More on the Effects of Capacity Underutilization for European Based Auto Manufacturers, Including Ford

Our prior post detailed reasons why GM shouldn't be considered "saved" as a company, despite what our politicians may want us to believe.

In that regard, European auto makers are having an especially difficult time due to weak demand, heavy debt loads and the resultant industry's global manufacturing capacity glut.

Renault Mulling Complete Factory Closures contains this breaking news:

"French car maker Renault is considering the complete closure of factories because of the dire state of the European automobile market, the company's chief operating officer was quoted as saying on Sunday.

"We will see. We are currently talking to the unions and explaining to them how big the gaps are in our competitiveness," Carlos Tavares told German trade newspaper Automobilwoche.

 

"We have a competitiveness problem in western Europe and France."

 

The European market's prolonged decline is even starting to make previously impervious car makers, such as Volkswagen, feel vulnerable. "We're bracing for more negative surprises in 2013, perhaps also in 2014," Christian Klingler, VW's sales chief, said at the Paris auto show last week.

 

Tavares pointed out that Renault's cooperation with Nissan had given the company hard data on productivity levels at Nissan factories in Sunderland in Britain and Barcelona in Spain.

 

"These factories are really top," the Renault CEO said, adding that discussions were under way on whether Nissan could make production capacity available to Renault. . . . 

 

A Renault spokeswoman declined to comment on the report, but Chief Executive Carlos Ghosn said on Friday that the French car maker could disappear "in its current form" if it is unable to be competitive in its home market.

 

However, Ghosn also said that Renault had no plans at this stage to cut jobs in France.

 

And here's what Ford Will Trim Staff in Europe recently reported concerning Ford's European situation:

 

Ford Motor Co. plans to lay off "a few hundred" salaried workers at its European auto unit, and reduce the number of contract employees in the money-losing region to lower expenses.

The Dearborn, Mich.-based auto maker is offering voluntary buyouts to salaried workers in the U.K, Germany and other regions of Europe and cutting expenses on outside contractors as well as purchased services . . .

Ford has forecast a full-year loss of more than $1 billion in the region and is working on a wide-ranging plan to restore profitability to Europe. It is introducing three all-new models in Europe and has said it is working on cost-cutting efforts.

Ford is considering closing one of its five Western Europe assembly plants, but it would likely face strong resistance from unions and governments. . . .

The problems in Europe are "structural in nature," rather than the result of a cyclical downturn in the industry, Ford finance chief Bob Shanks then said.

Ford pledged to take actions to slash costs and production capacity in Europe, despite the political and labor opposition to closures that make it difficult to shrink operations there. It has suggested a downsizing in Europe could over time have positive results similar to those Ford has seen in North America, where the company restructured and now is producing near-record profits."

Summing Up

The auto industry is a prime example of what happens when strong debt induced demand over time reaches an unsustainable level. Eventually the bubble bursts, in other words, much like the housing situation.

Manufacturing capacity was put in place for artificial debt driven demand which has now disappeared. As a result, debt restructurings will require capacity restructurings as well.

And this bubble bursting impact is neither restricted to the auto industry nor to Europe. It's a worldwide problem in search of a solution. And the "unwind" solution will take time.

Simply put, the only lasting solution is for the private sector winners to produce globally competitive cars that consumers choose to buy.

Because in the end, consumers will reign supreme. Not governments. And not manufacturers that aren't able to offer competitive products and services.

And certainly not unions and those subsidizing and enabling governments that TEMPORARILY make it harder for the marketplace to operate and let consumers decide which individual private sector companies will survive and thrive. And which won't.

Wherever they may be located and whoever they may be.

Thanks. Bob.

 

Our Government Says It Has "Saved" GM ... Other Governments Are Propping Up European Car Makers ... But For How Long?

 Our government claims that it successfully bailed out or saved Government Motors, aka GM, recently. That we all know. We also know that government gets its bailout money from its owners -- the taxpayers -- We the People.

So how should we feel about the GM bailout and its success, whatever that means? For an answer to that question, in addition to the U.S., let's look to what's happening in Europe and beyond.

The conclusion is straightforward. There's a glut of global capacity, and that says the fallout will be severe, and many jobs and dollars will be lost. The jobs lost will result from factory related shutdowns and market share losses in a stagnant global economic environment, and the dollars lost will either be those of the companies' shareholders, governments, or both. Now let's talk about GM and its "salvation."

We're in effect helping GM stay in a losing game in Europe with billions of dollars of U.S. taxpayer money. But it's even worse than bailing out GM's European operations. We're making things tougher right here in the U.S. for not only GM but Ford and Chrysler, too.

To begin the discussion (and which is one you won't hear anything like from our politicians), let's address a few questions. Such as how many of We the People know that GM and Ford are EACH losing about one billion dollars annually in their European operations? Or that Europe's car producing capability is currently underutilized by approximately EIGHT million cars? Or that European governments and auto companies, along with the Japanese, Koreans and others are all planning to solve their capacity utilizations issues in large part by exporting more of their locally manufactured cars to the U.S.? And how well have our government officials thought through what all this means to the longer term success or failure of the taxpayer financed GM bailout that already has been declared a success?

The victory celebration is premature at best. Here's what I say. Let's all put the successful GM bailout story on hold, at least for now.

By definition, the global market for car sales, as with any other market, is always and only a grand total of 100%.

Thus, if U.S. taxpayer money is being used to keep GM afloat in Europe, that means the excess capacity in Europe will be increased and this will simply make things tougher for all competitors. In turn that means European governments and European manufacturers will try to export more of their production to the U.S., thereby making it even tougher to save GM and other U.S. manufacturers over the long term. Something has to give.

In other words, the global excess auto making capacity won't go away by refusing to let the market work as governments use taxpayer money to keep the weak players in the game through government subsidies. Such as bailing out GM in Europe, as an example.

And this trick of trying to sell out excess capacity in other markets instead of downsizing as required will only prolong the agony. In the meantime, companies will lose money, car prices will decline and things will just get worse. I guess the good part is that buying consumers will be able to get good deals on purchases which are indirectly being subsidized by their fellow taxpayers.

Let's use a simple example of how this all works when governments interfere with the market system.

If the global car market is 100 and isn't growing or shrinking as a whole, and if company A sells 50 this year compared to the 25 it sold last year, its competitors will sell 25 less this year than they sold last year. That's the simple math.

So when some companies are growing their share of the pie, others of necessity are shrinking their relative share.

Now let's move to some specifics and away from the local European eight million in excess manufacturing capacity issue. We'll look more broadly at excess capacity, weak demand, government involvement and exports.

Japanese auto makers have very big plans for their sales the next several years. So do the Koreans. And European makers plan to export lots of cars to the U.S. as well.

If they come close to achieving their goals, others will suffer. U.S. companies like GM and Ford, as examples.

Honda Aims to Double Sales in Five Years tells of Honda's aggressive global sales goals for the future. Toyota and Nissan have big plans as well:

"TOKYO—Honda Motor Co. set a goal of nearly doubling its global vehicles sales in five years, a move that would rely heavily on expanding its footprint in fast-growing emerging auto markets and on new small car models,

Japan's third biggest car maker by volume on Friday said it aims to sell more than 6 million vehicles in the fiscal year ending March 2017, a move that will heavily rely on its new Fit compact and low-cost Brio small model in mature and emerging markets.

