Mar 31th

Harmonic Notes Newsletter-March 26th

Author: Chris

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Mar 26th

Independent Market Commentary

Author: Admin

Comment: 1

This week all eyes were on Congress as they sought to pass Healthcare legislation.  Most people were wondering what it meant for them from a personal perspective, however, we were focused on a little discussed aspect of the healthcare bill. 

Most discussions to date regarding the cost of the Healthcare bill have centered on the costs the government is going to bear.  Little has been said about where else there may be a financial impact.  I have been concerned about the lack of cost detail available and companies have been reluctant to discuss the potential impact on their profitability.  That all changed this week as a number of “old line” companies issued statements regarding the financial impact on their operations.  The reason we saw the announcements out of the “old line” companies is that they tend to have legacy health care plans where the employer bears most if not all of the employee’s healthcare costs.  Catepillar announced that they will be taking a $100 million charge in the current quarter.  Deere will record a $150 million charge which amounts to 11.5% of their anticipated 2010 income.  I was somewhat surprised by the magnitude of the charge at Deere.  As companies prepare to release Q1 earnings, we should be able to get a clearer picture of the potential costs.  It should prove to be an interesting earnings season, but I guess they have mostly been interesting in the last year.  Have a great weekend!

Mar 26th

Weekly Economic Insight, 22 March – 26 March 2010

Author: Kenn Lamson

Comments: 2

The week ending 26 March saw indicators that provided incremental information on housing, the manufacturing sector, the American consumer’s mindset and the overall economy.  The data confirms our thesis that economic growth will continue to be lead by the industrial sector rather than households. We note also that the 4Q09 inventory- and stimulus-driven growth spurt appears to be waning, suggesting a significantly lower 1Q10 GDP print. 

 

RELEASE (leading, coincident or lagging indicator)

 PERIOD ACTUAL EXPECTED (consensus) LAST

HIA COMMENT

Chicago Fed National Activity Index 3-month moving average (coincident)

 February -0.39 NA -0.13

Three of the four broad categories of indicators that make up the index deteriorated, with only the sales, orders and inventories making a positive contribution.

Durable Goods Orders (leading)

 February +0.5% +1.0% +3.0%

Orders excluding transportation rose +0.9% month-over-month.

New Home Sales (leading)

 February 308K 315K 309K

New home sales plummeted for a fourth month, down -2.2% MoM.

Existing Home Sales (leading)

 February 5.02M 5.00M 5.05M

Sales slipped again, dropping -0.6%.

GDP (lagging)

 4Q09 final +5.6% +5.9% +5.9%

The final look at 4Q09 economic growth shaved the rate from earlier reports. Still, the pace of economic growth was the fastest in more than 6 years.

Univ of Michigan Consumer Sentiment (leading)

 March 73.6 73.0 73.6

American consumers’ opinion held steady in March.

                                                                                                                                            

CHICAGO FED NATIONAL ACTIVITY INDEX

As discussed in last week’s Economic Insight, the CFNAI will replace the Conference Board’s Index of Leading Economic Indicators in our analyses. 

The indicators that comprise the Index are drawn from four broad categories:

  • Production and income
  • Employment, unemployment and hours
  • Personal consumption and housing
  • Sales, orders and inventories

A zero value for the index indicates the national economy is expanding at its historical trend rate of growth; negative values and positive values indicate below- and above-average growth, respectively.

Month-to-month movements can be volatile, so the Index’s 3-month moving average is used to show a more consistent picture of national economic growth.

When the 3-month moving average value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the 3-month moving average value moves above -0.70 following a recession, there is an increasing likelihood the economic contraction has ended.  When the 3-month average moves above +0.70 more than 2 years into an economic expansion there is an increasing likelihood that a period of sustained inflation has begun.

February’s 3-month moving average decreased slightly from January but was higher than at any point since December 2007. The negative reading suggests US economic growth is below its historical trend and that there is low inflationary pressure.

DURABLE GOODS ORDERS

While the overall orders figures fell short of consensus expectations, the important manufacturing sector once again showed solid growth.  Month-over-month growth in new orders was seen in 4 of 8 major industry groups surveyed, including machinery (+4.7% and fabricated metal products (+1.9%). Weakness was centered in electronic equipment (-3.3%) and transportation equipment (-0.7%). 

