As we enter the holiday season, the big picture of our economy comes into focus. I paint as I see the picture. Sadly, it is not a classic, but more like modern art. We begin with the two most important.
Connected Problems
The biggest consumer purchase in our consumer society is a home. The second is a vehicle. There is a serious problem with both transactions - price. The cost for a new home is unaffordable for purchase unless your income falls into the upper middle class. The other option for purchase is trade-up with the asset of your present home. The census report reveals that 100 million Americans are renters. We know why - price.
Homes
The cost for a new home has climbed to $394,300. The average cost for a older, established home is $270,900. The latter appears more affordable until one considers this fact. Another report shows that 44% of all Americans are low-wage earners. This translates to an annual income of $18K to $20K per year. The Census Bureau says there are 38 million Americans in poverty. In another report by the Institute for Policy Studies found that there are 140 million Americans that are low-wage earners. In addition, there are 68 million Americans who collect a social security check each month. To put that number in perspective that is higher than the populations of France, UK, Italy or Canada. I believe it is fair to suggest that one-half of these recipients are living check-to-check. They will not be in a financial position to help the economy. Then, add to this number a rising poverty level (over 20% - see above figure) along with the homeless who are not counted and one realizes that over half of our population is in financial trouble. This is why home builders construct more multi-family homes each year rather than single family homes. By the way, this lack of entry level homes hurts the trade-up series for new homes.
Now, these figures help explain why new home construction has not risen in twenty years. The last recession only highlighted the problems - higher costs for land, workers and materials. Then, there is the cost for regulations, zoning and insurance. If those obstacles were not enough, add the cost of outsourcing of middle-class jobs and together, this means over half of our population cannot afford to make the most important consumer purchase, a home.
The second part of the equation is almost violating an American right of passage - a car. It represents so many aspects of our society. Libraries have rows of tomes written about it.
Cars
According to Kelley Blue Book, as of Dec.2018, the average cost of a new car is $37,577. A new car cost 25% more than a decade ago. However, it cost Americans more than 38% of their income to make a new vehicle purchase. Have wages climbed by that same percentage in the last 10 years? Sorry, I didn't mean to give you a heart attack by laughing. Even if a family has two, low-wage incomes to address a purchase, after all other expenses, this translates into around $400 per month. The only solution under those terms is for the payments to be stretched out over 96 months or 8 years. C'mon! That new vehicle will be almost ten years old by the time the payments end. You can readily see the problem for both consumers and auto manufacterers. After the last recession and the Obama solution, auto sales did respond. The closer look reveals that in 2008, the average age of autos at that time was almost 11 years. Everyone needed a newer car. With the economy recovering people were able to buy another vehicle. This set a nice streak for auto builders, however the streak is going to hit a wall like a long distance runner. Auto manufacterers were expecting another 17 million car sales in 2019. Sebastian warned that problems were looming. They are here.
China reported an 11% decline in auto sales. All US auto companies have seen decline in sales as well as all other global producers. In fact, this is the worst year for global sales since the recession of 2008. Nissan is close to bankruptcy. There are 7 million auto loans out there that are 90 days delinquent. This is what happens to people that are stretched to the limit with expenses. Unlike the government, citizens cannot "print" money. Presidential candidates who seek to take advantage of this situation without a real solution is corrupt at best. They make promises that only increase our already abusive national deficit. Deficits do matter and Cheney, you are an idiot! I also feel compelled to point the finger at the focal point which is the root cause of this situation - the Fed, our government spending and the military's role. The Fed devalues our money by excessive printing. Our citizens lose purchasing power and this excessive printing could cause a global fallout against the dollar as the world's reserve currency. Our government leaders use money like a carrot stick to stay in office and do nothing worthwhile for the nation. The military causes our deficits every year. They constantly BS about our national interest. They spend in over 100 countries and at the same time, deprive our nation from addressing real, internal concerns due to their paranoia. The Deep State is a disease that is rotting our nation.
Anyway, if you connect the dots of the two biggest consumer purchases, the economy is in trouble.
Other factors
What I am adding to the above is retail. This is the most important time of the year for retail. Analysts say that the American consumer is strong in confidence, their debt balances are under control and wages are rising. I cannot in good faith say I know enough if any of that is true or not. I do know this. This has been the worst year for store cloings in the US. Consumer spending is off to a good start. Black Friday has sale estimates approaching $4.45 billion. This would be a record and e-commerce continues to grow as demonstrated by Cyber-Monday. Consumers set a new record for sales which accounts for one-third of all holiday sales. Also, not all brick and mortar firms are under siege. Walmart, Target and Best Buy are doing great. Sadly, Macy's is not. Since Black Friday accounts for 6% to 7% of yearly sales for retail, the holiday season is off to a good start. I worry about the debt / credit card bills come this January. Also, in a related aspect, returns which is a growing problem for retailers.
In a related story by Juron, he noted that Americans are returning to bad habits with their homes. They are refinancing for lower payments. On the surface this would be smart except consumers are "cashing out." By this term Juron means that people are rolling over their debt with a new mortgage. They are using the extra cash to pay down debt (which is good) or purchase a car (trouble down the road). This debt surge is also showing up in a growing, dangerous debt, personal loans. People are seeking a personal line of credit. They have added over $300 million in debt which has come from their nest egg. This leaves people with no other resource for a rainy day. These are the type of errors that consumers make with their finances. If a hurdle in life arises, their is no rainy day money to cover the expense. The next thing you hear on this person is that they are included in delinquent category. It could be an auto loan, credit card bill or worse, their mortgage. These are the type of things which lead to a recession. Keep in mind the inverted yield in bonds which has never failed to indicate a recession, appeared this year.
I hate to be a bearer of bad news during this, the best of all seasons, but it is always cold in January. By the way, analysts said the same positive things for December 2018 and it was one of the worst holiday spending by consumers.
So long, old friend
Sadly, Bumble Bee tuna is joining Radio Shack. I'll miss ya!
Federal Reserve
Can't wait for the BS out of their first new year meeting. Retail prices will be a little higher this year due to tariffs, inflationary costs and the cost of financing for firms that are in trouble like J.C. Penny. There is also the problem of "shrinking." This is retail code for theft. It is rising and Home Depot drew attention to it in its last earnings report. Will the Fed even admit there is some inflation out there? Like I said, "Can't wait to see how they lie about this?"
Only $5.5 million.
Yes. It is a steal for a 30-second commercial for the 2020 Super Bowl.
One More Aspect to Housing
If, what I mentioned above were not enough problems for housing, add this. The passing of baby boomers will add 21 million homes to the US market. Granted, this will be a little at a time, but over the next 20 years, there will be an average of one million homes a year by death. This will create a crisis for some sun belt states like Arizona and Florida. They will force prices lower and offer this question. Will buyers want or be allowed to purchase homes in retirement communities? Something to think about if you are in one of these retirement villages and you want to leave your family your biggest asset?
Some Good News
There is a bond for forests. It provides money to clear some over abundant forests. The wood pays the bond while the forest cultivation makes the forest safer from wild fires. This is a win for the environment and wood has so many uses. There is mothing better than a real Christmas tree for the holidays. Take care, peace.
