Saturday :: Jul 29, 2006

Rough Diamonds? Tough!

by pessimist

Want to know what is considered important in the world? Read up on the difficulties confronting the holders of one of the most expensive inventories in the world:

Trying times at De Beers
by Justin Brown
28 July 2006

The world's largest diamond miner, De Beers, on Friday said it expects the outlook for the global rough diamond market for the second half of 2006 to be difficult. De Beers's marketing arm, the Diamond Trading Company (DTC), is estimated to have lowered the prices of its smaller diamonds by 5% to 7%...

As our wrong-wing friends would be quick to remind us (if they were showing up for RNC work today!), lowered prices mean reduced profits - a cardinal sin in capitalist circles. This situation is ripe for a further exploitation of the miners who actually pull diamond wealth from the rock in which it's formed. While there are instances of corporate benevolence in mining news, more generally African miners have it rough (pun intended).

Besides labor costs cutting into the facet of profits (pun intended), what other issues face companies like De Beers?

"The risk factors in the second half was [sic] rising fuel prices and higher interest rates, stock-market volatility as well as global instability," De Beers MD Gareth Penny said.

In other words, topics with the usual carats (pun intended). But let's not only point the finger at the mining companies themselves. The diamond markets themselves are also affected - as will their workers be:

Investment analysts have been concerned about the level of cutting-centre debt. The world's key diamond cutting centres are in Belgium, China, India and Israel. There is a lack of liquidity in cutting centres due to rising interest rates, Penny said.

Not to mention rising fuel prices and local market volatility due to local instability (particularly in India and Israel).

"This results from the impact, on rough diamond demand, of higher interest rates, higher gold and platinum prices in the retail jewelery product, reduced margins [read: lower profits] across the distribution pipeline, and the increasing need to manage polished inventory levels [higher interest rates on loans taken out to buy inventory]," the group added.

Don't you feel sorry for these jewelry people, whose personal wealth may only be in the millions?

Before long, the consumers of their products will also feel the pinch of the costs affecting suppliers. Maybe they already are:

US economy slows in second quarter

US economic growth dropped to a 2.5 per cent annualized rate in the second quarter, less than expected as business investments fell and consumers pared back spending, the US government said Friday. Climbing energy prices and higher interest costs contributed to the slow down.

The first estimate of the quarter's Gross Domestic Product (GDP) dropped markedly compared to the brisk 5.6 per cent annualized growth of the first three months, the US Commerce Department said. Analysts had expected a 3 per cent growth rate, according to surveys by Bloomberg financial news service.

At least in Bangkok, the money people understand the connection between rising costs and reduced consumer spending - and also what it means to the supply side:

Consumer expenditures rose at an annual rate of 2.5 per cent in the second quarter, connected to a slowdown in the housing market and high oil prices. In the first quarter, consumers spent 4.8 per cent more.

Gee - let's review. consumers spend, economic growth is strong. Consumers STOP spending, economic growth is weak.

NAH! It couldn't be that simple, or more Red Staters would understand this! Let's try looking in at Singapore and see if they have a different take on this alleged cause-and-effect:

US economy posts second-quarter growth of 2.5%
28 July 2006

The US economy grew by just 2.5 percent in the three months to June, a marked slowdown from the first quarter's blistering pace of 5.6 percent, the government said Friday. The rate of expansion in gross domestic product - the broadest measure of economic growth - was much worse than Wall Street's second-quarter forecast of 3.0 percent.
[The Commerce Department] said
the deceleration in real GDP growth in the second quarter
largely reflected downturns in consumer spending
on durable goods, equipment and software.

There is also some bad news for King George's brag about his 'booming economy':

The Commerce Department also revised down its GDP figures for 2002-2005 to show the economy grew at an average annual rate of 3.2 percent, 0.3 percentage points less than previously thought.

There is something else significant that just popped up in the analysis:

Export growth was much slower in the quarter, while federal government spending and residential fixed investment also went down.

What is 'residential fixed investment', you ask?