January’s durable goods inventory figure was revised upward to show +0.1% month-over-month growth, making February’s +0.3% figure the second consecutive month of inventory growth. Perhaps US manufacturers have finally seen the bottom of the inventory cycle that’s been long expected.

Durable goods orders (red) and consensus expectation (green), Jan 2000 – Feb 2010

 

EXISTING AND NEW HOME SALES

According to the National Association of Realtors, sales of existing homes dropped once again in February, following the combined 23% decline in December and January. As noted in earlier commentary the initial wave of first-time homebuyers crested in November but the second (assuming there is one) has not yet fully taken hold. Without sharply higher interest rates or other negative factor intervening, we’ll likely see another surge of first-time buyers in March and April.

The housing market continues to be supported through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end on March 31, 2010; it’s an easy bet that rates will likely rise if purchases are ceased.

The NAR report also showed that the reported estimate of existing homes for sale rose for the third consecutive month, by +9.5% to 8.6 months of inventory. Also, the median home prices were essentially flat at $165,100 while the average price fell to $210,500. Lower prices are a logical outcome of lower demand and increased supply. It must also be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market.   According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.

The decline was not adversely affected by the weather, as the Northeast and Midwest rose but South and West decreased. 

As with existing home sales, the drop in new home sales can in part be attributed to a lull in purchases via the first-time homebuyer tax credit. Also like the existing home sales release, supply was reported to have risen, in this case from 8.9 to 9.2 months. Unlike the report on existing homes, though, the median and average homes sales prices rose 6% to $220,500 and 5% to $282,600 respectively.

New (white) and existing (red) home sales, February 2005 – February 2010

 “FINAL” GDP

This release is the third and final look into the final quarter of 2009, which once again beat the consensus expectations. The “final” report is based on more complete data than was available at the time of the “preliminary” estimate last month or January’s “advance” estimate.  The report confirmed that fourth quarter growth was dominated by an enormous inventory adjustment. The downward revision from the “preliminary” report a month ago was cause by adjustments to spending on inventories, consumer spending and “nonresidential fixed investment.”

For 2009, this report puts full-year economic growth at -2.4%. 

 Accounting for the additional data released in the “final” report the contributions to growth looked like this:

SEGMENT

CONTRIBUTION

Consumer spending

+1.16%

Gross private domestic investment

+4.39%

Net exports

+0.27%

Government spending and investment

-0.26%

TOTAL PERCENT CHANGE AT ANNUAL RATE

+5.56%

The problem with inventory restocking-driven growth, of course, is that it’s temporary – once the proverbial shelves are full manufacturers will return to lower production levels.  In order to create a self-sustained economic growth we need to see demand from domestic consumers and businesses and/or foreign ones. As regular readers know, the downward pressure on demand is why we continue to focus so much of our work on understanding the unemployment trends.

CONSUMER SENTIMENT

The U of M Consumer Sentiment Index held steady at 73.6 for March. The measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, rose to 82.4 in March, the highest reading of this cycle.  Ominously, however, the index of expectations six months from now, which more closely projects the direction of consumer spending, again worsened, declining to 67.9 from 68.4 a month earlier.

As we’ve noted elsewhere, economic improvement appears to be centered in manufacturing, not in housing and employment, two areas much closer to consumers.

 

Mar 26th

Pepsi Gets a Makeover

Author: Chris

Comments: 0

Courtesy of The Economist

Pepsi gets a makeover 

Taking the challenge

The giant drinks-and-snacks firm attempts to wean itself off sugar, salt and fat

Mar 25th 2010 | NEW YORK | From The Economist print edition

COCA-COLA once famously defined its market as “throat share”, meaning its stake in the entire liquid intake of all humanity. Not to be outdone, Indra Nooyi, the boss of Coke’s arch-rival, PepsiCo, wants her firm to be “seen as one of the defining companies of the first half of the 21st century”, a “model of how to conduct business in the modern world.” More specifically, she argues that Pepsi, which makes crisps (potato chips) and other fatty, salty snacks as well as sugary drinks, should be part of the solution, not the cause, of “one of the world’s biggest public-health challenges, a challenge fundamentally linked to our industry: obesity.”

