rate reached a high of 5.4% in 2008, as Americans were trying to pay down their debts during the initial phase of the financial crisis, it started declining again in 2011.

This will have horrible consequences for the millions of Americans who will be facing a retirement funded entirely by Social Security. Pensions are largely a thing of the past and 50 percent of Americans don't participate in a retirement savings plan at work.

As it stands, current retirees are already relying far too heavily on Social Security.

According to the Social Security Administration, 23 percent of married couples and 46 percent of single people receive 90 percent or more of their income from Social Security. Furthermore, 53 percent of married couples and 74 percent of unmarried people receive half of their income or more from the program.

The average monthly Social Security benefit for retirees is just $1,262. That amounts to just $15,144 annually. Obviously, that doesn't go far.

According to a report by AARP, three out of five families headed by a retiree over 65 had no retirement savings. And half of those 65 and older had annual individual incomes of less than $18,500.

The problem for millions of Americans is that they simply can't afford to save. Adjusted for inflation, wages have been stagnant since the 1970s.

As bad as the Great Recession was to household incomes, those incomes have continued falling during the alleged recovery. Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials.

The problem continues; Inflation-adjusted wages fell 0.4% in 2012, following a 0.5% decline in 2011.

So this gives a petty clear indication as to why Americans aren't saving for retirement or an emergency; they simply can't afford to.

Here's a look at the U.S. savings rate in recent years, according to the Organization for Economic Cooperation and Development (OECD).

2006: 2.6%
2007: 2.4%
2008: 5.4%
2009: 5.1%
2010: 5.3%
2011: 4.7%
2012: 4.3%
2013: 4.0%

However, the personal savings rate was just 3.20% in May. It had been as high as 6.4% in December.

The low savings rate creates the potential for crisis for millions of individuals and families.

Nearly three-quarters of Americans don’t have enough money saved to pay their bills for six months, according to survey results released in June by

Half of the survey respondents said they had less than three months’ worth of expenses saved up, and more than one-quarter have no reserves to draw on in case of emergency.

In addition to stagnant wages, persistent unemployment has made it difficult for Americans to put any money away.

Low- and middle-income Americans were hit harder by the recession and slow recovery than the wealthy. While the annual wages of the bottom 90 percent of workers declined between 2009 and 2011, the wages of the top one percent rose 8.2 percent during the same period, according to a January analysis by the Economic Policy Institute.

According to Bankrate, if Americans want to ensure they're protected in the event of a financial emergency, like a job loss or a medical issue, they should have enough money to cover about six months' worth of bills saved.

The U.S. retirement savings deficit is between $6.8 and $14.0 trillion, according to the National Institute on Retirement Security.

That is a staggering sum of money, or rather, a staggering deficit.

The average working household has virtually no retirement savings. When all households are included — not just households with retirement accounts — the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.

Previous generations were much better at saving. During World War II, Americans were encouraged to buy government bonds as a matter of patriotic duty to aid the war effort. Following the Great Depression, regulation of the banking/financial industry greatly diminished bank failures, encouraging more Americans to save.

Credit was also not nearly as available in earlier eras, which encouraged people to save for future needs, whether it was a car, or a house, or an education. But, beginning in the '80s, there was an explosion of cheap and easy credit. That allowed people to get by without saving.

But the larger issue is the fact that household incomes have been flat for decades, while inflation has driven the prices of everything higher.

I've been coving the savings crisis and its implications on the retirement security of Americans since 2005, and the story hasn't gotten any better.

I asked the question "Will You Have Enough to Retire?" in February, 2006, and later that year I asked, "Are You Retirement Ready?"

And in September, 2010, I noted that "Americans' Retirement Savings Look Bleak."

Sadly, nothing has changed in recent years. Millions of people have simply moved closer to, or into, retirement quite unprepared. This has huge implications for our country.

Seniors are among the most vulnerable people in our society. Many will have to rely on their adult children or other family members to help them get through their final years. That will place tremendous burdens on already struggling families.