In the last fiscal year, the car maker sold 3.11 million vehicles world-wide.

"We achieved a speedy recovery [from last year's natural disasters in Japan and Thailand] and as of today we are ready to make a counterattack," Honda President and Chief Executive Takanobu Ito said at a news conference.

The ambitious target means the company would have to sell 1.7 million more vehicles compared with its goal for the current fiscal year—and double the pace of growth in the four years through March 2008, when its global sales hit a record 3.92 million vehicles.

Honda joins its two bigger local rivals—Toyota Motor Corp. and Nissan Motor Co. —in pursuing a lofty growth plan.

Toyota projects global sales of 10 million vehicles by 2015 . . . a record level for the auto industry and a 36% jump from 7.35 million it sold in the last fiscal year. Nissan expects its world-wide sales to reach at least 7.2 million vehicles by the year ending March 2017, up 48% from 4.85 million in the last fiscal year. . . .

Emerging markets will play a bigger part of its global sales, accounting for half of the total sales by the year through March 2017, up from 38% expected for the current fiscal year.

The plan comes as Honda gets back on its feet after the March earthquake and tsunami in Japan and massive floods in Thailand last year, which crimped its production networks and dented its sales world-wide.

Honda expects its net profit to more than double to ¥470 billion ($6.01 billion) this fiscal year, as it predicts its sales will rebound in all markets. . . .

Honda will focus more on mini cars in Japan with a plan to roll out six new mini cars to boost its home market sales as that would help keep the company's pledge to maintain a domestic production of at least 1 million vehicles.

The maker of the Accord and the Civic cars, as well as the Acura upscale brand, is introducing new vehicle development operations to become even leaner to fight the difficult environment.

Starting with the coming new Fit, known as the Jazz in some markets, each of six regions—North America, Europe, China, South America, Japan and other Asian countries—participates in product development concurrently so that the same model can be introduced in all regions within a short period.

The new approach will enable the car maker to reap economies of scale in purchasing parts, Mr. Ito said.

Until now, the company has developed a new model mainly in the home market first and each region partially redesign the body to meet customers' tastes in each market."

Now let's look at Italy and Fiat. They have big plans for America as outlined in Italy to Work With Fiat on Exports:

"FLORENCE, Italy—Italy's government (recently) vowed to help Fiat become more competitive in exporting cars outside Europe after the auto maker reiterated its intention to stay in the country, dismissing fears of factory closures and mass layoffs.

After an almost four-hour meeting between Italian Prime Minister Mario Monti and Fiat Chief Executive Sergio Marchionne, the government said it would set up a task force in the coming weeks.

"The government and Fiat have agreed to work together...to strengthen the company's competitiveness," it said in a joint statement. No reference was made to whether an exceptional extension of wage subsidies would be given to Fiat's thousands of furloughed workers.

It is also unclear what Italy's technocrat government—which is already struggling to find ways to cut spending in order to fulfill a pledge to balance its budget by next year—can do in material terms to help Fiat.

"Fiat intends to reorient its business model in Italy towards privileging the export [of cars], in particular outside of Europe," it said.

Fiat's unprofitable European car-making division is highly reliant on Italy, where sales have plummeted amid the recession. Unlike Germany, France, Spain and the U.K., the country has for years imported more cars than it exports. That has stoked fear that Fiat, which controls Chrysler Group LLC, would finally desert its home base.

"Fiat's executives have expressed their commitment to keep the group's industrial presence in Italy," the government said. . . .

Mr. Marchionne has previously suggested that Fiat make cars for export to the U.S., where demand is recovering. . . .

Summing Up

U.S. automobile makers have global competitors, of course, and everybody is looking to sell more cars in the U.S. market and everywhere else as well. A reasonable guesstimate would be that excess global capacity is perhaps close to twenty million units.

Accordingly, regardless of what the U.S. politicians may say, GM cannot be put in the long term "saved" category. Customers will decide who stays and goes, regardless of what governments do to prop up auto manufacturers. And GM and Ford definitely have a tough uphill competitive battle to fight, especially in their European operations. European companies, Japanese companies, Korean companies, Latin American companies, Chinese companies and so on all are facing difficult excess capacity utilization issues as well.

It's long past time to recognize and accept the facts of life in a global marketplace which is heavily indebted and plagued by less demand than manufacturing capability. Simply put, we're in the first innings of a long doubleheader. We're going to have to learn to play a whole new ball game when it comes to global competition. And that includes the UAW.

We'll have more to say on all this globalization and what it means at a later time, but for now suffice it to say that the world is much different now than it was ten, twenty, thirty, forty or fifty years ago.  We're not the only game in town.

The road ahead will not be an easy one, especially for the "middle class" that's going to be saved.

Global competition is real and no government can stop that. Not even ours.

 And that's regardless of who is elected president in November.

Thanks. Bob.

Tax Increases for Everybody in 2013

Almost everybody will pay higher taxes in 2013 as a result of the expiration of the payroll tax holiday. At least it sure seems like that will be the case.

Expect Higher Tax Bill in 2013 has the details:

"$1,001.08: How much more someone making the median household income in 2011 is likely to spend on payroll taxes next year.

No matter which party comes out on top in the November elections, nearly every working American is likely to pay higher taxes in 2013 than 2012.

 

Lost in the debate over the fiscal cliff and whether the Bush tax cuts should be extended for all Americans or just those who make more than $250,000 is the expiration of a tax holiday both parties quietly support.

In an effort to stimulate demand and put more money into consumers’ pockets, Congress temporarily lowered the Social Security tax withholding rate to 4.2% from 6.2% for 2011 and earlier this year extended it into 2012. The holiday in the so-called payroll tax is set to expire at the end of this year, and so far neither party has expressed much interest in another extension.

The two percentage point reduction in the payroll tax would reduce government revenue by about $110 billion per year, according to an analysis by PIMCO. That’s not a huge amount in a $3.8 trillion budget, but both parties have lately been trying to find ways to trim deficits. The tax cut was always meant to be temporary, and letting it expire as expected is a quiet way to increase revenue as bigger tax issues are negotiated.

But even if other tax increases aren’t triggered in the so-called fiscal cliff, the expiration of the payroll-tax holiday is going to mean less money in consumers’ pockets next year. For someone earning the 2011 median income of $50,054 that translates into $1,001.08 a year or about $40 less in a biweekly paycheck.

The increase also affects pretty much every working American. While 46% of households don’t pay federal income tax, which is phased out for low earners, just 18% of households avoid the payroll tax, according to the Tax Policy Center. That means even people with low incomes can expect a higher tax bill in 2013. There is a bright side for high earners, though. Workers only are charged payroll taxes on the first $110,100 of income, so whether your income is $110,101 or $110 million the most your 2013 increase can be is $2,202.

 

Summing Up

 

My strong hunch is that the payroll tax increase won't be the only tax hike to hit the "non-millionaires and non-billionaires" in 2013 and beyond.

 

Saving the middle class with a big and growing government in place certainly won't be cheap.

Accordingly, when the dust settles, everybody will be hit with tax increases of various kinds.

 

And as a result of individuals having less money to spend, that will only make it more difficult to achieve any sustained period of solid economic growth.

 

More government spending = more deficits = more debt = more taxes required = less consumer spending = less economic growth = less employment.

 

It's just that simple. The only question now is how high is up and how soon after the election this will begin to unfold.

