US Economy Mired in a Sea of Contradictions


1.Consumer Confidence Continues to Fall

2.Holiday Spending PlansMay Not be Affected by Shutdown

3.Unemployment Rate Dips to 7.2%, But New Jobs Disappoint

4.More Americans on Welfare Than Have Full-Time Jobs

5.Fewer Young People Entering the Workforce

6. National Debt Soars Record $328 Billion Overnight!


Consumer confidence has plunged over the last month, due in large part to the government shutdown and fear that the US might default on its debt – because of the ineptitude of our leaders in Washington. Normally, when consumer confidence plunges, we would expect a significant slowdown in consumer spending, which accounts for 70% of GDP.

Yet according to the latest Gallup poll, consumers plan to spend even more this coming holiday season than in the past two years. This would seem to be amajor contradiction. However, what this tells me that most Americans have figured out that there was never really a threat that the government would default on its debt, as I opined recently. That’s the good news.

The bad news is that the delayed September unemployment report was yet another disappointment, even though the headline unemployment rate inched down to 7.2%. New jobs created in September were well below expectations. More importantly, the Census Bureau reported last week that there are now more Americans on welfare than those who have full-time jobs. That is very disturbing.

Finally, I presume you noticed that our national debt skyrocketed by a record $328 billion in one day following the lifting of the debt ceiling earlier this month. The Treasury had to replenish all those “extraordinary measures” it used to fund the government since we hit the previous debt ceiling back in May. Our national debt is on-track to nearly double under Obama.

Consumer Confidence Continues to Fall

As noted above, consumer spending accounts for apprx. 70% of GDP – all goods and services produced by the US economy. And consumer spending is directly affected by how confident Americans feel about the economy and jobs going forward. Right now, 73% of Americans feel the country is headed in thewrong direction, while only 20% think we’re going in the right track, according to the average of the last eight polls asking that question.

The University of Michigan reported that its Consumer Sentiment Index fell to 73.2 from 77.5 in September. The index has fallen for three straight months after reaching a six-year high of 85.1 in July. A measure of Americans’ expectations for future growth fell to its lowest level since late 2011, pulling down the overall index.

United States Consumer Sentiment

The Conference Board’s Consumer Confidence Index came out this morning and as expected, it also fell significantly from a revised 80.2 in September to 71.2 this month. It was the worst monthly drop in more than two years and was well below the pre-report consensus. Forecasters believe that the government shutdown and fear of default drove both indexes sharply lower.

This morning we also got the latest retail sales report for September. The official number from the Census Bureau showed sales down a modest -0.1%, thanks to seasonal adjustments. However, prior to the adjustment, retail sales were down awhopping 9%last month! Not surprising, the mainstream media failed to report this disturbing fact.

Holiday Spending PlansMay Not be Affected by Shutdown

Economic forecasters have worried that the government shutdown and the debt ceiling battle might cause consumers to pull in their horns this holiday season. But maybe not, so says the latest annual survey by Gallup. Americans, on average, expect to spend $786 on Christmas gifts this year, which is actually a little more than in each of the past two years.

Nearly nine in 10 US adults say they will spend some amount of money this year on Christmas gifts. Some 30% plan to spend at least $1,000 this year, and half plan to spend at least $500. Only 3% intend to spend less than $100, according to Gallup.

Estimated Christmas Spending, 1999-2013

Gallup is one of the most respected pollsters out there, and the latest poll may prove to be correct. Yet I am going out on a limb to predict that holiday shopping this year will be worse than expected. Why? The latest implosion in consumer confidence is very significant, as is the huge drop in non-seasonally adjusted September retail sales.

The US stock markets are still trading higher on the day as this is written, despite the very bad economic news out this morning. I don’t think the news has fully sunk in yet.

Unemployment Rate Dips to 7.2%, But New Jobs Disappoint

The jobs report for September which was scheduled to come out on Friday, October 4 was delayed due to the government shutdown. The report finally came out last Tuesday and was weaker than expected. Employers added only 148,000 jobs in September, well below the consensus of 185,000 and fewer than the 193,000 jobs added in August. The monthly average for the last year was 185,000.