Assisted living facilities are very expensive. Nursing homes are even more expensive. Home health care and aids are also beyond the reach of great numbers of our senior population.

None of this appropriate or acceptable for such a wealthy nation — one that sees itself as a first rate, world leader.

For millions of Americans, what were supposed to be their "golden years" will not be so golden after all. At the least, they won't be nearly as golden as those of their parents and grandparents.

Saturday, July 20, 2013

U.S. Trade Deficit Dragging Down Economic Growth, Sending Billions Overseas

Warnings about the size of the federal budget deficit have made headlines for many years. We've repeatedly been cautioned about the threat the federal deficit poses to the U.S. However, we hear relatively little about the nation's trade deficit.

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.

A trade surplus is preferable to a trade deficit since it generally implies that a nation's goods are competitive on the world stage, its citizens are not consuming too much, and that it is amassing capital for future investment and economic pursuits. The U.S. hasn't known such a position since 1975.

The trade deficit acts as a drag on economic growth because it means the U.S. is earning less on overseas sales of American-produced goods while spending more on foreign products. Buying goods from abroad means they are not being made here at home, and that displaces American jobs. Simply put, the trade gap subtracts from economic growth (GDP).

Each and every month, tens of billions of dollars are being drained out of the U.S. economy.

Such an imbalance has been able to exist for 36 years only because the U.S. has run a surplus in the trade of services (tourism, financial services, telecommunications, etc.). However, the overall trade deficit is unsustainable in the longer term. You can't buy more than you sell indefinitely.

This problem will not be easy to rectify. It can't be fixed in a quarter, a year, or even during a president's term. This is a structural problem, not merely a cyclical one. It has been decades in the making and at this point it will be very difficult to rectify.

There was some modest progress last year, however.

According to the U.S. Census Bureau, the U.S. trade deficit in goods and services declined from $559.9 billion in 2011 to $540.4 billion in 2012, an improvement of $19.5 billion (3.5 percent). It marked the first time in three years that the trade deficit fell.

Record exports, a drop in the cost of imported oil, and a slowdown in the country’s demand for imported consumer goods led to the decline.

However, there is no getting around the fact that the U.S. ran a trade deficit in excess of half a trillion dollars in successive years. And the problem remains persistent.

This year, the U.S. posted a trade deficit of $44.5 billion in January, $43.6 billion in February, $37.1 in March, $40.1 billion in April and $45.0 billion in May. That amounts to a cumulative deficit of $210.3 billion through the first five months of this year, meaning that the trade deficit is once again on track to exceed half a trillion dollars this year.

Oil has long been a major factor in the trade deficit. Yet, a structural shift is underway. While the U.S. trade deficit in petroleum goods declined $34.8 billion (10.7 percent), the U.S. trade deficit in non-petroleum goods increased $35.3 billion (8.8 percent).

As the Economic Policy Institute (EPI) put it:

"Growing goods trade deficits have eliminated millions of U.S. manufacturing jobs over the past decade, and non-petroleum goods were responsible for the vast majority of the jobs displaced. Rapidly growing trade deficits in non-petroleum goods, especially manufactured products, represent a substantial threat to the recovery of U.S. manufacturing employment."

Obviously, the trade deficit is the result of whole lot more than crude oil. We'll explore the role of oil in the trade deficit in a moment.

The good news was that the U.S. shipped a record $2.19 trillion in exports in 2012, despite significant economic headwinds around the world that undercut global trade. Europe, for example, is in a recession.

Exports as a share of GDP held steady at a record 13.9 percent, according to the Commerce Department. But that remains one of the lowest export levels in the world among large, industrialized nations. Clearly, the U.S. will not export its way to an economic recovery.

The U.S. relies heavily on consumption to drive its economy, yet American consumers are buying a disproportionate share of their goods from foreign nations. That doesn't help the U.S. economy much. Though cheap foreign goods help hold down consumer prices, they come at the expense of American jobs.

Americans are literally buying tons of foreign goods each month instead of making them here at home. That's a shortsighted policy.