To that end, on March 22nd she unveiled a series of targets to improve the healthiness of Pepsi’s wares. By 2015 the firm aims to reduce the salt in some of its biggest brands by 25%; by 2020, it hopes to reduce the amount of added sugar in its drinks by 25% and the amount of saturated fat in certain snacks by 15%. Pepsi also recently announced that it would be removing all its sugary drinks from schools around the world by 2012.

Although Ms Nooyi talks about the need to “cherish” employees, and once wrote to the parents of her senior managers thanking them for bringing up such wonderful offspring, she rejects the notion that these goals are soft-headed or decorative. She argues that they are necessary to prevent food companies from going the way of tobacco firms, which are perennially held responsible by governments for the health problems associated with their products, and penalised accordingly. As it is, several countries in Europe and various localities in America have banned trans fats, a particularly unhealthy ingredient in much junk food. A bill introduced earlier this month in New York’s state assembly proposes banning salt in restaurants. Michelle Obama, America’s first lady, has launched a campaign against obesity among children.

In the 1990s virtually all of Pepsi’s products were bad for you—or “fun for you”, as the firm likes to put it. Under Ms Nooyi, who became boss in 2006, it has stepped up its diversification into products it calls “better for you” and “good for you”, including fruit juices, nuts and porridge (oatmeal, to Americans). Ms Nooyi does not see this as a case of trading profits for virtue. Instead, she insists both are possible—an idea expressed in the firm’s syrupy motto: “Performance with purpose.”

There is no shortage of sceptics, both about the sincerity of Pepsi’s social mission and, more recently, its performance, which was decidedly flat in 2009. Indeed, this week, at the firm’s first meeting with investment analysts since 2006, in New York’s Yankee Stadium, Ms Nooyi admitted to a series of disappointments, before promising that lessons had been learned and that “we won’t make the same mistakes.” As well as being hurt by the economic downturn, Pepsi suffered from a flawed financial hedging strategy that left it paying too much for commodities. And it has suffered from some recent marketing disasters, including a campaign for Tropicana fruit juice that is widely regarded as one of the worst brand makeovers since Coca-Cola launched New Coke.

Yet investors seem to be taking seriously Ms Nooyi’s claim that Pepsi’s future is bright. It helps that the firm has raised its dividend and announced a big share buyback. Investors also seem to be reappraising Pepsi’s decision last year to acquire the two independent firms that bottle its drinks. The deal had received a tepid reception, not least because Coca-Cola had insisted that keeping syrup-making and bottling separate made sense. Now, however, Coca-Cola has decided to follow Pepsi’s lead by acquiring its main bottler—a move Ms Nooyi describes as “vindication”.

The hope is that integrating the bottling company into Pepsi will bring greater control over an increasingly diverse drinks portfolio, and promote cross-marketing between the food and drink divisions (not something that Coca-Cola’s acquisition will help with much, as it does not own a large snack operation). Pepsi, which jointly markets several different brands, dubs the clout this gives it with retailers and customers “Power of One”. The bottling acquisition should boost this tactic by ending the need to negotiate a division of the spoils on every big deal. When Wal-Mart calls asking for a joint promotion of, say, Pepsi and Doritos, as it did for the Super Bowl in February, Pepsi can “respond in 24 hours, instead of six weeks.”

Ms Nooyi wants to take this idea further, with a strategy she snappily dubs “Power of Power of One”. By that she means partnerships with other firms to cut the cost of procurement, or research and development. Pepsi has already signed a supplies and ad-purchasing deal with Anheuser-Busch, a big brewer.

In the long run, much will depend on the success of Pepsi’s strategy to convince the public and regulators that it is on the side of reducing obesity, not creating it. This strategy will have several prongs, including reducing the amount of obviously unhealthy ingredients in its existing products, adding new healthier products to its portfolio, promoting healthier lifestyles and trying to point the finger of blame away from how many calories people consume to how few calories they burn. “Why aren’t we going after computer and cable-TV companies for creating a sedentary lifestyle?” asks Ms Nooyi.

Pepsi’s growing portfolio of “good for you” products now accounts for around $10 billion in revenues (nearly a fifth of the total). Ms Nooyi expects that figure to grow to $30 billion within ten years. The firm has been hiring an army of experts on health to work in its research and development business, to give credibility to its claim that it is applying science to creating products that are better for its customers. Mahmood Khan, a British-born doctor recruited to run Pepsi’s R&D at the start of 2008, says he has been “pleasantly surprised by how rapidly this new health agenda has been embraced.”