 

Thanks. Bob.

Student Loan Defaults Projected to Hit 20% Over Time

Defaults on student loans are increasing in these troublesome economic times. That's not surprising.

And defaults have almost doubled in the last five years. That is surprising.

But most alarming, they're projected to reach as many as one in five over the next several years. That's very surprising.

Student-Loan Defaults Rise puts it this way:

"The percentage of Americans who defaulted on federal student loans shortly after payments came due rose last year, fresh data show, continuing a trend throughout the recession and weak recovery.

The Education Department said 9.1% of borrowers whose payments kicked in during the 2010 federal fiscal year defaulted in the year ended Sept. 30, 2011. That's up from 8.8% in the prior year and 4.6% five years earlier. The government defines a loan as being in default when the borrower hasn't made a payment in a year.

The data released on Friday provide only a glimpse into a broader problem, as the report only includes borrowers who defaulted within the first two years of payments coming due. The data also doesn't take into account borrowers who have been allowed to postpone payments for a period during times of hardship, such as unemployment. Over the long haul, the government projects that nearly 1 in 5 borrowers will default on federal student loans at some point.

The higher defaults come as the weak labor market has left many college graduates unable to find work or having to settle for low pay. While student debt has risen among all age groups in recent years, young college graduates are hit particularly hard because they often have no savings and earn less than older workers. But older workers who went back to school during the recession and early recovery are also struggling with payments during the weak labor market.

The Obama administration has sought to ease the burden of student debt by moving to expand a program that allows borrowers to make payments equivalent to a percentage of their income, and then to forgive the balance of debt after 20 years of payments.

Economists say the combination of higher defaults and "income-based repayment" plans could drain revenues from the federal student-loan program in coming years."

Summing Up

Of one thing about student loans I'm certain.

Taxpayers will end up paying multiples of what is currently being predicted that we will pay.

This student loan story will only get worse and worse over time as government programs come to the forefront and personal responsibility moves to the background or completely out of the picture.

Anybody can get a loan, and colleges are able to charge higher tuition as a result of more and more government government funds going to both students directly for loans and to colleges indirectly for tuition.

As usual with government subsidies and related programs and beneficiaries, aka colleges, it's likely to be a downward spiral all the way as government plays chief subsidizer, savior and sponsor.

Therefore, my fellow taxpayers, we ain't seen nuthin' yet.

That's my take.

Thanks. Bob.

Consumers are Feeling a Little Better ... That's Good ... Not Great but Good

Consumer confidence continues to improve, and that's a very good sign. Both increasing stock prices and home prices are contributing to the better mood.

Now we just need the U.S. politicians to do their work in avoiding the year end "fiscal cliff" and for gas prices not to go sky high due to worldwide political issues. That's a mouthful, for sure, but I believe it's more likely than not that our elected officials will try to do something worthwhile shortly after the November election. Maybe they'll even act responsibly.

Consumer sentiment highest in four months has the details about the consumer's mood:

"A gauge of consumer sentiment is at its highest level in four months, led entirely by expectations, according to data released Friday

The University of Michigan-Thomson Reuters consumer-sentiment gauge rose to a final September reading of 78.3 — the highest since May — from 74.3 in August.... 

“The improvement was due to a reduction in their debt levels and an increase in the value of their assets, primarily because of rising stock prices and home values,” said Richard Curtin, the survey’s chief economist. “Nonetheless, consumers anticipate a rocky economic road ahead. Small wage increases, rising food prices, slowly declining joblessness, higher taxes, and an overall economy that will not expand continuously but suffer some setbacks over the next several years.”

The sentiment gauge, which covers how consumers view their personal finances as well as business and buying conditions, averaged about 87 in the year before the most recent recession. Economists watch sentiment data to get a feel for the direction of consumer spending....

According to UMich, more consumers expect a continuing economic expansion than a contraction.

“In the September survey, more consumers spontaneously reported hearing news about job gains, and expected continued job gains during the year ahead,” according to the report.

However, most consumers expect small gains in wages, according to the report.

“Half of all households anticipate declining living standards as their incomes fail to keep pace with inflation,” according to the report.

Friday’s report echoes a separate reading on consumer confidence released earlier this week that showed brighter expectations. The Conference Board’s consumer-confidence index rose in September to the highest level since February. 

Elsewhere Friday, the U.S. Department of Commerce reported that consumer spending growth in August was the strongest in six months. Read more about consumer spending."

 

Summing Up

The consumer accounts for two thirds of our spending. Accordingly, when more money is spent due to increased gasoline and food prices, along with debt servicing costs and taxes, less money will be available to spend on other consumer purchases.

And that's especially true in a slow growing economy which continues to struggle and where wage and salary gains are hard to come by as a result of weak demand related to high unemployment.

Yet consumers are indeed spending more these days, even though they're saving less as a result. Of course, spending more than we're earning is largely how we got ourselves in this mess in the first place.

Nevertheless, it's good to see consumer confidence improving and evidence that perhaps some of our "animal spirits" are returning to the economy.

If we keep feeling better, maybe we'll finally get this awful economy behind us in the not too distant future.

Then we'll be able to go from good to great.

Of course, we're not there yet -- not by a long shot -- but we're slowly headed in the right direction.

And that's a good development, albeit not yet a great one.

Thanks. Bob.

 

A Tried and True Way to Keep the Economy From Growing and Keeping the Government Burden Growing

France is hopefully not what we're going to become. They have a tried and true way of keeping unemployment high and economic growth low.

Let's hope our own U.S. politicans of both parties are paying close attention to Europe in general and France in particular.

France Raises Taxes in Tough Budget tells the developing what-would-be-silly-if-not-so-sad story:"

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French President François Hollande.

"PARIS—-The French Socialist government on Friday unveiled the country's toughest budget in decades, hiking taxes for the rich and big business in a bid to slash its deficit while facing a stalled economy.

President François Hollande, in his first budget since being elected five months ago, has pledged to balance public accounts by the end of his mandate in 2017 and given himself two years to turn around the French economy.

 According to documents presented at the weekly cabinet meeting Friday, the government aims to lift revenue from household income taxes by 23% next year, while revenue from business taxation is expected to rise almost 30%.

"We're asking the wealthiest taxpayers to make an effort," Prime Minister Jean-Marc Ayrault said after the weekly cabinet meeting. "As for companies, we're bringing back justice. CAC-40 firms pay less taxes than small companies…now we're asking them to contribute."

The budget increased the top marginal income-tax rate to 45% from 41%, and detailed plans for a special tax on incomes above €1 million ($1.29 million) a year, with 1,500 individuals paying an overall rate of 75%. They will pay on average €140,000 more in taxes next year, the government said.

The biggest new tax-take from business will come from limiting the deduction of financial charges from a company's taxable income. Now, businesses can deduct financial charges from their declared taxable income, a measure the government said benefits large companies and encourages debt financing over capital. Limiting the possible deduction to 85% of a company's financial charges will increase tax intake by €4 billion in 2013, the finance ministry said.

The budget comes at a difficult time for the euro zone's second-largest economy after growth ground to a halt in the final quarter of last year and failed to expand for the following nine months. Flagging growth has pushed unemployment above 10% this year. . . .