Consumer spending now comprises 71% of the U.S. economy. Yet, far too much of that spending is directed toward foreign goods. For comparison, consumer spending was about 62% of GDP in 1960, when the economy was more balanced. At that time, the U.S. manufactured and exported far more than today.

Durable (6 percent) and non-durable (6 percent) manufacturing amount to just 12 percent of the U.S. economy. While the U.S. is still the world's leading manufacturer (by some estimates, China may have recently surpassed the U.S.), our share of global manufacturing has been declining for decades.

The U.S. share of global manufacturing now stands at 18%, down from 29% in 1970. And just 9 percent of U.S. workers are employed directly in manufacturing.

In January 2004, the number of manufacturing jobs stood at 14.3 million, down by 3.0 million jobs, or 17.5 percent, since July 2000 and about 5.2 million since the historical peak in 1979. Employment in manufacturing was its lowest since July 1950.

So, the decline in manufacturing is contributing to the trade deficit, which has been decades in the making. The U.S. has been running consistent trade deficits since 1976 due to high imports of oil and consumer products.

More than half of the U.S. trade deficit is with China, making it by far the largest deficit with any individual country. So far this year, the U.S. deficit with China is running 3% higher than last year.

While this trade deficit is benefitting the Chinese job market, it is hurting American workers.

According to a 2011 Economic Policy Institute report, the growth in the U.S. trade deficit with China displaced 2.8 million U.S. jobs between 2001 and 2010 alone.

For many years, China has undervalued its currency (the yuan) in relation to the dollar to keep its products artificially inexpensive in the U.S. while discouraging U.S. exports to China. This policy is contributing to high unemployment in the U.S.

As noted earlier, one of the biggest drivers of the U.S. trade deficit is imported crude oil. Oil is priced in dollars and the dollar is buying less these days.

In 2001, the U.S. Dollar Index traded at around $120. Today, the U.S. Dollar Index is trading at $81, about 32 percent below the 2001 high. That's a serious decline in value in little more than a decade.

The weakened dollar is punishing Americans every time they fill up their gas tanks.

Though a declining dollar makes U.S. exports cheaper overseas, our No. 1 import is oil, which is also priced in dollars. A weak dollar makes oil, and ultimately gasoline, more expensive, forcing the trade deficit further into the negative.

Right now, virtually all developed nations are seeking to devalue their currencies to increase exports. But every country can't have a trade surplus. Someone has to buy. For decades, the primary buyer has been the U.S.

However, the reason our economy melted down in the first place was because it was built on a bubble of debt. American consumers simply cannot continue taking on ever more debt while serving as the world's primary consumer.

Many economists believe that a currency war is currently underway. Call it a race to the bottom.

Japan’s money-printing and bond-buying program is the latest salvo in the global currency war. The U.S., U.K. and Switzerland are already enjoined in the battle. In fact, nations that constitute around 70% of world economic output are “at war,” pursuing policies that cause devaluation and currency debasement to differing degrees. A weaker currency boosts exports, driven by cheaper prices.

However, just as every nation cannot be a net exporter, neither can every nation have the cheapest currency by implementing similar devaluation policies. And if everyone devalues, then what's the point?

As long as the trade deficit continues, the U.S. will have to continue borrowing from abroad to pay the difference. That's why the trade deficit is so pernicious.

Since imports shrink the nation's gross domestic product, U.S. GDP will continue to face downward pressure. Every $1 billion of a larger deficit subtracts about 0.1 of a percentage point from the annualized growth rate. That's bad news for an economy that is currently struggling to eek out a mere 2 percent growth rate.

The U.S., the world's No. 1 importer, has been able to run continual trade deficits for many years because it has been receiving an inflow of capital from surplus nations, such as China, Japan and Saudi Arabia. If these surplus nations ever hope to get repaid (i.e. to reverse those capital flows) then those trade imbalances must be reversed.

That will require less consumption, more saving and more production here at home, plus more consumption and less saving in places like China.