Pepsi already claims to be making significant progress in making its “fun-for-you products better for you” by voluntarily removing trans fats long before it was required to do so, and reducing the amount of sugar, fat and salt. There is now less salt in a packet of crisps, claims Dr Khan, than in a slice of white bread.

Quaker, which makes porridge, cereal, cereal bars and rice crackers, is Pepsi’s leading healthy brand. Pepsi hopes to use its expertise in product design and packaging to make these goods more enticing, especially to children at breakfast time. It is already testing oatmeal drinks and biscuits, as well as new flavours of porridge. Quaker Oats packaging will also get a more contemporary look, although the black-hatted Quaker mascot will survive. “Our goal”, says Ms Nooyi, in typically forthright style, “is to rewrite the rules of breakfast.”

There is no doubting the seriousness of Ms Nooyi’s drive to increase Pepsi’s sales of healthy products. But it will not be easy to push them without undermining sales of its other, less wholesome wares or appearing to nanny its customers. Moreover, politicians and public-health campaigners may not regard selling more healthy products, while continuing to profit handsomely from unhealthy ones, as the best way to tackle obesity.

Mar 26th

Office Rents

Author: Chris

Comments: 0

Office rents

Mar 25th 2010 | From The Economist print edition

London is the world’s most expensive city in which to rent and operate office space, according to CB Richard Ellis, a property consultancy. “West End” rents have increased by 11% in dollar terms over the past 12 months, although that increase is mainly down to the appreciation of sterling against the dollar. Office rents in São Paulo have increased by 61%, partly due to newly built office space coming to market, but for the most part caused by the depreciation of the dollar against the real by 35%. In Tokyo, the most expensive city twelve months ago, rents have fallen by nearly 30%. They have also fallen by more than a quarter in Dubai, which three months ago opened the world’s tallest building, the Burj Khalifa.

Mar 26th

Cartoon of the week

Author: Chris

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Mar 26th

Changing Jobs? Take Your 401(k) and … Roll It!

Author: Chris

Comments: 0

Courtesy of Forefield

 

If you’ve lost your job, or are changing jobs, you may be wondering what to do with your 401(k) plan account. It’s important to understand your options.

What will I be entitled to?

If you leave your job (voluntarily or involuntarily), you’ll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pretax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule.

In general, you must be 100% vested in your employer’s contributions after 3 years of service (“cliff vesting”), or you must vest gradually, 20% per year until you’re fully vested after 6 years (“graded vesting”). Plans can have faster vesting schedules, and some even have 100% immediate vesting. You’ll also be 100% vested once you’ve reached your plan’s normal retirement age.

It’s important for you to understand how your particular plan’s vesting schedule works, because you’ll forfeit any employer contributions that haven’t vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works. If you don’t have one, ask your plan administrator for it. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that luxury.

Don’t spend it, roll it!

While this pool of dollars may look attractive, don’t spend it unless you absolutely need to. If you take a distribution you’ll be taxed, at ordinary income tax rates, on the entire value of your account except for any after-tax or Roth 401(k) contributions you’ve made. And, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout. (There won’t be any tax-free qualified distributions of earnings from Roth 401(k) accounts until 2011 at the earliest, because there’s a 5-year holding requirement, and Roth 401(k)s first became available in 2006. And special rules may apply if you receive a lump-sum distribution and you were born before 1936, or if the lump-sum includes employer stock.)

If your vested balance is more than $5,000, you can leave your money in your employer’s plan until you reach normal retirement age. But your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan. As the name suggests, in a direct rollover the money passes directly from your 401(k) plan account to the IRA or other plan. This is preferable to a “60-day rollover,” where you get the check and then roll the money over yourself, because your employer has to withhold 20% of the taxable portion of a 60-day rollover. You can still roll over the entire amount of your distribution, but you’ll need to come up with the 20% that’s been withheld until you recapture that amount when you file your income tax return.

Should I roll over to my new employer’s 401(k) plan or to an IRA?