 

A spate of plant closures that started last summer . . . cutting hundreds of jobs, has seen the government's approval rate plunge. Mr. Hollande is counting on economic growth to pick up from next year, reaching 0.8% in 2013 and 2% a year after. . . .

"This all-tax budget doesn't bring a solution to our two main challenges: how to cut public expenditure and how to improve the competitiveness of our companies," Gilles Carrez, the conservative head of the National Assembly, said in a statement. . . .

Fresh figures published Friday showed the country's debt pile kept climbing, reaching 91% of gross domestic product in the second quarter of the year, up from 86.2% a year earlier. . . .

"If we don't put a stop to this, taxpayer money will keep paying for debt reimbursement," Mr. Ayrault said.

Summing Up

Sound familiar?

It should.

Slow to no growth will result in slow to no improvement in employment.

The only thing growing consistently will be the debt burden.

Thanks. Bob.

Consumer Spending Habits Are Changing Big Time ... It's the Cellphone, Stupid!

The world is awash in debt. That's no surprise. Thus, individuals, cities and countries are reining in spending across the board. That's an inevitable outcome of bringing debt in relation to income back in balance. It will take considerably more time.

As a result of debt servicing costs, including interest and principal, demand is weaker than it otherwise would have been by now. Similarly, capacity utilization and unemployment have both been affected negatively. That's been unavoidable, too.

But in addition, there are fundamental changes underway in what we are spending our money on when we do decide to buy. Such things as fewer car and home purchases, less clothing, less entertainment, eating out and so forth on the downside, of course, but there are some upsides as well.

Consumers, cities and nations alike are buying buying different things than has been the historic case. We'll focus on consumers herein.

So let's look briefly at how consumer spending is changing and its potential longer term impact on our U.S. manufacturing base and therefore employment.

I recently saw an interesting chart about the components of our current consumer spending in relation to a few short years ago and was somewhat surprised by what it says and possibly portends as well.

Cellphones Are Eating the Family Budget is worth reading. It concerns the growing relative importance of cellphone spending in relation to other consumer purchases.

"Heidi Steffen and her husband used to treat themselves most weeks to steak . . . near their hometown of Milbank, S.D. Then they each got an iPhone, and the rib-eyes started making fewer appearances.

"Every weekend, we'd do something," said Ms. Steffen, a registered nurse whose husband works at a tire shop. "Now maybe once every month or two, we get out."

 

More than half of all U.S. cellphone owners carry a device like the iPhone, a shift that has unsettled household budgets across the country. Government data show people have spent more on phone bills over the past four years, even as they have dialed back on dining out, clothes and entertainment—cutbacks that have been keenly felt in the restaurant, apparel and film industries. . . .

Labor Department data released Tuesday show spending on phone services rose more than 4% last year, the fastest rate since 2005. During and after the recession, consumers cut back broadly on their spending.

But as more people paid up for $200 smartphones and bills that run around $100 a month, the average household's annual spending on telephone services rose to $1,226 in 2011 from $1,110 in 2007, when Apple Inc.'s iPhone first appeared.

Families with more than one smartphone are already paying much more than the average—sometimes more than $4,000 a year—easily eclipsing what they pay for cable TV and home Internet....

But the question for the industry is how much bigger bills can get before the cuts in other parts of the family budget grow too painful. . . .

Carriers fully expect people to use more data and pay more for it. "Speed entices more usage," Verizon Chief Financial Officer Fran Shammo said at an investor conference last week, according to a transcript. "The more data they consume, the more they will have to buy."

But some question where the money for that data will come from. Americans spent $116 more a year on telephone services in 2011 than they did in 2007, according to the Labor Department, even as total household expenditures increased by just $67.

Meanwhile, spending on food away from home fell by $48, apparel spending declined by $141, and entertainment spending dropped by $126. The figures aren't adjusted for inflation.

The increase in telephone-services spending masks an even higher rise in cellphone bills, because people have been paying less for landline service. . . .

Almost nine in 10 of all U.S. adults have a cellphone, according to a Pew Research Center survey. Middle-income consumers increased their telephone spending in 2011 by $59, almost as much as the $64 in additional telephone spending by the 20% of consumers with the highest incomes, according to the Labor Department data.

As wireless service gets more expensive, the trade-offs become more painful. That could threaten to further crimp consumer spending elsewhere—or slow the upward swing in consumer spending on wireless."

Summing Up

We're spending more for cellphones and less for such things as cars and eating out at restaurants.

The cellphones aren't made in America, and this is just another example of the trend away from U.S. manufacturing. It's not a cyclical but a long term structural issue.

In my view, many of our employment problems are of a long term nature and related to the downsizing of our manufacturing base. Not all of the jobs lost during the last decade will return, even as the U.S. economy recovers over time.

And as the world becomes more digitally centered and the internet becomes more integrated as part of our daily lives, our U.S. employment plight will only get more difficult unless and until we reach cost competitive parity with other countries. We simply aren't able to compete right now, regardless of what the politicians say.

So how we'll ever as a nation be able to "save the middle class" without our workforce being able to compete globally is absolutely beyond my ability to comprehend.

And if our 'leaders' ever decided to be honest and come clean about all this global competitiveness stuff, it's undoubtedly beyond the ability of our politicians and union leaders to comprehend as well. 

At least that's my take.

Thanks. Bob.

Student Loans are a Widespread Problem

Outstanding debt on student loans totals more than one trillion dollars, an amount greater than total  credit card debt.

But now comes even more surprising news, at least to me, as described in One in Five Households Owe Student Debt. Here's the story:

"It’s no secret that student debt has risen rapidly in recent years. But a new report by the Pew Research Center has some eye-opening numbers:

–Nearly one in five households, or 19%, owed student debt as of 2010, Pew found. That’s up from 15% in 2007. Among households headed by someone younger than 35 years old, 40% owed student debt in 2010.

–Between 2007 and 2010, the average balance of student debt rose 14% to $26,682, after adjusting for inflation.

–Since 2007, student debt has risen the most among the poorest and wealthiest households, as opposed to those in the middle, while the share held by those in the middle three-fifths of earners declined, according to the analysis, conducted by Pew senior economist Richard Fry using Federal Reserve data.

The last point is particularly interesting, because Pew found that while student debt has risen for both poor and wealthy, it’s a much bigger burden for the poor when taking into account their incomes and other debts owed. Among all households in the bottom fifth of earners—including those with student debt and those without—the student-loan balance was, on average, equivalent to 24% of annual income, up from 15% in 2007. Across all households in all income brackets, the student-debt-to-income ratio was 6% in 2010."

Summing Up

The problem is even bigger than I realized. Much bigger.

How it will ever be brought under control is the question for which nobody as yet has proposed a plausible solution.

It's not the low interest rate on the loan that matters most.

Instead it's the alarming burden of student loan debt and its disproportionate impact on the poor that is most concerning. 

That plus the continuing absence of enough available good jobs for our heavily indebted and financially troubled graduates in the ongoing lackluster U.S. economy.

Thanks. Bob.

Cost Competitiveness, Unions, Italy and Car Companies

When sales are expanding and the economy is growing, even poorly run businesses are able to make money.

Conversely, when sales are tough to come by, even well run businesses will have trouble staying profitable. As the old saying goes, we can't save our way to prosperity. We need to grow sales to increase profits. It's that simple.

As a result, in the private sector profit is indeed the cost of doing business. No profit = no investment = no business.

