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Economic Updates for 11/30/2012-12/28/2012

It's been a few weeks since I posted any updates partially due to the Holidays and yearend planning, but also becuase I focused my time to make a final push to complete my Master's Degree in Financial Services (MSFS). I was notified on 12/21/2012 that I passed the final project and that my Diploma is on the way. After taking a much desreved break, it is time to get back to work!

For simplicity, I am going to lump the last few weeks of economic updates in one post:

Economic Update for the Week of 11/30/2012
Large retailers posted a 1.6% year-over-year gain in same store sales; expectations were for 3.3%. This included Black Friday and Cyber Monday.

Case/Shiller 20-City Home Price Index Up 3% Year-Over-Year. Limited (available) inventory and few new homes along with persistently low mortgage rates is causing home prices to edge higher. Clearly a trend has started but it is questionable how long this may last given two very influential factors that could keep prices low or bring them back down; mortgage rates rising and shadow inventory being released to the market.

New home sales was revised lower to an annual rate of 368,000 and reported flat for October. This is a critical number to watch for housing since the building of new homes is where all the construction, materials, and labor is involved which creates jobs. Buying and selling of existing homes does not create jobs, or at least has very little impact on jobs. At the housing peak we were at 1,000,000 new homes per year, so 368,000 should show good perspective on how far away we are.

3rd Quarter GDP grew by a 2.7% annual rate. Personal spending slowed during this period to about 0.99% of GDP when it should be about 1.5% or higher which means much of the growth was from government spending. This is concerning given the possibility of spending cuts and inventory building by companies.

Economic Update for the Week of 12/07/2012
Unemployment rate fell from 7.9% to 7.7%, 146,000 jobs were created on expectations of 85,000, however the labor force participation rate dropped 0.2% or 300,000 people. As always we have to look a bit closer at the numbers because on the surface the employment numbers look better however with fewer people looking for work or exiting the workforce, the unemployment rate goes up.

Economic Update for the Week of 12/14/2012
The Federal Reserve announced that in addition to continuing printing $40 billion per month to by mortgage backed bonds to keep mortgage rates low, it will also print an additional $45 billion per month to but US Treasuries to keep general interest rates low. Operation Twist, selling of short-term bonds to buy long-term bonds is coming to an end as they are running out of short-term bonds to sell. Instead of letting the program expire, the Fed will simply print more money to continue buying the long-term bonds. This plan means that the Fed's balance sheet should reach $4 trillion by the end of 2013. This announcement came very unexpectedly and yet had little effect on the markets. It appears that the Fed is no longer able to move the markets with its bazooka anymore. Perhaps we are getting closer to the point where the can has no more road to be kicked down.

Inflation came in at 1.8% for the year. This is a bit of a head scratcher because we all have experienced prices of certain items rising. For example, in Caifornia, BlueCross/BlueSheild asked regulators for a 12% premium increase for health insurance with some subjected to a 20% increase. Interestingly the government only counts healthcare as 6% of our spending even though it accounts for about 18% of GDP. What a great way to keep inflation low...don't count it! Costs for items are rising while wages are not; this is austerity.

Economic Update for the Week of 12/21/2012
3rd Quarter GDP was revised to 3.1%, much higher than the original estimate of 2.1%. Government spending accounted for about 25% while inventory building another 25% which means that without these unsustainable components, GDP may have come in roughly half at 1.6%.

GM announced a $5 billion buy back of stock from the US treasury at $27 per share. This makes you go "hmmm". In order for us, the US, to breakeven on GM stock, it has to sell at an average of $54 per share. Certainly this transaction was not done without the involvement of the Treasury which means that the US Government is apparently OK with losing billions on the bailout. This was our money and every taxpayer should be furious about this.

Economic Update for the Week of 12/28/2012
Here we are right up at the end of the year and still no deal for the "fiscal cliff." I don't want to go into any detail here because this topic is being covered by the media ad nauseam. The bottom line is that we will see reduced spending and higher taxes; there is no other way out of this. Politicians can continue bickering all they want, but in the end this is unavoidable and it is just a matter of time before they figure this out. It is very likely that some kind of deal will be struck either in the last minutes or sometime early in 2013 that will keep some of the tax cuts in place, but again, I believe this will be temporary. Maybe we get an extension for another year, but what happens when 2013 passes and we still do not see strong economic growth and the deficit continues to rise? At some point we will be forced to make the tough choices and it will result in a drag on the economy but unfortunately there is no other way. 

New home sales came in at 377,000 annual unit sales in November which is a 4.4% gain. New home sales, specifically new home construction is the part of the housing market that creates jobs and economic activity. 377,000 is certainly in the right direction however this is still less than half of where we were at the peak around 2005/06. I think too much is being made of these gains which come from very low levels, so while the news is good, we should remain cautious. 

Case/Shiller 20-city Home Price Index moved up 4% from October of last year. Again it appears a positive trend is emerging but let's not run out and start buying homes just yet. 

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