Is The Economy As Robust As the Republicans Say It Is?

I happen to attend a party over the weekend. It was a pumpkin carving contest and I was chosen to be one of three judges. It was a blast. All of the contestants won prizes and we all got to eat a great meal.

One of the guests at the party was a friend of the hosts. Apparently he is running for State Representative. He is a republican. My friend and host of the party asked this fellow if he was catching a lot of flack over the war in Iraq.

This fellow replied that yes he was and he was perplexed. Imagine that. After all, what could a state representative do about a war? That falls in the realm of U.S. Senators and Representatives.

He partially blamed the media because “they” were focusing on this war and not the good news about the economy. Then he went into what seemed to be a canned speech about how good the economy is. His exact word was “roaring.” He spouted statistics like unemployment rate, gas prices, and a record stock market. According to this fine fellow, everything was great and it was all due to the Republicans although again, what effect does a state rep have on something like the economy?

I stayed quiet. After all I was a guest. Later after he had moved on to another group at the party, my wife leaned over and said he was lying. She could tell by the look on his face. He did not even believe what he was saying. I found that interesting.

Let’s look at his “proof” and see if the economy is “roaring.” Unemployment is down to 4.6% from 4.8% at the beginning of 2006. Looks good if we just stick with this basic percentage, but if we dig a little deeper, we find that the BLS uses a job birth/death model to estimate the number of new jobs being created in the economy. This model estimates something over 100,000 new jobs created every month. Since the BLS only reported 51,000 new jobs created, that means that the country really lost jobs and the CES Birth/Death model is responsible for all of the job growth.

The unemployment rate does not take into consideration the number of people that are underemployed, that is, people that have taken lower paying jobs just to survive. It also does not take into consideration, the number of people who no longer collect unemployment benefits and are no longer actively seeking employment. Those folks simply fall off of the records.

My point is that the unemployment rate does not really indicate a strong “roaring” economy.

Next are gas prices. Yes I, like you, have enjoyed the drop in gas prices this fall, but I feel a little uneasy about the cause behind the dropping prices. There have been no new discoveries, OPEC is not producing any more oil, in fact production in Saudi Arabia is actually falling, and there have been no new releases from the government’s strategic reserve. So why are prices falling?

Maybe it has to do with the fact that Bush and Cheney both come from big oil and maybe they are calling in favors to help the Republicans maintain control of the congress. My prediction is this; that gas prices will be back around $3.00 per gallon by next summer. In fact, I think we will start seeing increases by Christmas. Remember, you heard it here first.

How about the record closes on the stock market? Seems perfectly reasonable. No way to doubt that one right? Guess again. If you go to any inflation calculator, (This one is good. http://www.halfhill.com/inflation.html) and put in the Dow Jones 2000 high of about 11,750 and calculate where we would be today based on the inflation rate since 2000, you will find that just to get back to the highs of 2000, we need to hit 13,782. So when a politician or talking head tells you that we are in record territory, don’t believe it.

Now we have pretty much dismissed this guy’s claim about a roaring economy, so let’s look at some numbers out today on personal consumption and expenditures. The Bureau of Economic Analysis reports that personal savings (disposable income minus expenditures) was a negative $15 billion in September. As a country we are still living beyond our means and at some point we are going to tap out our available credit. Then the party stops.

Personal bankruptcies for 2005, the most recent figures available, show an increase of 30% over 2004 numbers. Over 2 million people declared bankruptcy last year alone. Now to be sure, some of that increase was due to people beating the passage of the new Bankruptcy Laws that make it more difficult to declare bankruptcy, but as interest only or ARM home loans readjust, the number of foreclosures as well as personal bankruptcies will increase again, new law or not.

The Mortgage Bankers Association reported that 30% of all new home mortgages were of the new hybrid variety. These loans offer interest only payments and some of them offer a reduced payment for the first few years that does not even cover the interest. In these cases, the balance of the loan is actually increasing. These types of loans will be the first ones to go south when the economy rolls over as the people who typically take these types of loans are just barely making it financially.

If you have considered or are considering bankruptcy, I suggest you read my book, “Avoiding Bankruptcy, Know Your Options.” It’s free and you can get it by sending a blank email to: avoidbankruptcy@sendfree.com. You will also receive a free subscription to my email newsletter, “Personal Financial Tips.” At twice the price it is still a bargain.

Get your copy today before you make a decision that could adversely affect your life for the next 10-20 years.