Economic Checkup

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Seeking Signs of Health

Mixed messages in the media are rampant these days. Hopeful signals that the recession may be over are interspersed with stories of continuing high unemployment. Where does our economy really stand? Let's take a look at some of the main economic indicators to gain perspective on where we are and what our financial future may look like.

Gross Domestic Product (GDP)

The GDP is used as an indicator of the overall strength of the economy's health. It measures the total goods and services produced by the U.S. in previous periods, but does not reliably predict how the economy will behave in future periods.

Estimates indicate that in the fourth quarter of 2009, the GDP (adjusted for inflation) increased at an annual rate of 5.9%. This indicates that the U.S. economy may have emerged from the recession after four consecutive quarterly declines; however, economic activity remains well below its peak. Government programs seem to have been effective in stabilizing the economy, but it remains to be seen how sustainable economic growth will be as these programs wind down.

Consumer Price Index (CPI)

The CPI measures the change in prices of goods and services over time. In the first half of 2009, the CPI was negative, indicating a deflationary environment (an environment in which prices are going down), a sign of a contracting economy. However, by the end of 2009, the annual CPI rate was 2.7%. While this is lower than the long-term historical CPI (which averages about 3% annually), it reflects some increase in prices. Experts believe that, with the tremendous injection of cash through government spending and stimulus programs, we may shortly be headed toward a more inflationary environment.

Unemployment

The Bureau of Labor Statistics surveys households to determine the rate of unemployment. Individuals are classified as unemployed if they are currently seeking work and are available for work but lack current employment. Because the costs of high unemployment may include increased poverty and less consumer spending, the unemployment rate can be an important economic indicator. Labor growth is also an important part of GDP growth. However, trends in unemployment do not always predict the future direction of the economy.
The unemployment rate at the end of 2009 was 10%. (The average annual unemployment rate between 2000 and 2007 ranged from 4.0% to 6.0%). This statistic perhaps shows the most pessimistic outlook, since unemployment remains high despite the government's attempts at stimulating the economy.

Interest Rates

Interest rates are a key economic indicator, as they impact consumers' and businesses' ability to save, invest, and spend.

The Federal Reserve (Fed) has kept the overnight lending rate, also known as the "fed funds" rate, at a record low of between 0 and 0.25% for the past year. (Business and consumer loans are typically tied to the prime rate, which lenders generally set at about three percentage points higher than the overnight lending rate). Lowering interest rates is one way to stimulate the economy; by making it cheaper to borrow money, it encourages consumers and businesses to spend or to invest. The danger is that if this low interest rate doesn't accomplish its stimulating effect, the Fed has no room to continue to lower it. They will have lost a valuable tool to help boost our economy. Alternatively, there is the risk that low rates can overstimulate the economy and lead to higher inflation.

The data about our economy is slowly improving; there is hope in seeing some growth. However, with high unemployment and the end of government stimulus programs, the struggle is likely to continue. It's not easy to pull out of a recession, particularly one of this magnitude, and the process may take some time.

_{Sources: National Bureau of Economic Research; U.S. Department of Labor - Bureau of Labor and Statistics; Bloomberg L.P.}

Investing in America
The Economic Dividends of the Stock Market

You may have had a hand in the development of internet search engines, new drugs for cancer, innovations in car safety and fuel efficiency, and even the creation of the video game Guitar Hero®, among other things. How? By investing in the U.S. stock market. Investing in stocks is not only an important vehicle for growing your retirement savings; it also serves a vital function in our economy. By investing in U.S. stocks, people are also investing in the future growth and innovation of American companies. While it's easy to focus on the money-making (or losing) power of the market, it can be refreshing to remember that the stock market is an opportunity to participate directly in the larger economy of the country.

"Although it's easy to forget sometimes, a share of a stock is not a lottery ticket. It's part ownership of a business."

^{-- Peter Lynch, investing author and fund manager}

Infrastructure, technology, research, and development all require capital. Selling stock is one way a company raises capital to invest in new technology and improve existing products and services. Investors, as shareholders, take ownership in the company and share in its growth and profits.
"In the short run, the market is a voting machine, but in the long run it is a weighing machine."