So when business has been growing for years and capacity has been increased to accommodate that growth in business, it comes as a shock to the profit making capability of the company and industry involved when a downturn in sales occurs. Think recession.

That's what is happening to the global auto industry today. Too much capacity for the sales base.

And that's where unions and government tend to really screw things up, since they're playing the growth is good game when the game has changed to staying alive in a slow to no growth operating environment.

Fiat's Auto Job Problem is illustrative of this situation and will help explain why GM and others are by means out of the woods with respect to their future viability:

"For Fiat, home is where the heartache is.

The auto maker is under huge pressure to re-affirm its commitment to Italy, where its 90,000 employees make it the largest private sector job provider. The problem is that Italy isn't much of a draw. Its auto market is suffering the most in Europe: Car sales there fell 20.2% year-on-year in August. And Fiat's efforts to improve workplace efficiency are being stifled by Italy's still-powerful unions.

Luckily, Fiat's purchase of a 62% stake in Chrysler in 2009 has paid off, thanks to the U.S. auto industry's improved fortunes. But its Italian woes are threatening Fiat's ability even to make the most of that opportunity.

Indeed, Fiat could justifiably have given up on Italy already. Beleaguered Chief Executive Sergio Marchionne has suspended a €20 billion ($25.74 billion) investment program at Fiat and sister company Fiat Industrial's Italian operations, after spending only €2.5 billion. That decision saw the Fiat boss called into talks with Italian Prime Minister Mario Monti last weekend, after which Fiat committed to maintaining its industrial presence in Italy.

Yet closing down more Italian operations would make more financial sense. Fiat's auto-making plants in Italy are running at around 50% of their capacity, well below the 78% level needed for the company to break even, Goldman Sachs estimates. To return to profitability in Europe by 2014, after an expected €700 million loss this year, Fiat would need to cut 5,400 jobs, Goldman says. . . .


Closing plants would likely cause even more of a firestorm around Fiat in Italy. It already faces substantial resistance from unions to even minor workplace changes, such as a recent plan to cut workers' coffee breaks by three minutes. Adjustments such as shifting workers on production lines for poorly-selling cars to new operations can take months to negotiate, according to one person familiar with the matter.

Fortunately, things look better abroad for Fiat. Its low-cost operations in Serbia, Poland and Turkey mean it has the lowest labor cost per hour among European auto makers, Goldman says. Moreover, the Chrysler investment has proved a master stroke: It contributed 92% of Fiat's first-half trading profit. Take out Chrysler, and Fiat burned through €1.6 billion of cash in the first half, three times as much as its similarly troubled French peer Peugeot.

But under the terms of its investment, Fiat can't get its hands on Chrysler's healthier cash flow until it owns more than 80% of the U.S. company. A bid for the remaining stake is theoretically possible now, but Fiat needs to keep enough cash to tide it through the European market woes. Italy is not just Fiat's problem; it's the stumbling block to pursuing an American solution."

Summing Up

The auto industry is a global industry. Capacity is far in excess of both current sales and any interim term projections for auto sales as well.

Thus, the weak companies will fall by the wayside while the strong will get stronger.

Interfering governments and recalcitrant unions will hasten the day when the weak ones disappear.

So let's all hope our big remaining U.S. players (GM and Ford) make the right moves, that our government bureaucrats don't interfere, and the UAW's union leadership doesn't make an already bad situation even worse.

It's tough enough out there without the government and auto unions "helping" out.

Thanks. Bob.

Breaking Bad News on the Economic Front

Although most of the economic news recently has been better than expected, that's not the case this morning.

GDP Revision, Durable Goods: Ouch! has the details:

"Need a reason why the Fed’s going all in to juice the economy? Check this morning’s round of economic data.

The economy grew last quarter at an annual rate of 1.3%, according to the Commerce Department, a figure revised lower from the originally reported 1.7% gain. Economists were expecting 1.7% growth. The lower revision was due to less-than-expected consumer spending and weaker farm inventories, which were hit by the drought.

Whether the economy is growing at a 1.7% rate or a 1.3% clip is essentially negligible to the average American. Either way, growth is extraordinary weak for this stage of the economic recovery. As Paul wrote in today’s Morning MarketBeat, “The biggest problem with a stall-speed economy is that it’s exposed, and liable to be knocked over by any sort of exogenous shock.”

Other economic data released this morning didn’t exactly paint an uplifting picture of the economy. Durable goods fell 13.2% last month, notching their biggest decline since January 2009 and underscoring the growing weakness in the manufacturing sector. Weak orders for commercial aircrafts contributed to the downbeat number. . . .

“The sharp downward revision to the GDP report and the weaker-than-expected performance in durable goods orders in August provide a sobering reminder that the overall economic recovery is continuing to struggle to regain traction,” wrote Millan Mulraine, a strategist at TD Securities. “And while the improvement in consumer confidence and housing market activity offer some hope of better growth performance this quarter, the collapse in durable goods orders and weakness in shipments suggest that capital investment activity could continue to be a sore point for the economic recovery.”

The one hopeful sign this morning came from jobless claims, which tumbled by 26,000 to 359,000, the lowest level since July. Claims had been creeping higher in recent weeks, so this is a good a sign. But expectations are still pretty downbeat for the next monthly jobs report, due one week from tomorrow."

Summing Up

And so the roller coaster ride to nowhere soon continues along its not-so-merry path.

Thanks. Bob.

NFL News ... Refs Win ... Owners Fold ...Pensions Intact

As expected, the referees prevailed in their dispute with the NFL owners. They will be back on the field Thursday.

In the end, the voices of the paying customers, advertisers, coaches and players were heard by the owners. Bad refereeing won't be tolerated.

The owners clearly didn't follow the Boy Scout motto 'Be prepared' when locking out the refs.

N.F.L. Reaches Labor Deal With Referees has the story:

"The National Football League reached agreement on an eight-year labor deal with its game officials late Wednesday night, effectively ending a lockout that forced unprepared replacement officials onto the field, creating three weeks of botched calls, acute criticism, furious coaches and players, and a blemish — however temporary — on the integrity of the country’s most popular sport.

Multimedia

Slide Show

The Replacement Officials Handbook

Relief and Resentment After N.F.L. Deal(September 27, 2012)

The agreement, which was being put in writing late Wednesday night, came 48 hours after the nadir of the league’s experiment with replacement officials, when an incorrect call on the final play of the Monday night game cost the Green Bay Packers a victory against the Seattle Seahawks. . . .      

 

Commissioner Roger Goodell is temporarily lifting the lockout so a crew of regular officials can work the Ravens’ game against the Cleveland Browns in Baltimore on Thursday night. The members of the officials’ union will then gather in Dallas on Saturday and are expected to vote to ratify the contract, with regular officials expected to then work Sunday’s games.

 

Goodell said: “This agreement supports long-term reforms that will make officiating better. The teams, players and fans want and deserve both consistency and quality in officiating. We look forward to having the finest officials in sports back on the field.”

 

Scott Green, the head of the officials’ union, said, “We are glad to be getting back on the field for this week’s games.”

 

Under the terms of the deal, pensions will remain in place for current officials through the 2016 season. New officials will get a 401(k) instead. The average official’s salary will rise to $173,000 in 2013 from 149,000 in 2011.

 

Beginning in 2013, the N.F.L. will have the option of hiring a number of full-time officials; officials currently are part-timers.