Housing Slows, Taking Big Toll on the Economy
July 29, 2006

The housing industry — which largely carried the American economy through the tribulations of the 2000 stock-market crash, a recession and climbing oil prices — has lost its vigor in recent months and now has begun to bog down the broader economy, which slowed to a modest 2.5 percent growth rate this spring ... caused in part by the third consecutive quarterly decline in spending on houses and apartment buildings, after several years of rapid growth.

The Commerce Department said yesterday that housing investment fell at an annual rate of 6.3 percent last quarter, after dropping less than 1 percent in each of the two previous quarters. It grew at roughly 9 percent a year during the previous three years.

“Anybody who did not have a shovel in the dirt has chosen to wait till the market settles,” said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, Fla.

Think about this for a moment - the housing construction sector has declined almost as much in just one quarter as it grew all of last year.

Try and tell me that is a good thing!

The housing construction industry has been about the only sector in King George's 'booming economy' that really did increase employment:

For much of the last five years, housing — along with health care — was also one of the only reliable generators of jobs.

From the start of 2001, when the Fed began cutting its benchmark rate to steady a faltering economy, until early last year, the housing sector added 1.1 million jobs.

The rest of economy lost 1.2 million jobs over the same period, according to an analysis by Moody’s

So when George brags about all those new jobs, factor in all the lost old ones. There is still a net loss.

The loss of jobs, however, isn't seen as being as significant as another economic factor:

“Housing is going from being far and away the most important contributor to growth to being a measurable drag, and it’s happening gracefully so far,” said Mark Zandi, chief economist of Moody’s, a research company.
“But there’s now a growing and measurable risk that things don’t go according to plan.”

Does that mean THE Donald didn't use enough troops to build bungalows in Beaumont? Oh wait! That shortage of troops was IRAQ! My bad!

Thus, I have digressed!

The biggest risk, economists say, is that
the optimism that fed the real-estate boom
will reverse dramatically.
The number of homes for sale has surged in recent months, particularly in once-hot markets, like the Northeast, Florida, California and parts of the Southwest. As builders delay land acquisition and construction it could reduce employment and spending in the coming months.

More broadly, just as rising housing prices during the boom added to Americans’ sense of wealth and well-being — encouraging them to spend more on a variety of goods and services — the reverse could dampen sentiment and lead consumers to pull back on their purchases.

It isn't just builders and investors who will be affected by this slowdown:

Residential construction and all the activity that swirls around it
— mortgage lending, renovations and the like —
account for roughly 16 percent of the economy,
making it the largest single sector, slightly bigger than health care.

Housing provided the Potemkin Economy behind which George's prosperity lies hid:

Housing continued its rapid growth last year, and other industries began hiring in far greater numbers than they had been, creating the healthiest national job market since 2000.

But now, it is failing to provide that service:

In the last few months, though, three pillars of the housing sector — homebuilders, mortgage lenders and real-estate agencies — have stopped adding to their payrolls, and overall job growth in housing has begun to slow.

[W]here contractors until recently complained that they could not find enough workers to begin work on many projects, developers are scrubbing plans for new condominiums because they cannot sell enough units to get construction financing.

At Hovnanian Enterprises, one of the nation’s largest homebuilders, executives are renegotiating the company’s options to purchase land for future developments, in an effort to delay some transactions and reduce the purchase price on other parcels of land. In April, it forfeited $5.6 million in deposits on property near West Palm Beach, Fla., and Minneapolis, because it was not ready to build in the area.

Orders for Hovnanian’s homes fell by 18 percent in the three months ended April 30 and cancellation of existing orders by homebuyers rose to 32 percent from 21 percent a year ago. The company, whose earnings jumped 34 percent to a record last year, is expecting a mere 3.4 percent profit increase this fiscal year.

[T]he company had not resorted to layoffs, but it had been asking sub-contractors to lower labor costs — with some success.

Hello! Home Depot? How full is your parking lot? HOW MANY???

[T]he boom of recent years has pushed housing prices out of reach for many families along the coasts. Already, some homeowners have resorted to creative loans, like interest-only mortgages, to afford a house, and even modest increases in mortgage rates have the potential to cause a significant drop in demand for new houses. [H]ousing seems unlikely to continue being the economic powerhouse it was over the last five years.

