The State of the US Economy

Some economic indicators took a downward turn last month and of course the media has focused on these negatives. But there have been many more positive trends and let’s take a look at the “good stuff” happening in the US economy.


• The Index of Leading Economic indicators (see definition below) turned upward at the end of June and points to slowly expanding economic activity in the coming months

• Payroll data reflects modest improvement and is displaying a typical pattern of jobs recovery that occurs after a serious slump

• There were 117,000 net new jobs added in July and Unemployment claims have fallen from their high in April of 2009

• Cities, states, counties and federal entities are still shedding jobs but the private sector is adding jobs—this is good news for a more healthy economy

• Unemployment rate for college graduates is only 4% compared to national average of 9%. Getting a college degree is a smart thing to do!

• Fiscal stability of most states has greatly improved and revenues are now in line with expenses. Most states have balanced budgets. And have made the necessary cuts.

• Vehicle sales have been sluggish and pulling down Gross Domestic Product (GDP) (see definition below) growth mainly due to the parts shortage caused by the Japanese Tsunami. However, that is improving and we should be back to 13 million in sales per month for the last quarter of 2011.

• The US GDP growth is forecast to be close to 3% for the remainder of the year.

• Consumers have significantly shed debt loads and consumer credit is surging. This is a key driver in our consumer driven economy.


• Housing affordability is at an all-time high

• Interest rates expected to be very low for at least next two years, allowing more folks to take advantage of extremely low real estate prices.

• The US adds approx. 3 million new bodies each year. New housing starts have averaged 1.5 million per year. Considering that we have only been adding approx. 500,000 new housing units, the demand will soon exceed the supply. Once all the foreclosures and short sales get off the market, the demographics prove that a strong housing recovery will occur.


• Retail sales are higher now than before the crash of 2008. The consumer has more disposable income and is spending. But the consumer is also being wise and saving—the saving rate is 5.4%.

• Inflation is not expected to be an issue for several more years as promised by the Fed Reserve at yesterday’s meeting.

• Companies are reporting strong corporate earnings. Much of these earnings are being derived from overseas sales which are expected to persist. China, India and other emerging countries have a huge appetite and capacity to purchase our goods and services. And earnings drive the market in the long run. Right now, the S%P is selling for 11 times earnings and that is dirt cheap! The outlook for the stock market is good.



Index of Leading Economic Indicators

An index that is compiled by the Conference Board, a private-sector consulting firm. The index is designed to indicate the future direction of economic activity. A rising index signals that economic activity can be expected to increase in the near future

Gross Domestic Product

The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

9 Reasons to Not Panic About the Debt Downgrade

The Silver Lining in the US Credit Downgrade

Photo by Eric E Proimos on Flickr

 The US has had a AAA rating since 1941 and certainly in my lifetime, it was unthinkable that we could ever lose this coveted rating. But the unthinkable happened last Friday and one of three credit rating agencies (S&P) stripped the US of the AAA rating and downgraded us to AA. So…what does this mean and what are implications? 

1. Only S & P chose to downgrade, that means that Moody’s and Fitch still have confidence in our AAA status. Two out of three ain’t bad!

2. Insiders at the rating agencies and many large companies believe that the S&P move was super cautious because, remember, that they gave AAA ratings to all the companies that held all the toxic assets that brought down the economy in 2008. They were severely chastised by Congress for being asleep at the wheel and they lost a lot of credibility in the process. Payback time??? 

3. The downgrade is more a function of the political impasse in Washington and concerns that our political system cannot chart the necessary course to reduce our deficit and have a balanced budget. 

4. Warren Buffet’s perspective (and I value his commentary far more than the “talking heads” of the media) is that there's no question that the United States' debt is still AAA and that he's not changing his mind about Treasurys based on Standard & Poor's downgrade. "If anything, it may change my opinion on S&P," the legendary investor said. 

5. Japan lost its AAA rating many years ago but has had no problems borrowing money at super low interest rates despite a Debt-GDP (gross domestic product) ratio about where we will be in 7-10 years.

6. Rates are a function of supply and demand. Our supply isn’t changing, so a downgrade would tell us that the demand will now change. Really folks? Where will the money go? China is a huge purchaser of our debt and might like to park it somewhere else but where? No other country has the liquidity and the size to store their cash reserves. And no other country is safer. 

7. The new rating does not mean we are heading into a recession. While our economy is still struggling (Pimco calls it a “hobble through” economy) there is room for cautious optimism. 70% of the S&P 500 companies have exceeded earnings estimates this year. The unemployment figures look bad but if you drill down, the governments (cities, states, counties, US govt) are the ones shedding jobs while the private sector is adding jobs. Isn’t this what we hoped for and expected to happen as our infrastructure shrinks? 

8. The silver lining is that this is a wakeup call to Washington. It is a loud and urgent signal that we can no longer kick this can down the road. We have to deal with our burgeoning debt, our not so balanced budget, our entitlement programs such as Medicare and social security and we need to do it NOW. Both parties need to put aside their agendas and do what is right for our country and the world as we are still the Super Power. I was encouraged by President Obama’s speech today because I think that our politicians (both parties) now realize the damaging effects of the past 4 weeks. It was a humiliating picture to the world of how partisan and childish we have become. There will be enormous pressure on the bipartisan committee of 12 to get the job done and come up with a plan to show the world that we are serious about putting our country back on the path to financial soundness.

9. I, for one, am almost elated that this happened. We needed a kick in the butt. If I had a boatload of cash lying around, I would be buying every good US Company that I could. Ahhh… if only I had a small portion of Warren Buffet’s fortune!

A Summer Rollercoaster Ride

With the U.S. stock market falling for eight of the past nine days and dropping 8% during the past week, you are probably just a little bit on edge. After Thursday’s 5% drop in the S&P 500, the index is now down for the year, and the media is having a field day with terms like global meltdown, double dip recession etc.. I can understand the anxiety that you are feeling. It’s only natural.


My advice to you is the same as it was in 2008 (and has been for the past 13 years). Take a deep breath, stay calm, and keep your emotions in check. Successful investing requires us to be patient and have a long term attitude. Successful investors are not market timers. None of us has a crystal ball that tells us where stocks will go in the next month or quarter. But we do know that throughout history, stocks as a group have gone up two out of every three years, and I am confident that investing in a well-diversified portfolio of stocks and bonds remains one of the best ways to create lasting wealth for you and your family.

Looking back for context, we know that after falling 22% during 2002, the S&P 500 rallied 28% in 2003. In 2008, the market dropped a whopping 37%, only to gain 26% in 2009 and 15% in 2010. History is on the side of the patient investor who remembers that investing is a long term process.