America needs to produce more, export more, and save more. For more than a quarter-century, we did exactly the opposite. And that's exactly what we need China to do now; import more and spend more.

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

For decades, the U.S. has consumed more than it has produced, imported more than it has exported, and borrowed more than it has saved. The trade deficit is the unfortunate result of all those imbalances.

Sunday, July 07, 2013

Home Prices vs. Incomes: The Unravelling of the American Dream

The run-up in home prices in the last decade was unprecedented. Though home owners in some markets were thrilled to see their homes appreciating by 10, 15 or even 20 percent annually, these large increases priced-out numerous first time buyers and led many others to take on far too much debt in order to get aboard the runaway property train.

The rapid and substantial increase in home prices far outstripped income gains, otherwise known as Americans' ability to pay for these new homes. Despite the decline in home prices since the bubble burst, the disparity between prices and incomes still exists.

Home prices nationally had finally returned to their autumn 2003 levels by November of 2012, yet were still down about 30 percent from their respective peaks in June/July 2006.

That gives some perspective to just how over-inflated our national housing bubble truly was in the previous decade. The annual price appreciation from 2000 through 2006 was quite remarkable.

The following shows U.S. home-price appreciation by year, beginning in 2000, according to the Federal Housing Finance Agency (FHFA). Keep in mind that this was on a national level, and that in some markets the increases were considerably higher.

2000: 6.76 percent
2001: 6.61 percent
2002: 7.47 percent
2003: 7.57 percent
2004: 9.78 percent
2005: 9.84 percent
2006: 3.12 percent
2007: -2.35 percent
2008: -9.95 percent
2009: -2.06 percent
2010: -4.28 percent
2011: -3.12 percent

Even after steadily falling for five consecutive years, home prices are still 50% higher than they were in January 2000, according to the S&P/Case-Shiller Home Price Index (which refers to a typical home located within the 20 surveyed metropolitan areas).

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.

Your parents and grandparents viewed their homes as places to live, eat, sleep, raise a family and create memories. A home was a shelter that would gradually increase in value over time. Prior generations did not view their homes as investments. There was no expectation that houses could be a means to get rich.

Homes require upkeep, maintenance, insurance, taxes and interest payments. Yet, home values steadily increased for many years, decade after decade. It was enough to overlook the associated costs of ownership.

According to the Census Bureau, median home values (adjusted for inflation) nearly quadrupled over the 60-year period from the first housing census in 1940 to 2000. The median value of single-family homes in the United States rose from $30,600 in 1940 to $119,600 in 2000, after adjusting for inflation.

Median home value increased in each decade of this 60-year period, rising fastest in the 1970s (43 percent) and slowest in the 1980s (8.2 percent).

This all occurred before the Federal Reserve initiated the housing bubble by slashing interest rates in response to the bursting of the tech bubble, which hammered Wall St. and its investors.

Let's examine home price increases over the past four decades. None of the following Census Bureau figures are inflation-adjusted.

In 1970 the median home price was $23,400.
In 1980, the median price was $64,600 (176 percent increase).
In 1990, the median price was $$122,900 (90 percent increase).
in 2000, the median price was $169,000 (38 percent increase).
In 2010, the median price was $221,800 (31 percent increase).

The median home price peaked at $247,900 in 2007, the height of the housing bubble.

The median home price had advanced every year since 1963, with the exception of 1970 (when it dropped to $23,400 from $25,600 in 1969) and 1991 (when it dropped to $120,000 from $122,900 in 1990). In both of those years ('70 and '91), economic recessions were occurring.

So, the bursting of the 2000s housing bubble was largely an anomaly, and the price decline was extraordinary. The median home price fell from $247,900 in 2007 to $232,100 in 2008. Then it fell yet again, to $216,700 in 2009. A decline in back-to-back years was unprecedented in the modern U.S. economy, and it had not been experienced since the dark days of the Great Depression.

The big question is, how have median home prices stacked up against median household incomes? In other words, have incomes kept up with the almost perpetual rise in home prices?