^{-- Benjamin Graham, economist and author of The Intelligent Investor}

When volatility strikes, investors are naturally concerned. The recent volatility has been particularly difficult, especially coupled with economic uncertainty and troubled financial institutions. The short-term ups and downs of the stock market reflect investor sentiment and consumer confidence, both of which fluctuate according to the mood and events of the time. However, there's a reason experts continually tell us to keep perspective and maintain a long-term, diversified strategy. The long-term movement of the U.S. stock market reflects the long-term growth of American companies.

"I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies."

^{-- Peter Lynch, investing author and fund manager}

When investors watch stock prices go up and down, sometimes seemingly irrationally, it can be bewildering and frustrating to try to understand the reasons for the volatility. It's important to keep in mind that even though the laws of supply and demand determine a stock's price at any given time, shares of stock still represent ownership in the underlying company and retain that basic value no matter what the current stock price.

"The average long-term experience in investing is never surprising, but the short-term experience is always surprising."

^{-- Charles Ellis, investment consultant, trustee and chair of the investment committee at Yale University}

With a stock market crash like the one we've recently experienced, the biggest fear investors have is that the market will continue to plummet rather than recover. This is a good time to consider that the U.S. stock market does not exist in a vacuum but represents the business of America. Certainly, some businesses will struggle during uncertain times, but companies will adapt to the economic environment and shifting demands of consumers in order to find new ways to grow, thus benefiting shareholders. At the same time, investors are helping to spur that growth by providing capital to create innovation, invention, and infrastructure.

Information on the go

No time to keep up on the news in personal finance? Try listening to a podcast during your commute to work. Here are five websites that feature podcasts to keep you up-to-date on the latest tips and advice about money and finance.

• National Public Radio: Planet Money -- This podcast does a great job of explaining the forces that have shaped our economy. npr.org/blogs/money/
• American Public Media: Marketplace Money -- This site features hour-long segments on personal finance and investing topics. marketplace.publicradio.org/
• Moneygirl's Quick and Dirty Tips For a Richer Life -- A podcast that provides short and friendly personal finance and investing tips. moneygirl.quickanddirtytips.com/
• Feed The Pig -- Feed the Pig is all about practical ways to manage your personal finances more effectively. feedthepig.org/
• Kiplinger's Personal Finance -- A personal finance podcast dedicated to discussing such topics as budgeting, asset allocation, retirement plans, IRAs, and other areas in personal finance. kiplinger.com/podcasts/

Regulators Rein in Credit Card Companies

Over the past twenty-five years, credit cards have become not only more common but also more essential. Because credit scores affect everything from mortgage applications to job applications, it's difficult to get by without a credit card; most Americans have at least one. Regulators have recently recognized the need to protect consumers from some of the more aggressive tactics credit card companies use to squeeze fees and interest payments from their customers.
Beginning in July 2010, credit card issuers will have to abide by a number of new rules. Consumers will be pleased with some features of the reform:

• Limitations on interest rate hikes: Rates on purchases must stay fixed for one year; after that, users will receive 45 days' notice before any rate increases (previously, only a 15-day notice was required).
• Limitations on other fees: You can no longer be charged a fee for making payments online or over the phone unless you request expedited payment. Also, banks will not be allowed to charge you fees for going over your credit limit unless you specifically authorize it beforehand.
• Changes in penalties: Cardholders will have at least 21 days to pay monthly bills. Issuers will not be able to increase the interest rate on existing balances due to late payments unless the payment is at least 60 days late. Most importantly, your interest rate cannot be raised based on a late payment to a different credit card company.
• More control over your payment: You'll be able to allocate payments in excess of the monthly minimum to higher-rate balances on your account. Previously, lower-rate balances would automatically be paid off first in some cases, allowing the issuer to charge higher rates for a longer period of time.
• While consumer protection on credit cards may be welcome, there are likely to be some effects consumers won't be as thrilled about:
• While interest rates will probably be more stable, they will also probably be slightly higher on average to make up for some of the revenue lost due to reform changes.
• Annual fees will likely become more common.
• Credit will become tighter: With limitations on fees, issuers may become choosier about whom they lend to and how much credit they extend.

The information in this publication is not tax or financial advice. You are encouraged to review the provisions of your plan and to consult a financial or tax advisor on these and other tax and financial planning matters.

© 2009 Arnerich Massena Education, Inc. Articles reprinted by permission. DRS-MMBNWS