The good news is the unemployment rate fell to 7.2%, the lowest since November 2008, as 73,000 people joined the labor force and 133,000 people said they got jobs last month. That’s considered encouraging after months in which thousands of Americans were dropping out of the workforce or giving up on looking for work. Still, 11.3 million Americans are jobless.

The conflicting picture comes from two separate surveys conducted each month, which don't always match up. The first survey asks businesses and government agencies about their hiring, while the second survey covers employment status of individual households.

The cloudy picture of the job market isn’t likely to clear anytime soon. The economic impact from the government shutdown is likely to show up in the October jobs report, which is expected to be even worse than the latest report for September. Its release will be delayed until November 8, a week later than scheduled due to the government shutdown.

For individual groups that form the core of Obama’s voting constituency, the news in the September jobs report was almost entirely bad. A whopping 154,000 women lost jobs in September alone, and female participation in the labor force hit a 24-year low.

Young Americans remain stuck in recession. The jobless rate for 18 to 29 year-olds is 11.2% versus 7.2% nationally. If you cut the age group down to those 18 to 25 year-olds, the unemployment rate jumps to 16%. That number is particularly concerning to me since my two kids are in that age group and will be graduating from college over the next couple of years.

The broader measure of unemployment, the U6 data, remained at 13.6%. The U6 includes those without jobs, plus those who are “marginally attached” to the workforce and who work part-time but want full-time positions. That’s still way above the 10.1% in June 2009, the month the economy supposedly began its recovery.

In yet another contradiction, stocks rallied on the disappointing jobs report last week. Traders assumed that the weak jobs report, plus another one expected next month, are a sure sign that the Fed won’t taper its QE purchases until sometime next year. For now, bad economic news = good news for stocks. What else is new?

More Americans on Welfare Than Have Full-Time Jobs

The supposed improvement in the unemployment rate belies depressing new data from the Census Bureau. On October 18, it revealed that more people in America today are on welfare than have full-time jobs. That’s correct. At the end of 2011, the last year for which data are available, some 108.6 million people received payments from one or more means-tested government benefit programs – better known as “welfare.”

I should point out that the 108.6 million Americans on welfare donot include those who receive Social Security payments or veteran’s benefits, both of which are earned payments.

Meanwhile, there were just 101.7 million people with full-time jobs, the Census data show, including both the private and government sectors. Again, this data is from the end of 2011. And the number of Americans on the government dole has increased significantly since then.

Welfare NationThis is a real danger for the US – the danger of dependency. As I have written often before, anytime more people are being paid not to work than to work, it imperils our democracy. No one votes to cut his/her own welfare benefits. So welfare grows. Making matters worse, numerous studies show that once on welfare, only a tiny percentage ever get off of it.

In recent years, the welfare state has expanded to create an all-encompassing security blanket to protect Americans from most all difficulties of economic life. For everything from losing a job to having trouble paying the rent, there’s now a welfare program (or two or three) for it.

And it gets even worse. A Cato Institute study in August found that welfare now pays more than minimum-wage work in 35 states. Indeed, the federal government has 126 separate programs to help low-income earners. The Cato Institute study states:

“The current welfare system provides such a high level of benefits that it acts as a disincentive for work. Welfare currently pays more than a minimum-wage job in 35 states, even after accounting for the Earned Income Tax Credit, and in 13 states it pays more than $15 per hour.”

Given all the easily accessed welfare incentives, it seems as if the government doesn’t even want people to work. But why would that be? Perhaps it’s in the interest of those on the so-called progressive left – those most responsible for the uncontrolled growth of the welfare state – to keep Americans out of work and dependent on the government.

Sure looks that way.

