By JEANNINE AVERSA
AP Economics Writer
WASHINGTON (AP) – The Federal Reserve has little power left to
lift the economy out of its rut. Congress, with an election
looming, has no appetite for more stimulus. Shoppers are reluctant
to spend, and businesses are slow to hire.
Let’s face it: There is no easy or imminent fix for the flagging
recovery.
The sluggish economic summer wore on Friday with news that
Americans spent less at most retail stores in July. Earlier this
month came word that the trade deficit is ballooning and companies
are not adding jobs fast enough to bring down unemployment.
Typically, the Fed can lower interest rates to encourage
Americans to borrow money and spend it, invigorating the economy.
But the benchmark interest rate controlled by the Fed has been
almost zero for more than a year now.
The Fed this week took a new step by announcing it would use the
proceeds from its huge portfolio of mortgage securities to buy
government debt. The idea is to make cheap credit a little cheaper,
particularly for things like mortgages.
The problem there: Americans who are worried about their jobs,
not to mention volatility in the stock market, don’t want to
borrow. They saved 6.2 percent of their disposable income this
spring. Before the recession, it was more like 1.2 percent.
“You can’t force people to take out a loan or spend money that
they don’t want to spend,” says Alice Rivlin, who served as the
Fed’s No. 2 official in the late 1990s.
Sure, the Fed still has options. It could launch another
trillion-plus-dollar program to buy government debt or mortgage
securities like it did when it was battling the recession and
financial crisis.
Or the Fed could cut to zero the rate it pays banks to keep
money parked there, a move aimed at getting banks to lend more. But
banks are not exactly feeling free with their cash, either.
“It’s a pervasive level of uncertainty that people and
businesses feel about their economic futures,” says Ken Mayland,
president of ClearView Economics. “It’s frozen them into
inactivity.”
Congress has the power to regulate the economy by adjusting tax
rates and passing stimulus programs – the side of the equation
known as fiscal policy, as opposed to the Fed’s monetary policy.
But there is little interest on Capitol Hill to undertake a
major new stimulus effort. The midterm elections are less than
three months away, and Republicans and Democrats alike fear voters
are worried about the federal budget’s $1.4 trillion – and rising -
deficit.
A scholar of the Great Depression, Fed chief Ben Bernanke has
warned Washington policymakers not to repeat mistakes made during
the Great Depression by pulling in government stimulus too quickly.
Bernanke also suggested recently that extending the Bush tax
cuts, at least for a while, would be “one way” to “maintain a
reasonable degree of fiscal support – stimulus – for the economy.”
But Democrats and Republicans are divided on what to do. Most
Republicans want to make permanent the tax cuts enacted under
President George W. Bush in 2001 and 2003. That would amount to
nearly $3 trillion over the next decade. Democratic leaders want
the cuts for the wealthiest Americans to expire.
That leaves the work of jump-starting the economy for the time
being to everyday Americans and businesses, who can spend money and
accelerate the cycle of growth. But both are in a frugal mood.
Mortgage rates have sunk to record lows: Rates on 15-year
mortgages dropped to 3.92 percent this week, 30-year mortgages to
4.44 percent. Still, people aren’t scrambling to buy homes or
refinance the ones they already have.
Businesses, meanwhile, are sitting on a record $1.84 trillion
pile of cash, according to the Fed. They aren’t using the money to
expand operations or hire new workers because they, too, have
doubts about the strength of the economic recovery.
The economy grew at a 2.4 percent pace in the second quarter,
about half as fast as it was growing late last year. And it may
turn out, as the manufacturing sector is hurt by declining exports,
that growth right now is even slower than we think.
And the stock market, which had managed a significant rally in
July, is now absorbing the blow of the economic pessimism. The Dow
Jones industrial average fell this week from about 10,700 to about
10,300.
The key, says former Fed governor Randall Kroszner, is making
people feel more comfortable and confident that their jobs are
secure, and that the values of their homes and 401(k) accounts will
stabilize.
It’s just that no one is sure where that confidence will come
from.
“There is certainly no magic bullet to immediately turn thing
around,” he says.

(Copyright 2010 by The Associated Press. All Rights Reserved.)