With job loss, people have no choice but to cut back - hard! But even people with jobs are cutting back on expenditures:

Americans feel the penny pinch
Consumers and businesses are growing wary of spending and investing money as interest rates and gas prices rise.
Jul. 29, 2006

A recipe for slower economic growth:

Ingredients: surging energy prices and higher interest rates.

Mix well and watch consumers and businesses grow cautious.

The end result: a throttling back of the economy in the second quarter to less than half the pace of the previous three months.

"This expansion is getting a little frayed around the edges because of consumer exhaustion," said economist Ken Mayland of ClearView Economics. "Consumers are losing that extra mojo to spend" now that the slowing housing market is making people feel less wealthy, he said.

Costs across the consumer economic spectrum have contributed to this:

Even though the economy cooled in the second quarter, inflation heated up. An inflation gauge closely watched by the Federal Reserve showed that core prices -- excluding food and energy -- advanced at a 2.9 percent pace in the second quarter -- far outside the Fed's comfort zone. That was up from a 2.1 percent growth rate in the first quarter and marked the highest inflation reading since the third quarter of 1994, when core inflation rose at a 3.2 percent pace.
The inflation reading was taken before the latest run-up in energy prices.
Oil prices, which had hit a record high in late April, soared to a new closing high of $77.03 a barrel in the middle of July. Americans felt the pinch of $3-per-gallon gasoline prices and higher interest rates.

More money spent on purchases can leave one unable to make a major purchase like a house, with this result:

Spending on home building nose-dived in the second quarter, contributing to the slowdown in gross domestic product, which measures the value of all goods and services produced within the United States.

This slowdown has had an international effect as well:

Brakes slam on US economic growth
29 July 2006

The US economy, the world's largest, has slowed in the second quarter of the year, on the back of rising interest rates and soaring energy costs. Some slowdown had been expected, but its severity comes as a surprise.

Shaun Osborne, a strategist at Scotia Capital, said that Friday's Commerce Department report would "probably underpin expectations that US growth will slow quite sharply in the second half of the year and into 2007".

One of the main factors in the recent slowdown in growth has been a weakening of consumer activity. "Consumer spending has slowed fairly significantly," said David Resler, an economist at Nomura Securities.

The US dollar dropped on the news,
as analysts questioned [Fed] forecasts
for annual US economic growth.

But it wasn't just lower consumer spending that is catching the eye of foreign investors:

US economic growth dips in second quarter
29 July 2006

Not only was there a decrease in consumer spending on costly durables like cars, but export growth slowed, government spending was weaker and housing investment turned down. The economy had been widely expected to slow after a sizzling first quarter, in part because a cooling housing market coupled with soaring gasoline prices is expected to act as a brake on consumer spending.

Here's that item that is catching the eye of the foreign investor:

Separately, the Labor Department reported its Employment Cost Index, which covers wages, salaries and benefits, climbed by a bigger-than-expected 0.9pc in the second quarter. That was the largest increase since the first quarter of 2005, a potential warning sign on inflation.

Joel Naroff of Naroff Economic Advisors in Holland, said rising wage costs were likely to raise a red flag for Fed policy-makers since they were broad-based and had gained steam in the spring quarter.

What this means is that reduced employment is going to be used as the safety valve to ease inflationary pressures. The worker is once again going to pay with his job to protect the value of the investor's portfolio.

This action is going to have its own effect on the economy:

US economy slows to 2.5%, falling short of expectations
by Joe Richter

[B]usiness investment in equipment fell for the first time in three years and consumers reined in spending.

Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at a 2.7 percent annual rate in the second quarter, the smallest gain since early 2004, after rising at a 13.7 percent pace from January through March. Spending on new equipment and software fell 1.0 percent, the first decline since the first quarter of 2003.

The reduced business spending means that employers have no further need to invest in infrastructure - they will use what they have, as they aren't hiring more workers. This situation isn't going to change quickly:

Rising energy prices and higher borrowing costs will continue to restrain economic growth into next year, economists said.

