There has been a lot of good news about the economy in 2012. With each passing month, it seems that unemployment drops further, the stock market goes higher, and the housing market… well, that’s why there is still a pretty big question mark out there.

Economy 2012 Outlook

Typically, after an economic downturn, the stock market leads the way (it’s a leading indicator) by rising in the months before various economic reports (lagging indicators) start rising. If all goes well, the stock market’s rise, is legitimated by improving corporate earnings and then backed up by an increase in hiring that improves the employment outlook across the economy. Once these things happen, the U.S. economy kicks into gear and things march upward until the next correction, recession, or god forbid, depression.

The stock market has gone nearly straight up since the beginning of 2012. Earlier this year the Dow went over 13,000 for the first time since 2008. Not far behind, the S&P 500 index passed its 2008 high-water mark earlier this month. And, as Reuters and other report, the number of Americans filing for new unemployment benefits dropped to a four-year low. This follows the last few months of good labor market news.

So, why aren’t economists and the public at large more excited about this economic recovery. There are many reasons, but two of them really stick out.

2012 Housing Outlook

There is still a big problem out there in the housing market. Some analysts say that foreclosures are down only because the banks were holding off while negotiating a settlement over bad foreclosure practices and that a huge backlog of foreclosures is now heading for the pipeline. If this is true, the flood of new foreclosed properties onto the market, plus the economic downdraft caused by people losing their homes, and being afraid of losing their homes, could pull the whole economy back into negative territory.

Until housing is more stable and there are no huge waves of foreclosure on the horizon, it will be tough to consider this economic recovery to be on solid footing.

Will Politics Destroy the Economy?

The other very big problem out there is Washington D.C. and the increasingly polarized politicians who every day seem to care less about America and America’s wellbeing and more about what is good for their specific political party. Our so-called representatives nearly drove the world’s economy off of a cliff with their brinkmanship on the debt-ceiling.

An upcoming presidential election only makes that whole mess worse.

On one hand, with a Democratically controlled Senate and a Republican controlled House of Representatives, there is little chance of any meaningful new legislation getting passed any time before November. That means that Congress won’t be able to proactively derail the economy.

Unfortunately, there is a ticking economic time bomb waiting for this divided Congress come January 2013. That is when the huge automatic budget cuts from that debt ceiling deal are supposed to kick in. It is also when both the Bush tax cuts and Obama’s recently extended payroll tax cuts are set to expire.

In other words, three enormous amounts of money are poised to be sucked out of the economy all at once. If the train wreck that is Washington doesn’t get its act together, doing nothing may be all that is needed to make months of rosy economic news moot.

That’s why you won’t find anyone celebrating no matter how benign the economic data seems. Unless the economy is roaring hot enough to overwhelm the possible one-two punch from a sick housing market and a sick Congress, then things are still very shaky.

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2. Economy Outlook 2010 2nd Half – June Job Losses

Will the Economy Recover in 2012? originally published at Personal Finance Blog - FinanceGourmet.com

Yea! Just got news that Congress decided not to kill off the fragile economic recovery in the U.S., well, not yet at least. Congress has passed legislation that extends the payroll tax cut through the entire year.

The tax cut was a 2 percent reduction in the amount of Social Security tax paid by workers. The employer part of the social security tax (and therefore a significant part of the self-employment tax) was not cut. However, this tax cut put additional money in the pockets of households across America. Letting it expire and seeing what happens when people suddenly realize their paycheck is smaller than they are used to would have been a big problem.

Virtually every respected economist in the world warned that failure to extend this particular tax cut would have a big impact on the U.S. economy, perhaps causing the tepid growth to teeter, or plunge all the way back into recession.

I’ll be back later with more details once I have a chance to comb through the actually bill on its way to President Obama’s desk.

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Payroll Tax Cut Extended originally published at Personal Finance Blog - FinanceGourmet.com

In an announcement that comes as no surprise, in large part because it has been repeatedly telegraphed by the the Fed itself, the Federal Reserve Board on voted on Tuesday to leave interest rates at their current near zero rates. The Fed further reiterated its commitment to doing so for the near future, pledging to keep rates low through at least the middle of 2013.

There are several interesting implications for investors and consumers in the Federal Reserve’s actions and statements today. First, as mortgage lending continues to languish and be a rather slow and dour corner of finance, homeowners should take solace in the fact that there is no rush. While there is no guarantee rates will stay exactly as low as they are, the Fed’s continued commitment to low interest rates means that neither new mortgage interest rates or adjustable mortgage rates are going up any time soon.