Fewer Young People Entering the Workforce

Getting a job used to be the first step after graduating from high school or college, but not so much these days. Less than 78% of people aged 20 to 34 either have jobs or are looking for work, according to the Bureau of Labor Statistics. That’s down from the peak of 83% in 2000, and the lowest since the 1970s.

The biggest thing keeping young people out of work is the weak economy. Recessions are particularly hard on young people, with “last-in, first-out” policies at many companies and organizations and a preference to freeze hiring before they start laying off employees, which also hurts recent grads.

Percent of People Aged 20 to 34 in the Workforce

Economists generally agree that, aside from the weak economy, extended education is the biggest reason why today’s youth are shunning the job market. More people are going to college now – 25% more compared to 2000 – and they’re taking longer to finish.

There are several reasons why young people are spending more years in school rather than getting into the workforce as soon as possible, not all of which make immediate sense. First, more and more young people are staying in school longer to get more advanced degrees. There is a growing feeling that a college bachelor’s degree is no longer sufficient to provide a middle class income.

Second, the cost of going to college has spiraled upward over the past few decades, and that is causing students to take longer to finish. On the surface, that appears to be yet another contradiction, but many students are taking fewer classes per semester to keep costs down. Others drop out for periods of time to work and scrape up enough money to enroll again.

There are other reasons why young people are not getting into the workforce as early as in the past, but economists generally agree that, aside from the economy, extended education is the biggest reason why today’s youth are shunning the job market.

National Debt Soars $328 Billion Overnight!

US debt jumped $328 billion overnight on October 17, the first day the federal government was able to borrow money under the deal President Obama and Congress sealed the day before. Our debt now equals $17.075 trillion, according to figures posted by the Treasury Department on October 18.

The $328 billion increase is an all-time record, shattering the previous high of $238 billion set two years ago. The giant jump happened because the government replenished its stock of “extraordinary measures” that the Treasury had borrowed from various federal agencies since May to pay the nation’s bills.

Debt Subject to Limit

In this case, the Treasury Department borrowed $400 billion from other agency funds beginning in May, awaiting a final deal from Congress and Mr. Obama. Normally, Congress sets a borrowing limit, or debt ceiling, that caps the total amount the government can be in the red.

Not this time around. Under the terms of the latest deal, Congress set adate deadline instead of a dollar cap . That means our debt can rise as much as Obama and Congress want it to, until the February 7 deadline.

Judging by the rate of increase in the debt over the past five months, it could end up meaning that Congress just granted Mr. Obama a debt increase of$700 billion or more. Perhaps this is the biggest contradiction of all: Debt Limit Deal = No Limit on Federal Debt.

National Debt to Double on Obama’s Watch

In January 2009, when President Obama began his first term, the total national debt was $10.6 trillion. As noted above, today the debt stands at a staggering $17.1 trillion. The White House Office of Management & Budget (OMB) recently projected that the federal budget deficit for fiscal year 2014, which began on October 1, will be $750 billion.

If the deficits in fiscal years 2015 and 2016 continue at the same rate – and there’s no assurance they won’t be higher – then the national debt would be $19.35 trillion at the end of FY2016. Who could possibly have imagined in 2008 that our nation’s debt could mushroom by $8.75 trillion in the next eight years?

It’s not as if these projections were some sort of secret in 2012 when Americans elected Obama to a second term in office. Each year, the president is required by law to submit a proposed federal budget to Congress, and those budgets must include a 10-year forecast of what the budget deficits are expected to be. So, we knew what we were getting.

The national debt is on track to increase by a record 83% (or more) by the time Obama leaves office. That is the largest increase ever by far! And how about past presidents? The national debt increased by 38% in George W. Bush’s eight years. In Bill Clinton’s two terms, the debt increased by 32%. And we thought those numbers were huge. Not now.

The question is: How long will investors and foreign governments continue to buy our Treasury debt? Especially when they all know there isno chance the government will ever pay it all back. I don’t know the answer, but this unprecedented debt party will end very badly.

Best regards,

Gary D. Halbert

Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert, Mike Posey (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

© Halbert Wealth Management

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