In addition, the reduced historical spending of consumers tells an interesting tale of their sorry condition:

Consumer expenditures rose at an annual rate of 2.5 percent last quarter, as a slowdown in the housing market discouraged spending, compared with a 4.8 percent pace in the previous three months. Economists expected a 2.1 percent gain, based on the survey median.
Consumer spending growth has averaged about 3.4 percent a quarter over the past 30 years.

This means that consumers have finally scraped the bottom of the barrel clean. There's nothing left to glean. The fact that the actual number was higher than the one predicted by economists means that they were seeing more of a turndown heading our way. Whether this really will result in less consumer spending (the trend is in that direction, after all!) remains to be seen - but I would expect it to happen.

So far, the factors affecting foreign investment in America have been the typical ones, the foreseeable ones. What happens when you factor in the incompetence or ineptitude of those whose job it is to evaluate these economic factors?

Revisions of earlier growth estimates by the Bureau of Economic Analysis show that the economy grew by about 0.3 per cent a year less in 2003-2005 than reported, because computer sales were overcounted, [and] core inflation was higher than thought.

You as a foreign investor might begin to wonder if there are adults in charge of the American cookie jar:

[T]he US economy still counts far more for the growth and prosperity of the world economy. A 1 per cent rise in US output is worth 6 per cent in China (or the UK). So the US locomotive’s unexpectedly sharp slowdown in the spring is a potential worry to all.

The slowdown shows Americans have been finding their wallets empty after two years of relentless interest-rate rises swelled mortgage charges just in time for oil shortages to work through to low-taxed motor fuel. No wonder Americans had no heart for car-buying.

For Ben Bernanke and his colleagues at the Federal Reserve, the central banker’s dilemma of falling growth and rising inflation is hardly worth the name. Core inflation is up to 2.9 per cent but that may be a one-off reaction to higher energy prices. In a bankers’ world, business could not pass costs on. But it would make no sense to keep raising rates now.

The 17 rate rises are having their effect; if they did not, the Fed might as well give up. The house price stampede, source of so many local doom scenarios, seems to have been corralled and there is little sign of the rest of the economy overheating. Rather, US business needs a new stimulus.

The question is: will the foreign investors continue to play ball with Bu$hCo people who don't seem to understand the game?

If only the Chinese authorities would co-operate, that [new stimulus] should come by the dollar falling against Asian currencies in time for the IMF’s September meeting. That would be good for China, good for the US and good for the world economy.

But that will continue to be bad for the American worker!

Questions exist about Fed Chair Bernanke's abilities as well:

U.S. economy shows sharp slow-down

[W]ith higher interest rates one of the two main factors directly responsible for the slowdown in the economy, it is apparent that the conundrum of today could turn into a huge problem going forward.

Leave the interest rates alone and hope that inflation eases of its own accord, or continue to raise rates as the economy slows and risk throwing the U.S. economy into a recession; not an easy choice for the new Fed chair Ben Bernanke, but surely one that could determine the economic outlook for both the U.S. and Canada going forward.

There is some good economic news to offer. The first shipment of Acura TL sedans built in Marysville [OH] landed this week at the port in Shanghai, China.

Dealerships in major metropolitan areas, including Shanghai and the capital city of Beijing, await the sedans. Those new dealerships will start selling the Acuras in September, and the company expects to sell about 2,000 TLs in 12 months.

"In this case, you’ve got to start with small steps," Acura spokesman Mike Spencer said. "This is a small step for us. The key for us is the fact that it’s a great step in the right direction."

Regular shipments will be made to China, and Honda plans to sell the Acura brand in Japan by 2008. This isn’t the first time Honda has exported vehicles made in the U.S. It has sold Acuras in Canada, and it began selling them in Mexico last year.

The Acura TL is manufactured only in Marysville, where workers will need to make small changes to the Acuras to comply with Chinese regulations, said Ron Lietzke, a Honda spokesman in Marysville. Last year, the plant produced more than 78,000 Acura TLs. It expects to make a few more to keep up with sales in China, he said.