Second, the Fed announced that it would continue to implements the so-called “twist” in which the Federal Reserve is moving its short-term bond holdings to longer-term bond holdings in an effort to bring down long-term interest rates. Longer term rates are traditionally less influenced by the Fed, which sets only the short-term overnight lending rate that banks use. However, this new wrinkle may prevent longer-term rates from rising, even if they were prone to do so. Again, this is good news for homeowners, though bad news for those trying to get better rates from longer-term bonds like pension funds.

Interest Rates Rising Soon is Myth

Third, the vote to keep interest rates low was 9 to 1, but it’s not what you think. The 1 vote against was not to raise interest rates, but rather a vote against current Fed action being insufficient. In other words, not only has the Fed committed to continuing ultra-low short-term interest rates, it is doing so unanimously with one member wanting low rates and then some. This is important because it shows that there is absolutely no reason to expect interest rates to rise anytime soon.

Fourth, while the Fed is very concerned about the U.S. economy and its lackluster growth, it did note that the economy IS actually growing. This is good news on several levels. It means that things are moving in the right direction, assuming that neither Europe, nor Washington, screws it up. It also means that the Fed is not going to kill off a weak economy by trying to thump it’s “inflation hawk” credentials.

Finally, although the Fed is leaving rates low and pledging to do so for an extended period of time, there is has been absolutely no talk of another round of Federal Reserve led stimulus for the U.S. economy. A third round of quantitative easing, or QE3, is not in the cards for the near future. I guess we don’t have to worry about Rick Perry indicting Federal Reserve Chairmen Ben Bernanke for treason before the U.S. elections.

What Fed News Means for You

What today’s news means for you is that if you are currently doing well enough, there is no reason to think that things will change. If you have been hunkering down, so to speak, fearing the worst, it is probably time to lower your guard a bit.

If you have been narrowly skating by in this long and lingering recession, then things are starting to look up. It looks like the economy is growing, albeit slowly, and that means things like lending, financing, and other money based systems should be getting better over the next year.

The two dark spots in all of this are housing and the job market. The amount of economic growth being seen is not enough to begin generating anywhere near the number of jobs needed to make up for millions of out of work Americans who lost their jobs. However, it does look less likely that solid companies will be dragged far enough down that they must lighten payrolls again.

Housing is still the big concern. Economic growth or no, foreclosure rates are still very high and lots of people are underwater on their mortgages. If you are just a bit underwater and want to stay in your home, riding this out is the way to go. If you are way underwater, it is probably time to look at all your options, including drastic measures. You want to be ready to recover when the economy does. Getting hit now makes you one of millions. Taking a hit a year or two after the economy starts to rebound puts you behind.

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Fed Keeping Interest Rates Low originally published at Personal Finance Blog - FinanceGourmet.com

New unemployment claims fell to a nine month low in October. This trend has been struggling to get going for several months now. However, the possibility of an improving job market is a good sign for the U.S. economy.

Update: Consumer sentiment also rose. That is a little bit more good news for the economy.

Unfortunately, the news isn’t anywhere good enough to declare an economic recovery. The “good news” about the labor market we have been getting for the last several months means more about the job market bottoming out than it does about it getting better. Essentially, if you were drawing a graph of the U.S. labor market, these last couple of months of good economic news and indicators means you can stop drawing your line down. It does not mean, however, that you can start drawing that line back up.

There are two major stumbling blocks now to an economic recovery. The first is the very unstable situation in Europe. What once looked like a problem for a couple of the continent’s weakest economies now looks like a full-fledged crisis for the entire European Union. Any collapse, or loss of faith, there and the U.S. economy will be pulled back under. The second issue rearing its head is the expiration of current payroll tax cut.

Established a temporary tax cut (aren’t they all?) the current tax cut reduced the amount workers pay for FICA (Social Security taxes) from 6.2 percent to 4.2 percent.

See information about small business FICA taxes.

That tax cut expires on December 31, 2011 and it means that millions of Americans will be surprised in January by lower take home pay just when they start getting their bills for the holiday shopping season. Nothing slams the breaks on a weak economic recovery like consumers that tighten their wallets and avoid spending.

Pretty much every reputable economist out there agrees that eliminating the payroll tax cut will not only reverse the stimulating economic effect it had, but will also act to slow growth, just when it is getting started.

Of course, like everything in Washington these days, extending the tax cut is caught up in partisan bickering by politicians who grow ever more loyal to their parties while caring less and less about what it good for the country and the U.S. economy. Time will tell if the party bosses can wring enough bragging rights from some sort of agreement to get the extension before it is too late. Even one round of smaller paychecks could have a chilling effect on consumer spending.

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Jobless Claims Continue to Fall originally published at Personal Finance Blog - FinanceGourmet.com

The U.S. economy continues to grow at a very slow pace according to the Federal Reserve’s Beige Book. That isn’t good enough considering how deep the current recession is. At this rate, growth back to anything resembling an expansion would take a very long time. However, the good news is that the economy isn’t getting any worse for the time being.