I have noticed an interesting trend as the nation continues to claw out of the ugly recession.  While the job picture remains bleak, those who do have jobs seem to be ready to exhale and do a little shopping.  The financial collapse of a year ago triggered a period of uncertainty that lasted thru most of July. Even if you had a job, you probably knew someone who lost theirs, or you looked at your retirement savings and saw 10 years worth of growth wiped out. That alone can rain on a shopping spree parade.  But as the stock market has improved (the Dow up 28% over the past 6 months. It saw a 15% jump in the 3rd Quarter alone – its best quarter since 1939) that has helped those who aren’t looking for work– feel better. As a result– they are cautiously loosening the purse strings and giving into that pent up demand to shop. Many economists have asked whether we can have a sustained recovery with such high unemployment? It is a good question, but one of the best things the people with jobs can do to help those without jobs, is to  dip their toe back in the water and spend a little. I don’t mean the out of control, over-extended spending we saw in the boom that led to the bust. Most of us couldn’t do that today, even if we wanted to. What appears to be happening is that rational spending is once again taking place. As businesses and consumers invest their cash in worthy products and services– more people will be needed to meet that demand.

Most forecasters say the recession is over, and their focus now is on the future. How can we have sustained growth, that creates jobs, that does not lead to runaway inflation? Consumers are starting to do their part, and so are some businesses (more need to step up). It’s also time for rational spending to return to Washington, in this case– it’s reigning in the purse– not loosening it. A case was made at the height of the crisis, that huge spending was needed to right the ship. That appears to be happening. If those in-charge want to end up as heroes in the history books, they need to show a smart strategy for deficit reduction that keeps the U.S. competitive in the global economy.  Smart programs that will pay dividends to our children are worth the investment. But spending to spend– can no longer be justified. The American consumer  appears to have learned their lesson.. lets hope our lawmakers have too. -Mary

BTW here is Economist Joel Naroff’s take on today’s August Spending and Income Report. Joel’s commentary has been right on this year. He is the President of Naroff Economic Advisors.

INDICATOR: August Spending and Income

KEY DATA: Consumption: +1.3%; Disposable Personal Income: +0.1%

IN A NUTSHELL: “The wallets were dusted off and it wasn’t just to trade in the clunkers for cash.”

WHAT IT MEANS: The iceberg is melting. Consumers had given the malls the cold shoulder but that seems to have changed. In August, spending grew at the fastest pace in eight years. Yes, “Cash for Clunkers” played a major role in generating the huge increase but it was not the only reason people parted with their hard-earned cash. They also went out and spent a lot on soft goods. In addition, demand for services rose solidly. In other words, we shopped ‘till we got tired. Can households keep up this level of spending? That is not clear. Incomes rose only modestly. However, one good sign was that wages and salaries continue to post gains despite the declining number of jobs. As the payroll losses ease, we could see income growth improve and that would put a floor under spending. In the interim, people are drawing down their savings, which fell for the third consecutive month. As for inflation, there was a large rise in energy costs that pumped up the rate but excluding food and energy, prices remain well contained.

MARKETS AND FED POLICY IMPLICATIONS: Instead of restraining growth, consumption is likely added solidly to GDP in the third quarter. While government policies, especially “Cash for Clunkers” hyped spending, the good news was that people are out buying lots of other things. However, as I have warned in my discussion of the coming “head fake”, don’t expect the solid growth we should get to be repeated. Ultimately, income growth will drive consumer spending and businesses seem to be intent on watching their wage costs carefully. Thus, while new claims for unemployment insurance are generally edging downward, they are doing so only slowly. It will be quite a few months before we see job increases rather than losses and even then the increase could be modest. That argues for minimal income gains and sluggish consumption growth. Still, it is nice to see that there are ways to get people to buy, even if it takes taxpayers dollars. Now they have to start standing on their own. The Fed is taking this all in but so far is in no hurry to start raising rates. But I still believe that once they start, they will do so with “alacrity”, as Dallas Fed President Fisher recently stated. Maybe that limb I am out on is not that thin.