 

The negotiations with officials were conducted largely by Goodell and the league’s top lawyer, Jeff Pash, with little of the direct owner involvement that was featured during negotiations with the players last year."

 

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Summing Up

 

And so silliness season ends for pro football and it's back to the real game on the field.

 

And one more thing: there are a grand total of 121 union represented NFL referees.

 

Thanks. Bob.

NFL and Pensions for Refs ... The Business of Pro Football

It sure looks like the N.F.L. referees' lockout will end in time for this weekend's games. One blown call on Monday night sealed the deal.

For those interested in what Hall of Famer Fran Tarkenton says about it, please take the time to read Pro Football Keeps Fumbling.

For our purposes herein, we'll focus on the reasons for the dispute --- pensions and employee evaluations. Sound familiar?

In addition to giving owners the right to evaluate and where necessary terminate unqualified referees, the main item in dispute is pensions vs. the adoption of 401(k) plans for current employees.

The refs have hung tough and probably received an unintended boost from the blown call by replacement officilials at the end of the Packers and Seahawks Monday night game. If so, that's too bad.

N.F. L. and Referees are Close to a Deal updates the story:

"The N.F.L. and the referees’ union were closing in on an agreement to end the lockout . . . . 

If the resolution is completed Wednesday, it will come two days after the end of Monday night’s game between Green Bay and Seattle, which was marred by blown calls by the replacement referees that have caused an uproar over the damage being done to the game’s integrity.

A remaining issue is how quickly the regular referees can return to work. There is a game Thursday night between Cleveland and Baltimore, as well as the full schedule Sunday.

The lockout began in June and centered largely around the issue of referees’ pensions, which the league sought to eliminate and replace with 401(k)'s. The league also sought more control over replacing officials it deems are underperforming during the season. . . .

The union has fought to maintain its members’ pensions and control over the makeup of their crews. The union has argued its pension costs (are) a tiny percentage of the N.F.L.'s $9 billion in annual revenue."

Perhaps an even better summary of the nature of the dispute is contained in Officially Horrible, appropriately subtitled 'Americans are slow to anger, except against lousy football referees.' Here's what it says:

"What could possibly make Wisconsin Governor Scott Walker agree with organized labor? Answer: replacement referees in the National Football League.

Like all good cheese-heads, Mr. Walker is appalled that the guys in black-and-white stripes managed to convert a game-saving interception for the Green Bay Packers on Monday night into a game-winning touchdown for the Seattle Seahawks. The Governor is calling for a return of the regular zebras.

The howling over this threat to the integrity of pro football seems to exceed in passion and intensity any of the current political campaigns. Many fans seem willing to pay for labor peace in NFL officiating at almost any price. Note the contrast to Americans' general refusal in recent years to meet the demands of government employee unions. This is perhaps a commentary on the relative quality of the products offered on the field and in the bureaucracies.

But even fans who want the NFL to open its checkbook to solve this problem might wonder what this fight is really all about. Last year the average NFL ref made about $150,000 for a half-a-year commitment that adds up to weekends, a few days of summer training, occasional meetings and conference calls and some study leading up to game day. The referees currently receive an NFL pension, which is the heart of the dispute. The NFL wants to convert the refs to a 401(k) plan, but the refs want only new officials to get that deal, while current refs continue to receive pensions.

Such are the riches of the business known as the NFL that Commissioner Roger Goodell will be under enormous pressure to cut a deal with the refs that includes the pension status quo. This will raise costs that will eventually mean higher ticket prices."

Summing Up

Employees should be qualified and perform at satisfactory levels. Employers have every right to insist on that. To think otherwise is nuts.

At the same time, the lack of qualified referees shouldn't disrupt or threaten the integrity of the entire league when the owners are unable to put competent referees on the field.

Accordingly, it is the responsibility of the owners to either not play scheduled games or have qualified replacements on the field.

In sum, it sure looks to me like the owners really screwed up this one. Big time.

Now the referees will win a fight they shouldn't have won, and the season will resume by this weekend.

And with the current referees' pensions intact, sending a signal throughout America that pension cost containment isn't really that big of a deal after all.

But as we all know, pensions are both a tremendously big deal and an unaffordable one in the public sector.

Oh well, maybe we shouldn't be too concerned about the private sector N.F.L. owners and their refs.

At least it's not the taxpayers' money that's at stake here. Just the owners, the refs and the ticket buying customers of the future.

Thanks. Bob.

More Good News on Housing Today

New home sales dip in August, prices soar has today's good news on housing. It's subtitled 'Increased demand pushes up cost by record 11.2%:'

"Sales of newly built homes in the U.S. fell slightly in August as prices rose a record 11.2%, but demand remained at a two-year high.

Sales of new homes dipped to an annual rate of 373,000 in August from 374,000 in July, the Commerce Department said Wednesday. Yet the pace of sales in July, originally reported as 372,000, was the highest since April 2010. . . .

Although demand for new homes has been on the ascent — sales are up nearly 28% from one year ago — a huge jump in prices may have deterred some buyers last month.

The median sales price of a new home surged 11.2% last month to $256,900, the biggest one-month increase ever recorded. Prices have climbed 17% over the past year.

Prices of new and previously owned homes have been rising since the spring. Higher prices might even be drawing some people into the market who otherwise might have waited.

Yet the low stock of new homes might also have ratcheted up competition, spurring many buyers to increase their bids. The number of home available for sale in August remained at a record low 141,000.

Buyers were especially active in the Northeast, where sales shot up 20%. Sales also rose 1.8% in the Midwest and almost 1% in the West.

Sales fell 4.9% in the South, however, the region in which the real estate market has been generally strongest. . . .

Even if the long-awaited recovery in housing is here, the real-estate market has a long way to go. Purchases of new homes fell to just 306,000 in 2011, the lowest level recorded since the government started to keep track in 1963.

By contrast, new-home sales averaged from 877,000 to 1.28 million annually in the six years before the 2007-2009 recession. If the economy were fully recovered, analysts say, sales of new homes could top 1.5 million a year.

The supply of new homes available for purchase on the U.S. market was unchanged at 4.5 months. The low level of inventory, growing demand and rising backlog of orders indicates builders are increasing construction, though sales could falter if the U.S. economy weakens.

So far there’s little evidence of that."

Summing Up

All the housing signals are pointing in the right direction, and that's an excellent sign that the U.S. economic recovery is likely to continue at a steady and uninterrupted pace.

That said, the fact that new home sales in 2011 were 306,000 compared to a "normalized" full recovery rate of 1.5 million means we have a very long way to go to get to a healthy housing market again.

Of course, that will take another several years for sure, but at least we're steadily making progress now and that's great to see.

Thanks. Bob.

Rising Home Prices Make Everything Better

Rising Home Prices Brighten Economic Outlook describes a developing good news story about the economic progress we're making:

"They’re back! Home prices, that is.

Two reports out Tuesday confirm an uptrend in home prices. The S&P/Case-Shiller home price index of 20 major cities increased 1.2% in the 12 months ended in July, beating expectations. Later in the day, the Federal Housing Finance Agency reported its measure of U.S. home prices increased 0.2% in July over June. That rise capped off seven consecutive monthly gains.

To be sure, real estate values aren’t soaring as they did during the housing boom, and the level of prices remains about 30% below their 2006 highs, according to S&P data. But you have to crawl before you can walk.

