On the heals of recent negative job numbers reported by the U.S. Department of Labor, comes news that bankruptcy filings increased by 14 percent during the first half of 2010. Does this bode well for the economy or is this one of the signals of a recession coming back to haunt us?

Unfortunately, as is always the case when it comes to finance and the economy, the answer is complicated. The most important thing to notice is that the first half of 2010 includes January through March of 2010 which are the months of this year that came before the stock market started recovering. Those months also came before the some lending started loosening back up. They also came before job numbers started going up suggesting that more people will not need to file for bankruptcy if they can make their loan payments with the salary from their new job.

However, it would be foolish to dismiss the news of increasing bankruptcy filings as a non-event. It is just as important to note that the 14 percent increase in filings being reported is as compared to the first half of 2009 when bankruptcy filings were not exactly at all time lows. In fact, the first half of 2009 was very bad for bankruptcy filings already. To actually increase over that number, things in the economy had to be really bad.

What does high bankruptcy filings mean for the economy overall, and does this signal a stock market downturn or a coming recession or even depression?

Bankruptcies Get Worse Economic Outlook for 2010 Gets Clearer

The bad news, of course, is that if people are filing for bankruptcy that means that financial institutions will suffer losses due to those bankruptcies. Furthermore, plenty of the bankruptcies from “irresponsible” borrowers who were clearly overextended in order to buy real estate – remember how “fix and flip” was the easy way to get rich just a few years ago – and those who just overspent and never had any real chance of paying back their loans without selling their house to get the equity, already filed for bankruptcy months ago. That means that these bankruptcies are the “hard” ones, the bankruptcies that come from people who have lost their jobs being out of work for so long that they had choice and no other way to make it work.

Now, for the good news.

Americans in general have far too much debt and far too little savings. This so-called savings deficit is a big problem. Furthermore, for many Americans who have been jobless for too long, there is almost no way they could get out of the hole they are in even if they got a new job paying what they used to make tomorrow. Finally, the U.S. real estate market has bottomed out or is only declining slowly in all but the most overheated real estate bubble markets.

Doesn’t sound like good news does it?

Here is where the good news for the economy is.

As has been widely reported, banks and financial institutions took government stimulus dollars and bailout money to shore up their own balance sheets and did very little additional lending. That means that a majority of debts being wiped out by bankrupt borrowers are old loans instead of new ones. That means that a lot of these debts have already been written off or assigned very low values on the bank’s balance sheets. In other words, this isn’t going to make things any worse for them than it already was.

With that being the case, at least for the short term, there is little concern for the banking sector as bankruptcies rise, so long as they come to an end soon. This is where the good news comes from.

As bankruptcy filings accelerate, they clear out the pipeline of possible bankruptcy filers that might otherwise come later. Banks will find that the profits they managed to squeeze out earlier this year are gone, however, when they come back, there will be much less potential danger overhanging them.

On the other side of each bankruptcy filing is a person or family that no longer has to pay off debts that had grown so unmanageable that they could have choked off 100% of discretionary spending from that family for years. In the aggregate, this would be much worse news for the economy than high bankruptcy numbers now. While bankruptcy is a huge blow it is a one time event from which recovery, albeit a slow one, begins immediately.

Many bankruptcy filers are baby boomers approaching retirement. These people have gotten the very pleasant surprise that, in most cases, retirement accounts such as IRA accounts and 401k accounts cannot be touched in bankruptcy. These same borrowers will also find out that as long as they make their mortgage payments, they are also very unlikely to lose their home during bankruptcy, because a certain percentage of equity is considered untouchable by creditors, as well. Having borrowed against this equity earlier, and with home values dropping, many filers will find themselves well under the equity limit.

Add it all up, and you have a large collection of people who will actually find themselves in a pretty decent position as the economy turns around. Those without jobs will find employment again, and those with them will find their paychecks much easier to stretch to make ends meet without all of those credit card payments. In other words, it will take a lot less economic improvement to put these households back to “normal.”

In short, higher bankruptcies and accelerating filings will cause pain in the short-term, but may be just what the doctor ordered for the economy for next year and beyond.

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Economy Outlook 2010 – Bankruptcy Filings Increase First Half of 2010 originally published at Personal Finance Blog - FinanceGourmet.com

Recent new that payrolls fell in June here in the U.S. is bad news for the economy, but maybe not as bad as it is being made out by the headlines.

Let’s start with what the numbers are and move on to what they mean.

As with all economic statistics, employment numbers are compiled from numerous sources which provide an inconsistent snapshot of job activity from around the country. These numbers are made usable by applying a consistent mathematical methodology to them. This results in numbers that may or may not be in any way accurate. What makes the statistics relevant and useful is that because they are always calculated in the same manner looking at the numbers relative to previous statistics is a valid way to analyze growth or contraction in employment.

….More about personal finance tips.