The Census Bureau publishes median household income data from 1967 until present day.

According to the Census Bureau, "household median income" is defined as "the amount which divides the income distribution into two equal groups; half having income above that amount, and half having income below that amount."

The Census Bureau publishes both nominal (not inflation-adjusted) and inflation-adjusted figures for household income. Since we looked at nominal figures for home prices, we'll do the same with household incomes.

In 1970, the median household income was $7,143.
In 1980, the median household income was $16,200 (126 percent increase).
In 1990, the median household income was $27,922 (72 percent increase).
In 2000, the median household income was $40,418 (44 percent increase).
In 2010, the median household income was $47,425 (17 percent increase).

We can see that median household income more than doubled from 1970 to 1980, climbing 126 percent. But then income growth slowed in the ensuing decades, rising 72 percent between 1980 and 1990, 44 percent between 1990 and 2000, and then just 17 percent between 2000 and 2010.

Clearly, median household incomes were not keeping up with the rise in home prices, decade after decade.

Let's look at the comparison more closely.

While the median home price went up 176 percent from 1970 to 1980, median household income went up just 126 percent.

While the median home price went up 90 percent from 1980 to 1990, median household income went up just 72 percent.

While the median home price went up 38 percent from 1990 to 2000, median household income went up 44 percent.

While the median home price went up 31 percent from 2000 to 2010, median household income went up just 17 percent.

The only decade in which incomes gains eclipsed the rise in home prices was the 1990s. In every other decade, the increase in home prices significantly outpaced the rise in household incomes.

As if that wasn't bad enough, the income numbers are quite different, and tell an even worse story, after adjusting for inflation.

In 1970, the inflation-adjusted median household income was $45,146.
In 1980, the inflation-adjusted median household income was $46,024.
In 1990, the inflation-adjusted median household income was $49,950.
In 2000, the inflation-adjusted median household income was $54,841.
In 2010, the inflation-adjusted median household income was $50,831.

This means that household incomes barely budged for a couple of decades, and then they went backward in the last decade. Americans are making roughly the same amount today, in inflation-adjusted terms, as they were making back in 1990.

Yet, the problem of falling incomes stubbornly persists. Median household income after inflation fell again in 2011, to $50,054. It was part of an ongoing pattern. Inflation-adjusted wages fell 0.4% in 2012, following a 0.5% decline in 2011. Simply put, wages aren't keeping up with inflation.

Sixty-five percent of the jobs added to the U.S. economy since the recession officially ended have been lower wage jobs ($35,000 annually, or less). Those aren't the kind of jobs that allow people to service an existing mortgage, buy a new home, or firmly entrench anyone in the middle class.

Given the steady increase in home prices and the rate of inflation in general, that's been back-breaking for the typical American family.

Historically, from 1914 until 2012, the U.S. inflation rate averaged 3.36 percent. This means that your money has been losing roughly a third of its buying power each decade.

Given that inflation-adjusted median household incomes are now at the same level as in 1990, and that they are only marginally higher than in 1970, inflation has really punished most Americans and that is clearly seen in the housing market.

Since home prices are still well below where they were during the housing boom, when so many people bought into the market, millions of homeowners remain underwater.

A total of 13 million borrowers, or 25.4 percent of all homeowners with a mortgage, still owe more on their mortgages than their homes are worth, according to a new report from Zillow.

This prevents these people from moving and it is keeping millions of homes off the market. Another 9 million borrowers, while not entirely underwater, likely do not have enough equity in their homes to afford to move, according to Zillow.

That means a whopping 22 million homeowners are essentially stuck in their homes. This is limiting the supply of houses on the market and is driving up prices once again.

So, while home ownership was traditionally seen as the embodiment of the "American dream," it has become a nightmare for millions of Americans. And for million of others, it is nothing more than a pipe dream, an aspiration that has become entirely out of reach.

Every time there is an increase in home prices, home owners cheer. Meanwhile, those on sidelines, who hope to one day become homeowners, watch as their dream seems to move further off into the ether.