The Beige Book is a summary of the current state of the U.S economy across all of the Fed’s districts and for the most part, all reports are of "modest" or even "slight" growth.

Inflation Not Happening

It seems that the highest "street cred" a Fed banker can have is to be an inflation hawk. Since 2008, however, inflation hawks have actually been Chicken Little’s. With the economy growing very slowly and many Americans still out of work, it’s hard to see where inflationary pressure could come from.

The just released Consumer Price Index (CPI) just confirmed that there is no real inflation anywhere to be found in the economy. The index rose just 0.1 percent. Prices excluding food and energy, both traditionally volatile pricing sectors that seem to move of their own accord rather than in step with other prices, actually rose at the slowest rate in six-months, suggesting that retailers have little to no upward pricing power in the months leading up to the holiday season.

In other words, the economy has to get moving again before anyone is going to have luck raising prices and that isn’t going to happen before Christmas. Look for a value priced holiday shopping season, but big discounts might be hard to come by as retailers won’t be reducing prices from higher profitability, growing prices, but rather from low profitability, stable prices.

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Economy Growing Slowly – Inflation Benign originally published at Personal Finance Blog - FinanceGourmet.com

Sales of new houses rose 7.3 percent, to 323,000 annual pace, the highest level in 2011. Of course, this comes on the heels of a record low just two months ago.

New home sales statistics are quoted on an annual basis. In other words, if April’s new home sales numbers were what the new home sales numbers would be for every month of the year, how many new homes would be sold. So, the 323,000 new homes sold number means that there would be 323,000 new homes sold for the year.

There are two important things about this latest economic data and how it will affect investors and the economy. First, the number is slightly higher than what economists were expecting. Any time a number surprises to the upside, that is good news, because it means that things were actually better than everyone thought. Second, while the number is higher, it is still very weak, meaning that IF the housing market is recovering, it is doing so very meekly.

The big problem for new home sales is that there are so many existing homes for sale on the market today. Foreclosures and distressed owners continue to flood the housing market, and a weak and inconsistent lending environment has even willing buyers unable to buy. Until the lending market gets better, housing won’t get much better, and the economy will be trying to pull an anchor up the hill.

Too bad Congress is too busy playing politics to take action.

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New Home Sales Rise originally published at Personal Finance Blog - FinanceGourmet.com

The April jobs report is due out from the U.S. Labor Department on Friday. While economic statistics typically have a temporary effect on Wall Street before being shoved aside by whatever bit of news or data arrives a few days later, the April jobs number could be a bigger deal than usual.

Recently, the Federal Reserve left interest rates unchanged. Following the announcement, Fed Chairman Ben Bernanke held the first ever Fed press conference in which he laid out the Fed’s view of the U.S. economy. He suggested that the economic recovery is slowing. He didn’t use the word fragile, but plenty of people heard it anyway. He also suggested that inflation was tame and that any uptick was dwarfed by the greater potential for a slowdown in growth.

Jobs Key to Economic Recovery

Business spending has been measured, despite a tiny boom going on in Silicon Valley. Consumer spending has been whacked by not only by widespread job losses, but also by the housing market crash and subsequent collapse of the mortgage industry.

Many homeowners have no equity left in their homes. Those that do are finding that terms for second mortgages are no better than the difficulties faced by many in getting first mortgages. Refinancers aren’t doing any better regardless of credit score and loan payment history.

In other words, the only source of new money for this economy is new jobs. Without them, the recovery is doomed. With them, what is now a fragile economic recovery could slowly bloom into a full-fledged recovery.

The April jobs report is expected to come in with around 200,000 new private sector jobs. If the actual jobs number is close, expect the usual temporary effect from the jobs report, up if better than 200K or lower if less, either way, faded into market memory by the middle of next week.

If, on the other hand, the jobs number comes in substantially lower, expect some serious fallout. Unless analysts choose to write off April as an anomaly, low job creation suggests the economy may not be recovering, slowly or otherwise. That suggestion could trigger the slow unwinding of the current bets on Wall Street that better numbers and better growth is on the way for stocks and earnings. Without that optimism, nothing is holding this market up.

Low job growth, plus Washington budget cutting that slashes jobs at the Federal Government could be the death blow for an economic recovery that has been slow and unsteady thus far.

If investors start worrying too much about that possible future, the market is due for another downturn that could wipe out all the gains for this year and may even start wiping out last year’s stock market rise.

