Sunday :: Oct 16, 2005

Baby, It's COLD Outside!

by pessimist

It doesn't matter where you get your news. It all reveals clearly that it is going to be a long and cold winter for a lot of people, due to the increased energy costs which resulted (in part) from increased world demand and the reduction in refining capacity in the US. For this, thanks are due to the two Divine-retribution hurricanes and another on the way.

Increased energy costs, however, are just one economic problem facing the average American consumer today:

Post-Hurricane Energy Costs Lift Consumer Prices
The 1.2% rise last month is the biggest since 1980

Hurricanes Katrina and Rita cut a swath of destruction through the national economy last month, with surging energy costs pushing consumer prices to their highest monthly rise in 25 years, the government said in a flurry of economic statistics Friday. A record 12% jump in energy costs, pushed higher by Katrina and Rita, was responsible for 90% of the increase, according to the Labor Department... But the stock market rallied off the news, largely because inflation outside of energy and food was relatively tame, suggesting that businesses have yet to significantly pass higher energy costs on to consumers.

Other data also weren't pretty, with industrial production dropping to its lowest level in 23 years and a survey of consumer confidence hitting a 13-year low. Retail sales were relatively weak, and a measure of worker earnings took its worst drop in nearly a decade.

"We are in the midst of a protracted wage slump," said Jared Bernstein, a senior economist with the liberal Economic Policy Institute, "a troubling trend that is largely going unnoticed by policymakers."

Of course it's largely going unnoticed by policymakers! The facts don't fit the theory!

But I digress.

[T]he Labor Department said average weekly earnings of production workers, after adjustment for inflation, fell by 1.2% in September, its steepest fall in nearly 10 years. For the 12 months ended in September, earnings fell 2.7 percentage points short of keeping up with inflation.

In other reports Friday, retail sales rose only 0.2% in September, reflecting a large decline in auto sales after the petering out of huge discount-pricing promotions over the summer. Retail sales would have declined 0.2% without a jump in gasoline sales that reflected prices that at one point soared above $3 a gallon.

Industrial production fell by 1.3% in September, the Fed reported, as hurricane-related shutdowns of Gulf Coast plants contributed to declines of 3.3% for chemicals and 6.4% for petroleum and coal products.

Also, the University of Michigan said its national survey of consumer confidence fell in mid-October to 75.4, while its measure of consumers' inflation expectations rose. "Consumer spending will weaken in the months ahead," said survey director Richard Curtin. [S]oaring home prices have reached their peak, and the prospect of a winter of high heating bills ... could stymie consumer spending.

Despite recent rosy commentary from some of our Wrong-Wing Wregulars, the higher energy costs are taking their toll:

Rising gas cost derails budgets
Energy expenses sapping economy

Not since 1980 has inflation risen so quickly from one month to the next. No problem, said Wall Street: Core inflation, which excludes food and energy, barely budged. The Dow Jones industrial average rose 70.75 points, while the Standard & Poor's 500 index and the Nasdaq composite index also gained.
Get real, said Main Street: Consumers don't exclude energy and food from their monthly purchases. Soaring gasoline prices have torn through paychecks at the fastest rate in years.
"My husband drives 80 miles a day, so higher prices really affect us," said Sheila Martinez, a Woodland Hills bookkeeper. "We're more cautious with our money. We hardly eat out now. I'd like to take my kids out more, but we can't."

[T]he squeeze on consumers is apt to get tighter. Natural gas prices are expected to jump by up to 90 percent this winter, when consumers use the fuel to heat their homes.

Higher crude prices could lead to further price hikes because oil isn't just used to make gasoline. It's also a critical ingredient in making plastics and other products. "Average fuel prices are going to be higher than they have been in the recent past," said Waco, Texas, economist Ray Perryman. "As petroleum works its way through the economy, we are going to see inflation that's going to be a little bit higher than it has been in the recent past."

Annual inflation could rise to the range of 3.5 percent to 4 percent, Perryman said, instead of the 2.5 percent to 3 percent range that has been typical in recent years.

The business community can see the handwriting on the wall that Bu$hCo can't seem to stall:

The economic outlook has the nation's top business people worried. Chief executives' confidence fell to its lowest level in four years, The Conference Board reported Friday. The group's measure of CEO confidence fell 5 points, to 50, in the third quarter, its lowest ebb since the end of 2001, just after the Sept. 11 terrorist attacks and as the corporate scandals were unfolding.