Assuming both options are available to you, there’s no right or wrong answer to this question. There are strong arguments to be made on both sides. You need to weigh all of the factors, and make a decision based on your own needs and priorities. It’s best to have a professional assist you with this, since the decision you make may have significant consequences–both now and in the future.

Reasons to roll over to an IRA:

  • You generally have more investment choices with an IRA than with an employer’s 401(k) plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. By contrast, employer-sponsored plans typically give you a limited menu of investments (usually mutual funds) from which to choose.
  • You can freely allocate your IRA dollars among different IRA trustees/custodians. There’s no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service. It can also allow you to have IRA accounts with more than one institution for added diversification. With an employer’s plan, you can’t move the funds to a different trustee unless you leave your job and roll over the funds.
  • An IRA may give you more flexibility with distributions. Your distribution options in a 401(k) plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions is generally at your discretion (until you reach age 70½ and must start taking required minimum distributions in the case of a traditional IRA).
  • You can roll over (essentially “convert”) your 401(k) plan distribution to a Roth IRA. You’ll have to pay taxes on the amount you roll over (minus any after-tax contributions you’ve made), but any qualified distributions from the Roth IRA in the future will be tax free.

Reasons to roll over to your new employer’s 401(k) plan:

  • Many employer-sponsored plans have loan provisions. If you roll over your retirement funds to a new employer’s plan that permits loans, you may be able to borrow up to 50% of the amount you roll over if you need the money. You can’t borrow from an IRA–you can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties. (You can, however, give yourself a short-term loan from an IRA by taking a distribution, and then rolling the dollars back to an IRA within 60 days.)
  • A rollover to your new employer’s 401(k) plan may provide greater creditor protection than a rollover to an IRA. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you’ve declared bankruptcy. In contrast, any amounts you roll over to a traditional or Roth IRA are generally protected under federal law only if you declare bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will generally depend on the laws of your particular state. If you are concerned about asset protection, be sure to seek the assistance of a qualified professional.
  • You may be able to postpone required minimum distributions. For IRAs, these distributions must begin by April 1 following the year you reach age 70½. However, if you work past that age and are still participating in your employer’s 401(k) plan, you can delay your first distribution from that plan until April 1 following the year of your retirement. (You also must own no more than 5% of the company.)
  • If your distribution includes Roth 401(k) contributions and earnings, you can roll those amounts over to either a Roth IRA or your new employer’s Roth 401(k) plan (if it accepts rollovers). If you roll the funds over to a Roth IRA, the Roth IRA holding period will determine when you can begin receiving tax-free qualified distributions from the IRA. So if you’re establishing a Roth IRA for the first time, your Roth 401(k) dollars will be subject to a brand new 5-year holding period. On the other hand, if you roll the dollars over to your new employer’s Roth 401 (k) plan, your existing 5-year holding period will carry over to the new plan. This may enable you to receive tax-free qualified distributions sooner.

When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

What if I really do need to use the money?

In some cases, you have no choice–you need to use the funds. If so, try to minimize the tax impact. For example, if you have nontaxable after-tax contributions in your account, keep in mind that you can roll over just the taxable portion of your distribution and keep the nontaxable portion for yourself. For example, if you’re entitled to a distribution of $50,000 that includes $10,000 of your own nontaxable after-tax contributions, you can roll the $40,000 of taxable dollars into a traditional IRA, and keep the rest for yourself. You’ll have $10,000 to use, and you’ll pay no current income taxes.

What about outstanding plan loans?

In general, if you have an outstanding plan loan, you’ll need to pay it back, or the outstanding balance will be taxed as if it had been distributed to you in cash. If you can’t pay the loan back before you leave, you’ll still have 60 days to roll over the amount that’s been treated as a distribution to your IRA. Of course, you’ll need to come up with the dollars from other sources.

Mar 25th

“The Great Arbiter”

Author: Kenn Lamson

Comments: 0

Throughout this year’s Idaho legislative session there’s been a more than usually vigorous debate regarding the state’s fiscal status. That’s understandable, of course, given the difficult circumstances in which Idaho, and virtually every other state, finds itself as the US muddles through the “Great Recession.” Political debaters, and often the media, make statements regarding Idaho’s financial position that can leave the interested observer confused as to the reality of the situation and wishing for a referee to cut through the rhetoric.  Luckily, there is such an arbiter that aggregates the opinions of participants into a single piece of data:  The bond market.