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April Jobs Report Could Have Big Impact On Stocks originally published at Personal Finance Blog - FinanceGourmet.com

Today marks the first time the Federal Reserve will hold a press conference to go along with it’s decision on whether to change interest rates. Most observers expect the Fed to leave interest rates unchanged (basically at zero percent), so the real action will be in the details that emerge from the press conference where questions about how the economy is doing, what the Fed is doing, and how long they think those things will last, will take center stage.

In another change, the Federal Open Market Committee will also release the quarterly growth and inflation estimates that is uses to make its rate decisions today. Usually, the Fed releases those numbers weeks later.

Today’s changes could make for a very volatile day in the markets because no one has ever done things this way before, so no one really knows how they are supposed to react.

• Will the markets over-react to something Fed Chairman Ben Bernanke says?
• Will the markets react less than they would otherwise given how fresh all the data is?
• Or is this all just a bunch of sound and fury signifying nothing?

We’ll all find out later today.

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First Ever Fed Press Conference originally published at Personal Finance Blog - FinanceGourmet.com

The November jobs report came in worse than predicted. Recent reports suggesting that consumers were spending more money and that first-time unemployment claims were dropping suggested that the Great Recession might be coming to an end in 2010. Alas, the jobs report shatters that idea for the short-term.

A recovery without new jobs isn’t worth the paper it’s statistics are printed on. Ongoing economic recovery requires that not just the people who are currently employed go back to spending and non-fear based economic decisions, but also that more people join their ranks. Unfortunately, that can’t happen if people are not returning to being employed.

Smart money decisions will swing from taking advantage of low prices and low interest rates to saving cash. While increasing savings is good on a personal level, it isn’t necessarily good for the economy overall.

The possibility that jobless benefits will begin to run out for millions of Americans only adds an additional weight to the overall economy. Put it together with States losing billions of dollars worth of Federal money from economic stimulus programs ending in 2011, and you have a lot of negatives pulling on the first quarter of 2011.

The Federal Reserve’s recent announcement to continue providing monetary stimulus is no doubt tied to the expanding scope of economic concerns. Whether the Fed can keep the economy from falling backwards is unknown, but it can blunt the effects of all the negatives lining up against a strong economic recovery next year.

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Unemployment Report Bad News for 2011 Economy Recovery originally published at Personal Finance Blog - FinanceGourmet.com

Is the recession really over?

That is the question a lot of people are asking today as newspapers, news websites, and television news shows lead with a headline that seems to declare that the economy is back to normal. Of course, this is not at all what is going on. This presents another opportunity to take a quick look at how financial facts and financial reporting are not always in sync.

First, the actual event that occurred is that the National Bureau of Economic Research, or NBER, released a statement saying that “a trough in business activity occurred in the U.S. economy in June 2009.” Obviously, this does NOT mean the economy is back to normal, a fact that the NBER statement goes out of its way to highlight.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.

Why is every news outlet in America proclaiming that the recession is over then?

Technically, the recession is over, but that doesn’t necessarily mean what people think it means. Assuming the picture below depicts a hypothetical economic cycle of growth, or expansion, followed by decline, or contraction, the “end” of the first recession occurs at the lowest point of decline, as indicated by the red arrow.

Notice how this in no way implies that the economy has returned to normal. For one thing, there is no such thing as a “normal” economy. Technically, the economy is always growing, contracting, or flat. In other words, the economy is always moving. People like to think that a growing economy is “normal” but there is nothing more normal about growth than there is about a shrinking economy.

Looking at the picture above, no one would dispute that the red arrow points at the time when the economy stopped shrinking and started growing again. This is what it means when the recession is over. However, this DOES NOT mean that the economy has gotten back to where it was. In fact, in the graphic above, the economy goes through two more recessions before growing back to the highest point of expansion from the first economic cycle.

Declaring Recession Over

It is also important to realize that NBER is not a forecasting group. In other words, NBER does not make predictions about whether or not the economy has hit bottom. Instead, NBER looks at historic data and then determines where the bottom of economic contraction occurred. NBER is essentially looking at a graph like this, and pointing out where the lowest point of the trough occurred.

This also does not in any way state that the economy cannot go down from here. Economic expansions can be very short-lived. When a recession ends and a new one begins shortly thereafter, is often referred to a double-dip recession. That may still happen to the U.S. economy, or it may not. Either way, all that anyone is saying today is that there was some upward trend in the economy that started in June 2009. How much or how long that upward movement lasts, is still to be determined.

Finally, remember that this has NOTHING to do with the stock market, the real estate market, or any other financial markets. Economic data is tied to how much stuff the country is making, how much money the country is spending, and how many people are working. It is not about how well the stock market is doing or if stocks are going to make money again.

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Is The Recession Really Over – Recession Ended in June 2009 News Reports Say originally published at Personal Finance Blog - FinanceGourmet.com