That is higher than economists had expected. However the number of jobs lost, while high, continues to be “less-bad.”  What does it all mean?  As someone who went through the unemployment process this year and who knows lots of other people in the same boat, consumers don’t spend when they aren’t employed. They also don’t spend as much if their friends and neighbors continue to get pink slips, because they fear they could be next.  I don’t want to make too much of today’s 9.7% figure. Since last December I have heard the smartest forecasters predict 10% unemployment.  So it some respects, the number is baked in the cake. But it is worth noting that unless Americans have jobs, they won’t be the world’s spenders. If we aren’t demanding products and services, who will?  Without that demand, how do you sustain a healthy economy?  -Mary

Ellen Hughes-Cromwick made the case for Ford to concentrate on the emerging markets of Brazil, Russia, India and China (the BRICs) almost a decade ago. Her forecast was right on. Ford, the only major U.S. automaker to make it through the recession without filing for bankruptcy, is fighting the good fight for market-share in the BRICs. In her lecture before a Global Interdependence Center audience, Hughes-Cromwick cautioned that investors need to treat the BRIC nations as separate entities with very different issues and needs. I spoke with her just before her lecture. Here a re-cap of that conversation. -Mary Caraccioli

Note: For more on the Global Interdependence Center visit their website: http://www.interdependence.org
I am a member and a big fan of the high quality programming they offer.

Enough with the search for green shoots. The Financial media is missing the point in its constant banter about green shoots. Yes there are green shoots, brown shoots, verdent pastures and drought-choked fields, but that isn’t the point. It is the landscape that has changed. You won’t see that shift if you are obsessed with a single shoot. Reporting on how the changed landscape affects the flow of commerce in different industries is the real story and the more beneficial one to anyone following the financial news. There are so many new twists and turns to navigate and to project – regulatory, geographical, sovereign, and economic, just to name a few.  Rules change here and elsewhere, economies are better some places than others, some businesses are loving the opportunities presented to them, others won’t exist next year.  Until the coverage dives just a little deeper — we won’t see the landscape for the shoots. – MC

These are hard times… everything I thought I knew… or had planned seems to be unraveling. Investments for retirement and my daughter’s education, even my career path seems to be a mess. The economy has created challenges and has forced me to rethink assumptions and on some days it feels like a giant dark cloud parked just above me. But these are the days that will define me. These are the days that I need to move past fear and accept the landscape has changed- permanently.

A recession is by definition,  a contraction of the economy. A depression – is a recession on steroids. A reduction in consumption leads to reductions in employment and often in prices because no one has any money. But when you think of the overconsumption, especially in the U.S. over the last decade, it had to crash.

USA: Consumption nation. Skip across the television dial — The Biggest Loser, Celebrity Fit Club, Bulging Brides, Nip and Tuck… is this who we have become, a freak show of overconsumption? The evidence of this affliction is everywhere, not just on TV, but also on the roads with our massive vehicles, the supersized retailers with endless aisles of needless junk. The constant cry for more was answered by willing manufacturers from all over the globe. Our spending spree was lining the pockets of capitalists from the deserts of the Middle East to the Middle Kingdom of China. And they kept the party going by buying up dollars, essentially funding the spree. But the ride is over. The chapter ends like any binge session, with regret and some pain. But tomorrow is a new day. Americans don’t have to be who we were. We can be better. Contraction doesn’t have to be a dirty word. We celebrate getting fit and dropping the weight… why not celebrate slimming down as consumers. Why not put our American and our global ingenuity into creating products and services that rise above simple consumption. What each of us take away from this period in our history is up to us. But I chose to look at this as an opportunity—to fine tune myself, my mission and what I worry about and more importantly what I celebrate. – Mary Caraccioli

A side note: Zandi was asked whether his firm’s parent company, Moody’s, used his forecasts when rating securitized subprime mortgage products, now known simply as toxic assets. Zandi said although his company was purchased by Moody’s in 2005, Moody’s did not use his firm’s forecasts to rate the quality of the assets in question. He said, however, that Moody’s is now using Economy.com’s forecasts.