Let me begin by offering several unbiased quantitative data points that speak to Idaho’s financial health.  The Federal Reserve Bank of Philadelphia produces a Coincident Index for each of the 50 states. Below is a graph of the Coincident Index for Idaho and the US using data from January 1992 to January 2010.

It’s clear according to this measure that the Idaho economy has outpaced the national one for some time, but that our state suffered the recent downturn more severely than the US as a whole.

BMO Capital Markets, who were kind enough to allow the use of some of their data and graphs to support my comments, have incorporated the state Coincident Indices into their proprietary “Financial Strength Index”. Over the past couple of years, the Financial Strength Indices for Idaho (black) and other western states look like this:

Meanwhile, the quality rating given to Idaho’s bonds by the major rating agencies, Moody’s and Standard & Poors, is two notches down from the very highest (AAA) rating, at Aa2 and AA respectively.

Bond investors consider all of this information, and additional data, when determining what price they would be willing to pay for a given security, or at what price they’d be willing to sell.

Since, as we’ve been reminded recently by California’s and other states’ difficulties, states can default on their debt, municipal bonds are considered riskier than US Treasury notes or other AAA-rated bonds. Consequently, a municipal bond buyer should be offered a premium for accepting the incremental risk. That premium is reflected in the yield difference between the municipal bond and a Treasury note of similar maturity.  The higher the premium, the riskier that investors judge the security to be.

Here’s where the rubber hits the road: Since yield spreads reflect the consensus opinion of investors regarding the fiscal strength and stability of the issuer, tracking them is an extremely useful way to cut through the political rhetoric to learn what those who “put their money where their mouth is” believe.

Plotting the states’ bonds yield spread (in this example, compared to a theoretical AAA-rated bond) versus their Financial Strength Index reading provides insight into how bond investors view Idaho’s fiscal situation (Idaho = yellow data point).

The takeaway from this analysis is that while Idaho’s fiscal situation has deteriorated sharply, bond investors, “The Great Arbiter” of risk and return, have not grown overly cautious. As this and the other charts imply, however, continued fiscal deterioration may drive up Idaho’s cost of borrowing.

Mar 25th

Idaho Personal Income, 4Q09

Author: Kenn Lamson

Comments: 0

The US Commerce Department’s Bureau of Economic Analysis today released state-by-state Personal Income data for the fourth quarter and full year of 2009. While the data is somewhat stale, an analysis may provide insight into the structure of and changes within the economic situation of the citizens of the state of Idaho.

According to the BEA the seasonally adjusted total Personal Income for the state of Idaho was over $49 billion in 3Q09. Of that total, $30.4 billion was from net earnings(1); $9.4 billion from dividends, interest and rent; and $9.5 billion from transfer payments.

Idaho Personal Income rose +1.2% from the third quarter of 2009, placing the state 7th in terms of income growth. However, the state ranked poorly on a per capita basis, coming in 48th in terms of per capita income for 2009 and 47th on the basis of the change in per capita income 2008-2009.

After peaking in the second quarter of 2008, Idaho Personal Income fell through 1Q09 but now has stabilized.

Over the past couple of years, Idaho clearly has become more dependent on transfer payments such as unemployment insurance and payments received as part of the American Recovery and Reinvestment Act of 2009, as the percentage of Personal Income derived from this source has risen while income from wages has fallen.

On a quarter-over-quarter basis, Idaho was slightly ahead of the US average.  Personal income rose by +1.2% in Idaho compared to +0.9% nationally.  The bulk of the Idaho’s income growth came from net earnings (+2.2%) and dividends, interest and rental income (+1.2%).  The largest contribution to the +0..8% quarter-over-quarter change in net earnings was a nearly $200 million jump in farm income.