Honda’s "tossing their hat into the ring, but other automakers are already there," said Bernard Swiecki, an industry analyst with the Center for Automotive Research in Ann Arbor, Mich. He cited General Motors Corp.’s success with its Buick family as an example.

"China is on its way to becoming the largest automotive market in the world," Swiecki said. It may take several decades to reach that status, but the Chinese market is so large that "it takes just a small uptick to result in a large sales gain," he said.

"Automakers are trying to get their foot in the door now so they can be there to reap the rewards when it matures."

This report also is good news for Honda's Ohio workers:

Honda’s quarterly profit jumps 30 percent
July 26, 2006

Honda Motor Co., Japan's third-largest automaker, said first-quarter profit increased 30 percent to a record on higher sales of Civic compact cars in the U.S.

"Honda remains in a unique position of grabbing share in the U.S. without sacrificing profit margins as consumers move toward passenger vehicles," that use less gasoline, said Amir Anvarzadeh, director of Japanese equity sales at KBC Financial Products in London. "Its U.S. Civic sales have been so strong that inventories have fallen to 10 days versus 50 days for its entire model range."

Note to GM Chief Rick Wagoner: SUVs ain't profitable no more!

But I digress.

Honda increased its U.S. market share to 8.9 percent in the first half from 8.1 percent with a focus on fuel-efficient vehicles. President Takeo Fukui plans to open a sixth North American factory to build on gains that lag behind Toyota Motor Corp. in the world's largest car market.

While GM and Ford continue to discuss closing plants! It leads one to wonder why Toyota and Honda can use American workers and be profitable while US companies cannot.

But that is the topic for another post. Generally, though, the investment analysts know what is really going on:

“There’s a slowdown under way,” said Steven Wieting, an economist at Citigroup Global Markets. Barring an external shock like a further spike in oil prices, he added, “a soft landing has a very high probability.”

“There’s no question that this worsens the Fed’s dilemma “The question is what does the Fed do as the economy slows but inflation continues to worsen,” said Nariman Behravesh, chief economist at Global Insight, an economic analysis firm based in Waltham, Mass.

And the decline has barely started.
Michael Carliner, vice president for economics at the National Association of Home Builders, pointed out that there was still a lot of building in the pipeline from 2005, which was a record year for single-family housing starts. When that is gone, residential construction could decline more sharply.

“Residential investment is not going to carry the load it has been carrying the past few years,” Mr. Carliner said. “Business investment should pick up the slack.”

Yet the one big surprise in the second quarter was the sluggishness of business investment, which grew by a mere 2.7 percent, down from a 13.7 percent increase in the first quarter of the year as purchases of software and other equipment fell unexpectedly for the first time in more than three years.

Despite employer bias that their workers are ignorant, many (not enough!) are smart enough to read between the lines, and they don't like what they see. They blame the Republicans:

NBC/WSJ poll: U.S. pessimism on increase
Doubts about children’s future and concerns about wars weigh heavily
By Mark Murray, Political reporter, NBC News
July 27, 2006

With congressional midterm elections less than four months away, the latest NBC News/Wall Street Journal poll finds that candidates will be facing a public that has grown increasingly pessimistic, as nearly two-thirds don't believe life for their children's generation will be better than it has been for them, and nearly 60 percent are doubtful the Iraq war will come to a successful conclusion. And there's more pessimism:
Among those who believe the nation is headed on the wrong track,
more than 80 percent say it's part of a longer-term decline.
"This is just a horrendous set of numbers," says Democratic pollster Peter D. Hart, who conducted this survey with Republican Bill McInturff. The mood is "as dank and depressing as I have seen."

Yet perhaps the most revealing finding in the poll is how little the political environment has changed in the past year. For the eighth straight survey since October 2005, President Bush's job approval rating sits below 40 percent; for the fourth straight time since March, just a third approve of his handling of Iraq; and also for a fourth straight time since March, only a quarter believe the nation is headed in the right direction.

And this isn't good news for Bush and the Republican Party, say the pollsters who conducted this survey, because it means that — outside of an extraordinary event — the political environment is pretty much locked in as we head into the November elections.