There is a tiny sprig of green in the clay pot on my patio. Last summer purple clematis flowers spilled from the pot and weaved in and out of the railings. They were the picture of abundance. In the cold of winter and the ruthlessness of the financial crisis over the last six months, I had begun to wonder if abundance could ever return to anything, including my small garden. There is a barren feeling that comes when jobs are lost and futures become murky. That feeling is intensified by the lifelessness of the winter months.

As I watch my plants return to life, I am reminded that the economy, my own and the world’s, will too return to life. The next logical question becomes, “when?” I say move past that question for now. Yes, I know, answering it correctly is akin to a winning lottery ticket. Lottery winnings aside, I believe the better question is, “am I ready for the rebound?” The world will be a different place because of this crisis. Listen to my conversation with Martin Wolf, to get a sense of why that is the case. (Permalink: http://maryandmoney.com/videos/martin-wolf/) Even if you have enjoyed full employment and steady business in this period, the world has changed. Are you equipped to be a success in that new world. What have you done in this economic contraction to make yourself and your business more important on the other-side? Instead of asking when will this end, start asking how strong will I be when it does? You control that outcome. Employed or unemployed, rich, or wiped out, you can still position yourself to be ready for the moment. In fact you may just be a catalyst for the moment, if you are getting ready. –Mary Caraccioli

In his annual letter to shareholders Warren Buffet wrote, “The investment world has gone from underpricing risk to overpricing it.” This Buffet argues is leading to yet another bubble in a decade that has seen its share of them, tech, housing, oil, and now Buffet and others say U.S. Treasuries. While the other bubbles of the decade were fueled by rampant speculation and unsustainable returns on investment, the treasuries bubble is different.

It is fuel by what Buffet called the over-pricing of risk, commonly known as fear. It’s palpable. I hear people talking about their fear of the financial markets everywhere, from social situations, to the waiting room at the dentist office; to just about anywhere people are forced to make idle chat. Instead of the weather, the favorite gripe is how miserable everything has become, including how battered their investments. The consensus “I just don’t want to lose anymore money than I already have in the market.“ Others say, “Making money is for another day, a day when there is a little more clarity about corporate earnings and the economy.” And then there is this common complaint, “I have watched my retirement fund get cut in half, I just can’t make money in the market.” The result of all this negative sentiment and the over-pricing of risk and an indiscriminate sell off of every asset class. Until the dust settles, most investors believe only U.S. Treasuries will do.

When everyone is getting rich, it’s easy to think of your self as a maverick who embraces investment risk. But the reality is that most investors and most people are way more risk averse than they give themselves credit for being. Now, that once hidden aversion is causing the proverbial pendulum to make a big swing in the other direction. So, instead of recklessly using our homes as our piggy banks, we have found religion. But how do we use that wisdom to guide us away from the herd going forward? That is the question we have to ask ourselves. The old cliché is that it is darkest before the dawn. As the economy looms large over our every move these days, Buffet reminds us to embrace the darkness, “When investing, pessimism is your friend, euphoria the enemy.” The pessimism didn’t prevent him from buying, it helped him find the opportunities, he said ”In our insurance portfolios, we made three large investments on terms that would be unavailable in normal markets.” Embrace the fear, its healthy, but don’t forget to occasionally ask yourself “what opportunities are out there for me.” – Mary Caraccioli

Saying Goodbye After Our Final Show

 I am my lead story.

As my staff and I reported on the world’s economic turmoil for my nightly TV show Money Matters Today, we got the news. Our network, show, and jobs were being eliminated. Three-hundred-and-fifty of us would be thrown back into searching for a job at a time when it felt as though there was no job market. For my staff, the news was particularly hard.

Day-in and day-out we covered the story of the bad economy…we knew the economic forecasts and they were downright ugly. The irony was not lost on us. We had become our lead story.

As we reported the rise of unemployment, some of us would soon be filing for first-time jobless claims. Our fears were real. Would we lose our homes too? Could we even sell them now even if we wanted to? These were questions we had tried to answer for a viewers every night. And now, we had to answer them for ourselves.

At this moment it occurred to me how important a nation’s psyche really is. This is America. We pick ourselves up by our bootstraps. While headlines blared about bailouts, I decided bailouts had no appeal to me personally. What the big banks and the auto industry are learning now is that bailouts come with strings attached. I prefer to write my own script. But how do I pull it together when my industry is cutting back across the board?