A reading of more than 50 points reflects more positive than negative responses.

"CEOs' confidence was already waning in the face of rising energy costs, and Hurricane Katrina has further exacerbated this situation," said Lynn Franco, director of the Conference Board Consumer Research Center. "Confidence has fallen to a four-year low and will likely remain subdued for the rest of 2005."

The consumer - whose hard-earned wages drive the economic engire - can also see the coming hardships:

[T]he University of Michigan's consumer sentiment index fell to its lowest level in 13 years in October. Rising energy costs are an obvious cause. Another reason is that wage increases have been lagging price hikes during most of this year.

"The problem isn't simply that families are facing higher prices, particularly at the pump," said Jared Bernstein, senior economist at the liberal-leaning Economic Policy Institute. "It's also that they're facing lower wages. If wages were keeping pace with inflation, the pinch wouldn't be as hard."

Falling income

The U.S. median income has fallen for five years in a row, according to the U.S. Census Bureau. That's the longest such decline since officials started tracking those numbers in the 1960s, Bernstein said. "It's unprecedented," he said. "There is a large and growing gap between how the economy is performing and the living standards of the people stoking the engine."

Kathryn Robertson, 38, said she couldn't agree more. Money has long been tight in her mobile home in Forestburg, Texas, where she lives with her husband, a hospital maintenance worker, and her three teenage children. Their combined income is about $1,200 a month, and skyrocketing gasoline prices have pushed their finances to the breaking point. "My family has gone from 'Everything's OK' to 'Oh, my gosh!"' she said.

She's behind on her rent. Her electric bill has gone up this year, and she's bracing for further hikes in the coming months. She hasn't paid her telephone bill in two months. She estimates that her 1988 Jeep gets about 15 miles to the gallon, but she can't afford a more fuel-efficient car. As for food, "If it's not Ramen noodles or macaroni, we pretty much don't eat," she said. "We have hot dogs once in a while." Celebrating Thanksgiving is probably out, and the same goes for Christmas. Robertson's family probably won't even bother putting up a Christmas tree or buying a holiday ham.

But the real question is whether she can keep her plans for a better future on track. Robertson is studying to become a special-education teacher, which she says would boost her up the economic ladder. But if energy costs keep rising, "it probably means I'm going to have to quit school," she said. "That's going to keep us right where we are."

I wonder if she voted for King George?

But at least she gets it. Some still don't:

For Mike Kennedy, a 45-year-old occasional professional surfer from Canoga Park, inflation has hit him in the worst possible place. When he stopped off at Scotland Yard, an English pub on Sherman Way, his bar tab seemed a tad higher. And, boy, was he suddenly mad about inflation. "Yeah!" he bellowed. "Beers are up 25 cents! They won't cut me any slack!"

All over the nation, state governments are taking steps to ease the costs of the coming winter heating season: Washington, Pennsylvania, Indiana, Colorado, Arkansas, Oklahoma, West Virginia, Utah, Montana, and many more.

Even in my neck of the woods - Southern California's Inland Empire - it can get cold in the winter, and I can attest from decades of residence that the costs of heating a typical SoCal home are significant. Even here, in (usually) Warm, Sunny SoCal, people are seeking energy assistance:

Utility customers like Evelyn Thompson have been watching their heating bills rise as the price of natural gas soars. The retired school secretary says friends had already prepared her to expect a big jump in her bill but she an her husband were still shocked to see the total. "Our bill has gone up to $171.00 a month." For the couple living on [a] fixed income the decrease in assistance couldn’t have come at a worse time "We don’t have a gas range, dishwasher or garbage disposal, I wash clothes during off peak hours and hang them on the line outside. What more can we do?" asks Thompson.

Thompson says she and her husband will have to dip into their retirement savings to pay winter heating bills yet they consider themselves lucky knowing that many of their low income neighbors don’t have savings to fall back on.

"It’s really a hardship."

Since her husband died a few years ago Ola Mae Williams has lived in her family’s three bedroom house alone. She has watched in dismay as her utility bills ballooned. "It has almost tripled since last winter. I’m afraid to look at this month’s bill." Williams has had to turn to her grown children for help paying her bills.

Last week Williams and Thompson lined up at a local senior center to apply for assistance and discount programs under the Edison Energy Management Assistance program.