"I feel like Republicans are in a barrel and headed toward Niagara Falls," says Hart.
"It's ... a python-like grip in terms of a negative mood. This is wrapped pretty tight."
McInturff, the Republican pollster, adds that GOP candidates can count on having plenty of money and a proven get-out-the-vote operation. "But they are going to have to run very aggressive campaigns at an individual level to separate themselves from the national environment." In fact, McInturff says, Republican incumbents who wait until the fall to begin engaging their Democratic opponents will be "rolling the wrong dice." "The national mood is too set and there is not enough time."

It isn't going to get better for the GOP if more American voters start asking "Are the Best Times Behind Us?"
by Christian E. Weller, Senior Economist, and Jack Henry-Rhoads, Economic Policy Intern, Center for American Progress
July 28, 2006

The weak estimated economic growth rate of 2.5 percent is a result of the heavy indebtedness of America’s households and of policy decisions by the Federal Reserve to raise interest rates for two years in a row, which made the debt burden more cumbersome for America’s families. With interest rates rising, families have found it harder to maintain the steep pace of the real estate boom of the past few years. And no wonder:
By the first quarter of 2006,
the last period for which data are available,
American households had amassed debt
in the equivalent of a record high
of 126.4 percent of their disposable income
In the wake of a slowing housing boom, consumer spending growth for other items also appears on a downward trend. With the American consumer less inclined to borrow, continued strong economic growth would have required more business investment.
But with consumer spending slowing,
businesses apparently have fewer incentives
to spend their money on new plants and equipment.
In fact, data from the Federal Reserve shows that non-financial corporations have been holding about 6 percent of their total assets in cash, the largest share since the mid-1960s. Corporations’ reluctance to part with their cash is also reflected in the slowdown in business investment spending in the second quarter of 2006.

Nor are the remaining sectors of the economy picking up the slack. Government spending was essentially flat in the first quarter with an annualized increase by 0.6 percent as spending by the federal government declined by 3.4 percent and spending by state and local governments grew by 3.0 percent.

And foreigners are not buying U.S. products either.
The trade deficit expanded again
relative to the size of the economy.
To revive U.S. economic growth in the U.S., consumers need to find a way to raise their spending without going deeper into debt. This can only come about if more jobs are created and workers see real wage gains.

Without a revival of consumer spending on consumption and homes, though, the economy could find itself in this apparent slowdown for some time to come.

View full report with charts (PDF)

A few aren't so sure that the Good Times Have Rolled:

U.S. Economic Growth: Calling out the Naysayers
July 28, 2006

Annualized U.S. gross domestic product growth in the second quarter of 2006 came in at 2.5 percent, according to a July 28 Commerce Department report. Market commentators, disappointed with the figure, immediately warned that U.S. growth was tanking and the Federal Reserve was clearly finished with the growth-cooling tactic of raising interest rates.

Graph from
Anytime a highly developed economy such as that of the United States exceeds a 2 percent growth rate, it should be cause for celebration. Unlike developing economies, which experience massive growth shifts in line with whatever commodity prices are doing, the U.S. economy is huge, diverse and relatively even-keeled. Assuming the Commerce Department's figures are correct, the 2.5 percent growth in the second quarter added about $80 billion -- roughly the amount of the entire Algerian economy -- to the U.S. economy. Not bad for three months' work.
Claiming the growth is not good enough
is like a child crying
that he did not want that Nintendo for his birthday.

China holds that attitude about Americans!

But I digress.

The analysis of Stratfor is that the Fed will continue to raise the interest rates to control inflation. The only question - how much will it go up?

The idea that the Fed is done raising rates is similarly wacked. Core inflation rates -- a figure that filters out volatile food and energy prices -- increased by 2.9 percent in June compared to May, again at an annualized rate. That is the fastest rate of increase in 12 years and well above the Federal Reserve's comfort level of 2.0 percent. With growth still warm -- if not red hot -- and inflation robust, the only action available to the Fed is to continue increasing rates.
The only question in our mind is whether it will limit itself
to just a quarter-point hike at its next meeting.