Total Nonfarm Payroll US Department of Labor

The “employment number” everyone is talking about today is specifically the total nonfarm payroll numbers and is based upon a combination of data gathered from surveying people (the household survey data) and surveying businesses (the establishment survey data). Much like the Nielsen ratings for television, the numbers gleaned from the surveys are then extrapolated to represent the entire country.

What Job Losses Mean For The Economy

The June 2010 total nonfarm payroll declined by 125,000 for June. This is the “bad” news that headlines are shouting from the rooftops. The same report also says that the unemployment rate actually dropped from 9.7 percent to 9.5 percent. This is the “good” news that no one feels like playing up today.

Keep in mind that since today is July 2, that this data is in no way “final” and that the “revised” June payroll numbers will come out later.

So, what do the job losses in June mean for the economic outlook for the second half of 2010? What do they mean for the stock market recovery underway since 2009?

As always, viewing a single number without context is not meaningful. The June payroll numbers are the first to show overall job losses in 2010. That means that either:

• a) The U.S. economy is slowing back down
• b) The U.S. economy is moving sideways
• c) The U.S. economy continues to grow, but at a slow pace

Temporary employees working on the US Census 2010 were finished with their work in June. These employees alone counted for a drop of 225,000 jobs. More importantly, the private-sector actually added 83,00 jobs. This is in no way robust growth, but it is still positive. However, this low-level of growth also means inflation will not increase and the Fed can keep interest rates low.

The economic outlook for the rest of 2010 depends then on two factors. First, is how these numbers hold up when the revised numbers come out later. If the private-sector number remains positive, then that is good news overall. If, however, that number gets revised down and becomes negative, then we have a problem.

The second factor is the July employment numbers. If July also comes in negative, then one cannot help but consider that whatever growth the economy managed to squeeze out on the job front during 2010 is over for now, or at least on pause. If job growth stalls out now, there is nothing to kick it back into gear until the holiday shopping season with a few hundred thousand temporary jobs come back online.

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Economy Outlook 2010 2nd Half – June Job Losses originally published at Personal Finance Blog - FinanceGourmet.com

To hear many of the newspapers and other media outlets tell it, Google’s blowout third quarter is the official signal that the recession is over and that businesses are spending again, because customers are spending again, and everything is fine again.

The logic goes something like this. Google is not only the largest search engine, but it is also the largest provider of Internet advertising, particularly in America where its ad market share is something like 75% or so. Thus, Google acts as a bit of a proxy for the online advertising market in general. Online advertisers, then, spend money on online advertising only when, a) they have the money available to spend, and b) there are customers out there spending money to attract. So, theory is that since Google’s earnings came in above expectations, then that shows that advertisers are spending more money on online ads, which therefore means that more consumers are spending money online. That’s the idea, anyway.

Google Is Not The Economy

It is tempting to pronounce everything that Google does and everything that happens to Google as very important to major aspects of American life, including the overall business environment, and the U.S. economy. After all, Google is probably one of the most followed stocks in the country. Those who own shares can’t stop obsessing about them (and using them as proof that they are smart investors) and those who don’t own them can’t stop obsessing about whether or not they should cost as much as they do. Analysts trip over themselves raising their 12 month price expectations and revenue forecasts, each one dying to be the one who was "right" by calling the huge upward move in the most popular stock.

However, there is a major problem with using Google’s fortunes in this way. Regardless of whether or not Google’s stock is or is not a good investment now, the company makes a very bad barometer of the current state of business and by extension, the economy overall.

Google’s advertisers are almost exclusively smaller businesses. As such, Google’s fortunes do not connect very much with the major corporations whose fortunes move the most widely followed market barometers like the S&P500 Index, the Dow Jones Industrial Average, and even the NASDAQ 100.

While small business is a major component of the U.S. economy – some statistics suggest that small businesses are THE drive force of the American economy – there is a very big disconnect between most small businesses, and those who advertise online via Google and other ad networks. Entire segments of the small business economy have nothing to do with online advertising. Mom and Pop stores on Main Street, U.S.A. typically do not find their customers online.

In fact, the vast majority of all online ads are placed by online retailers, which is a very small subset of small businesses overall. Furthermore, increased online spending could actually be an indicator of LESS spending by U.S. consumers. After all, many people turn to online retailers hoping to find cheaper prices, different products than they would normally buy, a way to save money by not paying sales taxes, and of course, to shop around for the lowest prices without ever leaving their homes.

While many other indicators seem to be pointing toward a recovering U.S. economy, including the fact that over 70 U.S. cities are no longer statistically in a recession at all, using Google as the proverbial canary in the coal mine for the American economy, carries a very significant possibility of providing the wrong signal at the wrong time.

Related posts:

1. Is The Recession Really Over – Recession Ended in June 2009 News Reports Say
2. Apple Earnings Way Up for Quarter

Google Posts Higher Than Expected 3rd Quarter Numbers – Is The Recession Over originally published at Personal Finance Blog - FinanceGourmet.com