The news has to bring joy in the hallways of the Federal Reserve. That’s because rising home prices bring a hat trick of benefits to the economic outlook.

First and most obviously, rising prices indicate the housing market is in better balance. The supply of homes has shrunk considerably since the worst of the housing recession, while low rates and somewhat better job markets have lured in more buyers. A relatively low level of inventory coupled with rising demand will support greater homebuilding in the future, a plus for real gross domestic product.

Second, better values mean fewer homeowners remain underwater on their mortgages. Positive equity makes defaults less likely. That’s a plus for banks’ balance sheets.

Lastly, consumers feel more confident and wealthier if their homes aren’t losing value like a sieve leaking water.

Better news on real estate could explain why surveys of consumer confidence posted better-than-expected readings in September–even as other data for this month, such as factory surveys and weekly jobless claims, remain weak.

Happier, richer consumers are more willing to spend–a trend sure to hearten central bankers.

Economists at Deutsche Bank call homeowners’ equity “the biggest driver of household buying power.” By their calculations, home equity grew by $827 billion in the four quarters ended in the second quarter of 2012, the largest year-over-year increase since 2005.

Coupled with positive household cashflow and better credit conditions, rising home equity should support real consumer spending at about a 2% pace–as long as gasoline prices don’t spike, the DB economists forecast.

“While hardly robust,” they write, “[the pace] will be enough to assure further modest expansion in overall real GDP growth and help minimize recession risk.”"

Summing Up

While Happy Days may not be here, at least happier days looks like they are.

We have a long way to go, but we're clearly headed in the right direction.

As housing sales and prices improve, even if slowly, everything else will get better, too.

So let's pay continuing and close attention to housing. It will slow during the fall and winter, of course, but perhaps it's building a base to perform solidly next spring and summer and in the years to follow.

If so, that's good news for everybody.

Thanks. Bob.

What Italy's "Stop the Decline" New Political Party Can Teach Us

I never thought political parties in Italy would have anything constructive to say about how things should work in the U.S. But then again, maybe it's time we stop and listen to what the "Stop the Decline" party has to say about creating the conditions for economic growth.

Italian Politics After Monti says it plainly:

"The good news is that Italy is safe. Even Moody's, in a report last month, conceded that if Italy continues its planned reforms, it could return to pre-crisis levels of GDP as soon as 2013. But safety—remaining in the euro zone—is not enough.

The bad news is that Italy still lacks a long-term plan to spur growth and investment, beyond the implementation of short-term crisis measures. Even if there were such a plan, Italian politicians in the past have consistently shown themselves unable to rise above petty squabbling and rivalries, which they must in order to achieve serious long-term reform. . . .

A new player, called Fermare il Declino or Stop the Decline, is emerging from this vacuum of political ideas with new proposals and faces. The movement gathers professors, entrepreneurs, professionals, journalists and Italians concerned about the future of the country. Since Stop the Decline first published an appeal in six national newspapers at the end of July, more than 22,000 people have joined the movement.

Although most of its founders are professors of economics, this is not a utopian initiative of the "best and the brightest" seeking a voice in newspapers, blogs and conferences. The movement represents a breaking point in the Italian political scene. Recent polls suggest that more than 50% of Italians are anxious for change but do not know who to vote for. A new movement could obtain 20% of seats in the next parliament and thus have a serious impact on future policies.

While other parties promise vague reforms in a distant future, Stop the Decline's approach is coherent and clear-cut. . . .We propose 10 structural reforms to jolt Italy's economy:

1. Reduce the debt.

2. Cut public spending as a percentage of GDP by at least 6% within five years.

3. Lower Italy's overall tax burden on the private economy by 5% over the next five years.

4. Liberalize protected sectors, including transport, energy, telecommunications, and privatize state-owned television stations.

5. Replace subsidies to inefficient companies with more unemployment benefits.

6. Eliminate conflicts of interest between business and government; increase transparency in business taxation and regulation; establish robust protections for whistle-blowers who expose corruption.

7. Ensure prompt access to efficiently administered justice; promote judges on merit rather than seniority; improve jail conditions.

8. Increase labor-market flexibility to create jobs for women and young people.

9. Improve the education system by encouraging competition and meritocracy; increase government funding for research based solely on merit.

10. Delegate more power and responsibility to local governments, while maintaining their accountability.

Some of these changes may seem obvious to citizens in other countries, but in Italy they would be nothing short of revolutionary. . . .  But the fact is these are the practical changes that Italy needs to keep its economy from backsliding even further.

Italy has long had one of the slowest-growing economies and some of the highest tax rates in Europe. Its large and heavily politicized public sector is plagued by crony capitalism. Its rigid labor market has led to one of the world's highest under-30 unemployment rates. . . .

Italy needs to change. If not now, when?"

Summing Up

Ditto for the U.S.

That's my take.

Italy advising us -- who'd a thunk it?

That said, their prescription makes lots of sense, so we should definitely give it a try.

Good ideas have no nationality. Besides, that's the way we used to do things, and it worked really well for all Americans. And it will again, given a chance.

Thanks. Bob.

More Good Breaking News... Consumer Confidence Jumps

Housing starts, sales and prices are up. That's good.

Also showing substantial improvement is the latest reading on consumer confidence. That's good, too.

Consumer-confidence gauge at 7-month high has the details:

"Led by expectations, a gauge of consumer confidence jumped in September to its highest level in seven months yet remained relatively low, the Conference Board reported Tuesday.

The consumer-confidence index increased to 70.3 in September — the highest level since February — from a revised 61.3 in August. A prior estimate for August pegged the level at 60.6. Generally when the economy is growing at a good clip, confidence readings reach at least 90.

“Despite continuing economic uncertainty, consumers are slightly more optimistic than they have been in several months,” said Lynn Franco, director of economic indicators at the Conference Board, a New York–based research group.

September expectations increased for employment and business conditions, while consumers’ views on the present situation also rose.

“These results could signify a crucial turning point as the housing headwinds turn into tailwinds propelling the consumer to make more of a dent in the pent-up demand as the holiday shopping season approaches,” said Michael Dolega, an economist at TD Economics. . . .

Looking at recent data trends, analysts at RDQ Economics in New York said households feel that the economy is “edging in the right direction,” and a sustained confidence gain “will be a wind in the sails of the president’s reelection chances.”

Summing Up

Similar to this morning's earlier report on the improved outlook for housing, the latest news on consumer confidence, while not healthy, is headed in the right direction. So maybe we've safely reached first base here, too. At least we're on base and with a chance to score.

Now let's hope nothing surprising happens to derail the budding U.S. economic recovery which is underway.

We can all use some ongoing good news about the U.S. economy's recovery. In my view, and perhaps yours as well, we've already had enough bad economic news to last us for at least another decade or more.

So while the news isn't great, it's not all bad either. In other words, slow growth is better than no growth and infinitely better than an uninterrupted long period of recession.

Maybe we should label this as a time to be long term optimistic while patiently impatient about the shorter term.

Thanks. Bob.

Breaking News ... Housing Continues to Improve ... That's Good News for the Economy

To score a run in baseball, you have to cross home plate. To do that, you first have to touch first base, then second, and then third base before heading for home.

It's the same basic idea with a sustainable housing recovery, which necessarily precedes any lasting economic improvement in the broader U.S. economy.