We'll find out soon, as the Ottawa Business Journal reminds us:

U.S. economic growth slows
By Ottawa Business Journal Staff
Jul 28, 2006

The Fed's next rate-setting meeting is August 8. The U.S. economy is slowing down ... There was evidence consumers were tightening their belts, as consumer spending rose just 2.5 per cent and spending on housing plunged 6 per cent. Higher energy prices and higher interest rates are taking a bite out of consumer's pocketbooks and the American economy, slowing growth to an annual rate of 2.5 per cent in the April-to-June quarter.

The weak growth bolsters the argument that the Fed should hold off on further interest rate increases. Fed chair Ben Bernanke told Congress last week he believes moderating economic activity will eventually lessen inflationary pressures on the U.S. economy.

At the same time that growth slowed, inflation shot up. [S]ome economists see a danger in the rising core inflation rate and a sharp increases in wages.

The Mountain Mail of Salida Colorado - "The Voice of Salida and the Upper Arkansas Valley" - sees the pattern, and they don't like it one little bit:

Fed reserve favors bonds, not workers
Guest Opinion by Mark Weisbrot

Mark Weisbrot is co-director of the Center for Economic and Policy Research.

Everyone recognizes that the U.S. economy is slowing, but the question is, how bad will it get? One disturbing sign is that the Federal Reserve is still raising interest rates as the economy further slows, and it is not clear when it will stop. This is not good because each rate hike is deliberately designed to slow the economy by causing consumers and businesses to borrow and therefore buy less.

Inflation, as measured by the Consumer Price Index, has been running at 5.7 percent during the last three months, up from 4.2 percent the previous year. But most of this is the result of higher energy prices and the fall of the U.S. dollar against other currencies.

These raise the price of imports and therefore add to inflation.

Although it is no secret among economists,
most Americans don't know the Fed fights inflation
by increasing unemployment and thereby lowering wages.
The public probably would find this unsettling.
The Fed sees rising wages as the problem, because people who run the Fed do not view the economy through the eyes of wage and salary earners. They have a "bankers-eye view" which sees even a relatively small increase in inflation as a dangerous thing because it erodes the value of bonds.
And for them, the way to keep inflation in check
- no matter what its cause -
is to keep wages from rising.
The idea, as Fed economists see it, is that as overall spending is reduced, employers will hire fewer workers. As unemployment rises, employees are in a weaker bargaining position, and this leads to slower wage growth. Slower wage growth, the Fed hopes, will lower inflation. Average wages, adjusted for inflation, are less than they were four years ago - which is unfair, to say the least, given the economic growth during this period.
But it's about to get worse.
Since the mid-'90s the country has accumulated an enormous housing bubble, as house prices nationally have risen nearly 70 percent after adjusting for inflation. In some bubble areas, mostly the East and West coasts, the real increase has been more than 100 percent.

The personal savings rate is at a record low for the post-World-War II era, hitting negative 1.6 percent in April. Many Americans use their houses as an ATM machine, borrowing against their value. These home equity loans, including hundreds of billions of dollars "cashed out" when people refinanced their homes as mortgage rates hit record lows in recent years, are what has driven the U.S. economic recovery since 2001.

Because house prices have historically increased at about the same rate as inflation, this means that more than $5 trillion of excess paper wealth - similar to the stock market bubble of the late 1990s - has been created. Just as bursting that bubble caused a recession in 2001, the collapse of the housing bubble will almost certainly do so soon.

Falling home prices leave less equity homeowners can borrow against.
House prices do not have to collapse all at once to tip the economy into recession. There is evidence this bubble is already leaking. New home sales, existing home sales and the median price of existing homes were all lower in the first quarter of this year as compared to peaks last year. Vacancy rates for new homes are rising too.

Rising mortgage interest rates [directly affected by the Fed - ed.] will finish off the housing bubble if oversupply and a psychological reversal of the speculative mania don't do it first.

This party is about over,
most unfortunately for the majority of Americans
who never got to join in the festivities.