Fresh layoffs occur by the day. Newspapers are folding, television news departments are no longer competing with each other. They are sharing material to stay on the air. My predicament is very similar to my friends in financial services and in the auto industry. Smart, hard-working, talented people are paying the cost for a situation caused by a bad economy and,in some cases, colossally bad management.

Worrying about how this happened—is a story for another day. Today, the only story I am concerned about is picking up the pieces as best I can and re-focusing on what really matters. I am focusing on things I can control. There is good that comes from a job loss. Now, you can magically cut through the noise and the trivial and gain clarity about what matters. So, how can you and I turn this situation around and make it work for us? I have three ideas I’d like to present and get your feedback.

1) Re-focus your long-range plan. What really matters now? Once you let go of goals from the past and accept that things have changed, think long term. What are your long-range priorities now? Your goals for yourself and the other people that matter to you – children, parents, community, etc. So often when we are in the middle of a job loss, we think about all we have to, or may have to, give up. I say reshape the discussion. It’s not giving up on things. It’s re-thinking the priorities. It’s not about deliberately shrinking goals, they may be even more grand than before. By acknowledging our world has changed you may also discover some of your long-range goals also have changed.

2) Re-focus your time. Recently, a friend told me that her job search was so time-consuming she had no time to network. I suspected that she was spending hours on Internet job boards as an excuse for not reaching out. When I pushed her on this she said her network no longer existed. She said her co-workers were her network and now they are either laid-off too or aren’t returning calls. I reminded her that she is much more than the title she had on her last job. She has family, neighbors and access to a larger community that she has yet to tap into. I asked if she had won the lottery instead of being laid-off what would she be doing with her time? She told me she always wanted to do non-profit work and that she loved cycling and would do a cross-country trip. I reminded her that her job search took time, but not eight hours a day. She had time to work in 10-20 hours of non-profit work per week. The work would be rewarding and create even more contacts for her network. Joining the local cycling club would allow her to train, stay fit and, again, meet new people. You never know where that next job will come from, but it often comes from personal referrals not a classified ad or Internet job board. Those tools are good, but the pros tell me to spend no more than 10% of your time looking through ads to find a job. Networking—which is simply reaching out to those in your circle—is the best way to get that job.

3) Re-focus your spending. What really matters now? Do you need the cable TV and internet? Maybe just one will do. Look at your spending. Where were you wasteful because you were so busy, you gave yourself permission to be wasteful? What can you do to lower bills or bring in more income. Things like conserving energy can lead to a very quick return on your investment in any season. Adjusting the thermostat or being diligent about turning off lights pays you back immediately. Take a look at things like your auto insurance. A woman I know was spending a fortune to insure a 13-year-old car. Good liability was important—but why pay to insure a car when your deductable is more than the car is worth? Shop around and make sure you have the right coverage. I am not saying skimp here, I am saying don’t be wasteful. Spend what you need and no more. Re-think your cell phone plan. To do this right you need to take a methodical and hard look at your spending. I would take a look at every dollar spent over the last 3 months. I am sure a lot of the wasteful stuff you could list without doing this. But, every time I do this exercise I find new ways to save. It’s tedious and it pays off. Do it.

You will also know exactly how much money you need to earn to stay afloat. Guessing isn’t good enough. If you have to negotiate a salary for your next job, it will be helpful to know what you really need to make, rather than what your ego needs you to make.

Finally, on the subject of our ego. The only thing more bruising to your ego than losing your job is getting dumped by a guy (or gal) that you didn’t really like all that much anyway. It stinks and you can’t help but feel insulted by a pink slip. I am better than this –right? Thoughts can really go down a negative road if you spend too much time serving your ego here. Tell yourself you will deal with the injustice later. Today is about moving on. I promise you there is something on the other side of unemployment. We are different people on the other side, often sharper, more interesting and far more compassionate than before.

I know that won’t pay the bills today, but it is your reward for continuing to work hard to right your ship. You are doing the right thing—keep doing it. It will pay off. In the meantime, I am right there with you. Let me know how you’re doing by visiting me at MaryandMoney.com. – Mary Caraccioli