(1)     Wages + salaries + proprietors’ income + supplements to wages and salaries –social security contributions

Mar 24th

Job Growth: Healthcare vs Export Industries

Author: Kenn Lamson

Comments: 0

A friend recently asked my input on a debate he was having with coworkers. As a human resources professional, he and his colleagues are keenly interested not only in capturing clients today for their consulting firm but also in anticipating the cyclical and secular trends that will drive their business in the years to come.  Specifically, he asked which segment of the economy was more likely to be a driver of job growth in the next decade: Healthcare or export industries. To put a finer point on his query, he believes that the aging of the Baby Boom generation will drive demand for healthcare, and therefore growth of healthcare jobs, throughout this decade.  His colleagues, however, believe that exporting to developing nations, in particular to Brazil, Russia, India and China (also known as the BRIC nations) will be the largest source of job creation.  Our conversation allowed us to explore two economic segments that have different fundamental drivers, but each of which may be a leader in the “new economy” in which we find ourselves.  Below I’ve excerpted a few of the observations I made during our conversation.

  • Both healthcare and the maturation of emerging markets (especially the BRICs) will probably be job generators in the next decade. Obviously, one is largely domestically driven (and therefore easier to politically control), the other is not.
  • It’s hard to say, off the cuff, what the magnitude of each might be. Note though that the healthcare industry is considerably larger than the industries benefitting from exports, at least right now. So, just in terms of raw numbers a 5% increase in jobs is a much bigger number in healthcare (16.3MM employees) than in, say, mining and logging (670K employees).
  • Growth in healthcare jobs seem like more of a sure thing; we know absolutely that the Baby Boom generation will press healthcare demand higher until the mortality rate of that generation causes the curve to turn over, in maybe 25 years.
  • If you look at the recent past, healthcare is about the only segment of the economy that’s created jobs through the recession. It’s obviously not that the sector’s been unaffected, but it’s clearly been a source of stability vis-à-vis job creation. I don’t think that will change, by the way, now that the healthcare bill has become law. The jobs might be funded by the government instead of the private sector, but there’ll be jobs nonetheless. The demand’s simply not going away.
  • US job creation to supply developing nations assumes a paradigm shift in the US economy from being a consumer/debtor nation to an exporter/creditor, AND it assumes that those BRIC nations create the correct political and economic environment for their citizens to consume. Foreign citizens would have to buy stuff that the US has produced, not things that’ve been made within the borders of their own countries.  I think those changes are likely to happen but I’d guess it’s a 50-year phenomenon, not a 10-year one.
  • As I mentioned above I think that the transition I describe above — where the US goes from being a net importer/consumer/debtor to a producer of goods (and services, to a much lesser degree) for export and shrinks the trade deficit — is one that will happen. You’re already seeing export-driven industries lead the way out of recession. Unlike healthcare, employment rates in those industries slumped (because foreign demand slumped too, at least until those countries got their feet underneath them) but now have rebounded. They haven’t put on lots of jobs, but they’re probably not far away from outright growth since their workweeks are 40+ hours and wages are stable or rising.
  • The US isn’t used to having to figure out what another country wants to buy and then making it; that mindset’s going to have to shift. Also, you can see the emerging markets countries stepping forward to fill the power vacuum the US has left. It’s hardly a smooth transition though – China’s the obvious candidate to become world’s #1 economic (and military) power, but it’s not as though they’ve solved all of their issues and can really take charge.  They’re worried about inflation and a whole raft of other stuff, not to mention their leaders constantly putting out internal political fires so they can stay in power.  India and Brazil are quite a bit more stable, but Russia’s a one-trick pony and the pony’s called OIL.
  • Interestingly, the phenomenon that might slow that toward the US becoming an exporter is the, well, self-centeredness of the Baby Boomers. As a generation they’ve spent the past 60 years being catered to, spending lots of money they didn’t have in the process. Which brings us back to Boomer demand, with a different flavor. Let me get super-philosophical for a minute: What you saw in the recent passage of the healthcare reform legislation was a signal of a generational shift in the US and in Congress. The Baby Boom generation is taking over from the “greatest generation” and they’re worried about how the cost and availability of healthcare will affect them as they live out their days. Consider: Many of them have pathetically little saved for retirement; what do you think will happen in the next 10 years as they realize they can’t afford to keep the heat turned on, much less pay the mortgage on their third house and put gas in the Hummer, on the pittance they’ve saved?  Yes, my friend, you and I will be called upon to save them from themselves.  Bank on it.
  • Now, this is not to take sides politically, it’s just to recognize a reality. And that reality WILL have a negative impact on US economic growth that WILL hasten the BRIC countries’ relative rise.
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