But who spent like drunken sailors, thinking they would. The evidence is that they were - charitably - misinformed:

ECONOMIC REPORT: Wage Growth Has Been Weaker Than Thought
By Rex Nutting
July 28th, 2006

In the political sphere, Democrats have argued that the booming economy of the past four years has not benefited everyone equally. The incomes of the vast majority who labor to earn their livelihoods have been stagnant while those who let their money work for them have prospered.
The new figures bolster the Democrats' side.
The growth of employee compensation, already thought to be the slowest in any post-World War II recovery, has been even weaker than previously assumed, the Commerce Department said Friday.

Wages were stagnant, but income from assets rose even faster than previously believed. While income from labor was revised lower by a total of $115.8 billion over the three years, income from owning capital was revised higher by a total of $139.9 billion.

* Real dividend income rose at an annual rate of 12.1%, up from 6.9% previously reported.
* Dividend income was revised higher by $110.7 billion for the three years.
* Real nonfarm proprietors' income rose at a 5.2% annual pace, revised from 4.3%.
* Proprietors' income was revised up by a total of $54.6 billion for the three years.

The faster payout of dividends [to investors - ed.] reduced corporations' retained cash. Corporate profits were revised lower by a total of $38.8 billion for the three years. Before-tax profits were revised higher by a total of $136.3 billion, but capital consumption was revised higher by $173.5 billion, offsetting the gain in pre-tax profits.

Like the general sorry state of King George's 'booming economy', the prospects don't look good for improvement:

Group predicts raises below 4 percent
July 29, 2006

U.S. salary increases will average 3.5 percent in 2006, making this the fourth straight year increases have averaged less than 4 percent. And projections are that the streak will continue at least through 2007. That’s according to the Conference Board, a nonprofit business-management research and education group. "Moderate inflation has allowed employers to continue to control payroll costs," said Charles Peck of the Conference Board. The board predicts inflation will be 3.1 percent this year and 3.3 percent in 2007.

If the United States had a real two-party system, this issue would be addressed. Instead, God's Oiligarchy Party now ruling in America takes advantage for itself:

Republicans Tie Minimum Wage to Tax Cut

Congress would pass an increase in the minimum wage before leaving Washington for vacation, but only as part of a package rolling back taxes on the heirs of multimillionaires, a Senate leadership aide said Friday. The GOP package would also contain a popular package of expiring tax breaks, including a research and development credit for businesses, and deductions for college tuition and state sales taxes.
"It's outrageous the Republican Congress can't simply help poor people
without doing something for their wealthy contributors,"
said Rep. Tim Ryan, D-Ohio.
Inflation has eroded the minimum wage's buying power to the lowest level in about 50 years. Yet lawmakers have won cost-of-living wage increases totaling about $35,000 for themselves over that time. Lawmakers fear being pounded with 30-second campaign ads over the August recess that would tie Congress' upcoming $3,300 pay increase with Republicans' refusal to raise the minimum wage.

House lawmakers were to discuss the package at an early afternoon session, while [a] Senate GOP aide professed confidence the bill could advance through the chamber next week. "It's the one chance for Democrats who want to get a minimum wage increase," the aide said. The aide asked not to be identified publicly because of the ongoing closed strategy sessions on the bill.

In advancing the tax plan, GOP leaders excluded a measure popular with small businesses that would make it easier for small businesses and the self-employed to band together and buy health insurance plans for employees at a lower cost. That idea was blasted as a "poison pill" by Democrats and labor unions. The small business health insurance bill exempts new "association health plans" from state regulations requiring insurers to cover treatments such as mental health and maternity care. And opponents fear they would offer inferior prescription drug benefits.

That's OK, though, as long as the wealthy can still buy their bling:

Demand for diamond jewelry in the consumer markets has remained robust, with estimated growth of 3% to 4% on the record levels of 2005, De Beers said. De Beers is looking to open 20 new stores before the end of 2006 De Beers MD Gareth Penny said.

"2006 results from the De Beers joint venture with LVMH in the retail sector have been good, with sales well up on 2005 in total and on a like-for-like basis. New stores have been opened in Japan and Dubai, and further expansion is planned in the United States, United Kingdom, Japan and Taiwan," De Beers added.

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