So while it's no time to declare victory, it is appropriate to note that we've reached the bottom and are beginning the long climb back.

Case-Shiller shows home prices rise sharply again has this morning's breaking news:

"U.S. home prices rose in July for the fourth straight month to reach their highest level in nearly two years, according to an index released Tuesday. The S&P/Case-Shiller 20-city composite posted a 1.6% increase in July in the wake of a 2.3% advance in June. And home prices are now up 1.2% compared to one year earlier. For the third month in a row, all 20 cities in the index recorded price increases. The rise in home prices reflects increasing demand for new and pre-owned homes following the real-estate market's worse slump in modern times. "The news on home prices in this report confirms recent good news about housing. Single family housing starts are well ahead of last year's pace, existing home sales are up, the inventory of homes for sale is down and foreclosure activity is slowing," said David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices. "All in all, we are more optimistic about housing." Despite the recent increase in prices, homes still sell for about 30% less compared to the market's 2006 peak."

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In baseball terms, let's just say we've safely reached first base and will be heading for second soon. At least that's the plan.

Thanks. Bob.

In Health Care Matters, Government Listens When Elections Are Near ... How About Listening to What the Free Market System Has to Offer, Too?

Wow, that was quick. Now we know the Obama team reads the newspapers. We also know it's election season, too.

On Saturday the New York Times reported that hospitals and doctors were ripping off Medicare by billions of dollars by abusing the new "money saving" electronic billing system.

Please see our post of September 22 on "Medicare and Third Party Payers ..." for the full story.

Attorney General Eric Holder evidently read the article, as did President Obama and the rest of the administration. They reacted strongly yesterday as described in U.S. Warning to Hospitals on Medicare Abuses:

"Saying there are “troubling indications” of abuse in the way hospitals use electronic records to bill for Medicare and Medicaid reimbursement, the Obama administration warned on Monday that it would not tolerate what it called attempts to “game the system” and vowed to vigorously prosecute doctors and hospitals implicated in fraud. 

 

. . . the letter continued: “There are troubling indications that some providers are using this technology to game the system, possibly to obtain payments to which they are not entitled. False documentation of care is not just bad patient care; it’s illegal.”

 

“Obviously, we are very concerned” that the adoption of electronic health records “could lead to coding inappropriately,” an administration official said. While aggressively looking for any providers who are committing fraud, the administration will also consider whether it needs to make changes in the way it pays for care.

 

The letter, sent to five major hospital trade associations, cited possible abuses including “cloning” of medical records, where information about one patient is repeated in other records, to inflate reimbursement.

 

“There are also reports that some hospitals may be using electronic health records to facilitate ‘upcoding’ of the intensity of care or severity of patients’ condition as a means to profit with no commensurate improvement in the quality of care,” the letter said.

 

The letter was sent two days after a front-page article in The New York Times detailed the ways in which the greater use of electronic records by hospitals and doctors might be contributing to a rise in Medicare billing. Much of the higher billing is taking place in hospital emergency rooms, where hospitals are classifying many more patients as sicker and needing more care.       

 

Hospitals received $1 billion more in Medicare reimbursements in 2010 than they did five years earlier, at least in part by changing the billing codes they assign to patients in emergency rooms, according to an analysis by The Times of Medicare data from the American Hospital Directory. Regulators also say physicians have changed the way they bill for office visits similarly, increasing their payments by billions of dollars. . . . 

 

The issue of Medicare costs is a contentious one in the presidential campaign and has been a centerpiece of the Obama administration. As part of a push that began under the Bush administration, government officials are spending tens of billions of dollars to encourage hospitals and doctors to use electronic records as a way to reduce costs and improve care. . . . 

 

Rich Umbdenstock, the chief executive of the American Hospital Association, which represents more than 5,000 member hospitals, responded to the administration’s letter, saying hospitals “take seriously their obligation to properly bill for the services they provide to Medicare and Medicaid beneficiaries.”

 

“We agree that the alleged practices described in your letter, such as so-called ‘cloning’ of medical records and ‘upcoding’ of the intensity of care, should not be tolerated,” he wrote in a letter.

 

The letter also called for Medicare to develop clear national guidelines for the billing of hospital emergency room and clinic visits."

 

Summing Up

 

Here are a few questions for the Obama administration, health care providers and my fellow Americans to ponder.

 

Can government ever make better decisions than individuals acting in a free market? Can a few regulators and government elitists take care of the many and make detailed rules to govern and effectively administer the health care system, which now represents 1/6 of our economy? Or will all of us always know more than a few of us can ever know, as the free market approach implies? Shouldn't we convert to individual vouchers from government's third party payer system for health care?

 

To answer these questions, I recommend that the Obama administration, health care providers and We the People take the time to review what a recent commentary had to say in Notable & Quotable:

 

"Economist Donald J. Boudreaux explains why the data necessary to rationally plan a market economy cannot be known to central government.

 

Donald J. Boudreaux writing in thefreemanonline.org, Sept 1:

A market economy is indescribably vast and complex—its success depends on so many intricate, changing details all somehow being made to work smoothly together that the "facts" that are essential to its thriving cannot be catalogued with anywhere near the completeness that can be achieved by a 21st-century scientist studying and cataloging the "facts" that enable sparrows to fly. A sparrow is complex compared, say, to a limestone rock. Compared to the modern market economy, however, a sparrow is extremely simple.

A surge in the supply of steel in Detroit for the month of October 2012—an uptick in consumer demand for a specific color of car and a downtick in demand for another color—the possibility of using a new financial instrument to spread investment risks more widely—unexpected difficulties in hiring workers who possess a certain set of skills—an innovation that lowers the costs of advertising—an electrical failure that threatens to shut down for several days a section of a factory—a trucking company that discovers it underestimated the fuel costs of delivering 1,000 new automobiles to dealerships throughout New England. . . . Dealing with details such as these—details that Hayek called "the particular circumstances of time and place"—is not incidental to the success of a modern economy; it is of the essence.

Awareness of these facts, and of knowledge of workable options of how to respond to them, are key to the growth and continued success of any market economy. These facts are dealt with successfully only in market economies and only to the extent that individuals on the spot are free to respond to these facts as they, individually, see fit.

Yet no observer or planner or regulator can see and catalog all these highly specific facts. The facts—each of which must be dealt with—are far too numerous at any moment for an observing scientist to catalog even if that moment were to be frozen for decades. Greatly intensifying this complexity is the reality that these facts are forever changing. A moment from now many of these facts will be different from what they are at this moment.

Nevertheless, too many people, including politicians, continue to believe that because they can observe a handful of bulky facts about the economy, they can thereby know enough to intervene into that economy in ways that will improve its operation. That belief, though, is hubris. It's very much like believing that you'll fly if you simply strap on a pair of wings and commence to flapping madly."

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"Hubris" describes very well how government officials think and what they believe.

"Flapping madly" describes how government officials behave and act in health care and far too many other matters as well.

No matter how smart or even well intentioned the bureaucrats and politicians believe themselves to be , they'll never be able to keep pace with individuals acting in their own best interests in a free market based economy.

As free to choose individuals, We the People will always know more than the few government knows best officials will ever know. And they'll always be too slow to react, too.

It's as simple as MOM vs. OPM.

But at least we know the government guys can read the New York Times, and that's a start, I guess.

Thanks. Bob.