Last winter federally funded state programs helped Thompson and a record 5 million low-income Americans pay their heating bills, but demand is expected to increase this winter due to a return to normal colder winters, high joblessness rates and heating fuel costs. "As it stands, states will have to divide the assistance pie into smaller pieces between more applicants," Mark Wolfe, head of the National Energy Assistance Directors’ Association, said.

Note how our 'compassionate conservative' government helps those in economic need:

This week more than 80 lawmakers urged Congress to add $4 billion in funding to the federal Low Income Home Energy Assistance Program (LIHEAP), noting that seniors and the poor are already being clobbered by skyrocketing gasoline prices. A broad energy law that went into effect last month called for $5.1 billion in annual spending for LIHEAP.
But an appropriations bill for the Health and Human Services Department, recommends keeping funding at the current level.

This leaves states like Iowa in a deep drift of the dreaded yellow snow:

Federal heating help holds steady, despite rising needs

At a time when Iowans fear skyrocketing heating costs, an announcement earlier this week seemed to say the federal government was giving Iowa an extra $27.7 million for heating assistance.

But the director of the state heating assistance program, Jerry McKim, says the money is no windfall. Instead, it's the routine payment for the program's regular budget, with nothing extra to help Iowans covera huge spike in heating costs. "This is nothing new. This is just what we expected," he said.

McKim says repeating the funding level from last year won't be enough, considering heating costs are expected to rise 40 to 60 percent.

Last winter, the program gave more than 85,000 Iowans an average benefit of $317. But this year, nearly every projection of household heating costs shows an average rise of at least $300 for the season, effectively canceling out the LIHEAP benefit, unless more money is plowed into the program.

"If my funding stays level from last year, this is going to be a horrible winter, not just for Iowans, but for low-income people all over the country," McKim said.

Ivan Gelfand, who bills himself as 'America's Money Man', has this to say [emphasis added]:

Please Wake Up and Smell the Roses - Inflation, Interest Rates, and Deficits
October 15 2005

To me, there was no surprise when the September U.S. consumer price figures were released which showed an increase of 1.2%. This was the largest in 25 years. There was no surprise when September energy prices increased 12%. And still there was no surprise when the September core inflation grew only 0.1%.

Quoting from the Wall Street Journal Online – "CPI is Great…if Oil Doesn’t count – U.S, consumer prices rose at the fast pace in 25 years, and that is somehow a positive for the economy and the markets? Puhleeze."

Mr. Labor Department, please wake up and smell the roses. My August newsletter was headlined – Is Core Inflation Tainted?. I asked - "Why exclude these dramatic increases in energy, if consumers are forced to reduce their spending…?"

Why is this being observed now when this was so evident several months ago? Why not face the facts now?

Consumer inflation has now gone up 4.7% in the past 12 months. This is the highest since 1991. However, core inflation has only increased 2% for the same period. Granted, core inflation (excluding food and energy) will eventually increase, caused by the effects of the increases in energy, as these costs filter down to the multitude of products using petroleum derivatives.

With consumers showing a lack of confidence (Consumer Confidence statistics) in the economy and their personal spending, plus a great concern about the high cost of gasoline, the outlook for the upcoming holiday retail sales is not very promising. If lucky, many retailers might see increases of 2% to 3% from 2004. Many retailers may see actual declines, year over year, for the first time in 20 years. Quoting Leon Nicholas, (, "a consumer markets analyst with Global Insight (a business consulting firm) warns that most consumers will be hit with a double whammy at the height of the holiday spending. Not only will there be high gasoline prices, but the first big heating bills of the cold weather season will come in November….even larger ones in December."

So let the sales begin. Expect to see extremely deep discounts on merchandise shortly after Halloween. As a result, the expected 5% increase in 2005, might be in the 3% to 4% area, a major disappointment. 2006 shouldn’t fair much better with retail sales increases in the area of 4%.

As expected the housing markets have begun to cool down. It is now a buyers market as inventories of unsold existing homes is now at a high level. It has not become a problem yet, but if the economy should slow you will begin to see a glut on the market. Mortgage rates continue to rise to 6 month highs. The 30-year fixed mortgage is now just shy of 6%. With rates expected to further rise, expect increases in sales and prices to slow.

So much for that highly-touted economic boom we've been hearing about since the reign of King George began.

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