Doing the Math on Jobs

It’s no secret that the Job market is struggling.  In fact, it is down right UGLY. Numbers are tossed around every week, but what we hear in the media could be a bit misleading.

We all know that without Jobs it is going to take a miracle for the economy to recover.  Why is that?  The short answer is this – without Jobs, people don’t spend, without spending, merchants don’t sell, inventory levels swell, manufacturing slows, company profits dwindle, people get laid off…and the cycle continues.

Each week we get a read on jobs.  First up to bat on Wednesdays is the ADP report.  They give us a forecast of what the private sector might look like.  I say “might” because their batting record isn’t so hot.  Then, next up to the plate is Initial Claims and Continuing Claims on Thursday.  And the big enchilada comes once a month – the first Friday – THE all important Jobs report.

Let’s break this down and keep it simple:

  • Initial Claims – (aka New Claims) people filing for unemployment for their very first time
  • Continuing Claims – people that are unemployed and still looking for work

Here is what unemployed folks can anticipate:

Unemployment benefits are 26 weeks

Then there are the numbers you don’t hear about – –

Extended Benefits – an additional 13 to 20 weeks, based on the state unemployment rate

Emergency Benefits –

Tier 1 – 20 weeks

Tier 2 – 14 weeks

Tier 3 – 13 weeks where total UE is 6% or higher

Tier 4 – 6 weeks where total UE is 8.5% or higher

And now an additional tier (Tier 5) has been proposed by Senator Debbie Stabenow (D) for what is termed the “99ers” (people who have exhausted all 99 weeks of unemployement) .  If they live in a state with 7.5% unemployment or higher, they would get a proposed additional 20 weeks.

Last week we added another 484,000 people who signed up for the first time to receive their unemployment benefits.  Today, it was another 500,000 people.  These are just awful readings which shows us that the “recovery” is still sucking wind.

Continuing Jobless Claims remain at 4.5 million, which does not include “discouraged workers” and in addition, many folks saw their benefits expire.   Look for these folks to eventually roll over to the Emergency Unemployment Compensation benefit category.

If we look to all the folks unemployed…we are hovering near 17% unemployment.

Doing the Math –

Naturally, we all want to see this improve.  The administration has thrown around a number of 6% unemployment as a 5 year target.  Our budgets are based on this 6% figure.  But how do we get to a 6% target for unemployment from these lofty levels?  Great question.

First – we need to account for population growth.  Births per women average 2.1%.  And don’t forget immigrants – those folks need to work also.  For population growth alone, the U.S. needs to add about 125,000 jobs per month.

Second – we are close to 10% unemployment (and this does not include the discouraged workers and those no longer receiving benefits.  So let’s do this math using the 10% figure.

There are 150 million people in the labor force.

That means 15 million unemployed (using 10% as our factor).

The administration says 6% is their target, or 9 million people.  Which means we need jobs for the difference ( 15M – 9M = 6 million jobs).

To create 6 Million jobs for the currently unemployed over 5 years (60 months) = 100,000 jobs per month each month for 5 years.

Add this 100,000 to the 125,000 we need for population growth and we are at a whopping 225,000 new jobs per month for every month over the next five years.

We have only done that for a mere 12 month span once in the history of our country…which was 2006.  To accomplish this month after month for 60 months seems like pie in the sky.

As I mentioned before, there is a link between Payroll Taxes and Jobs.  That could help.  Bottom line is this – to get the economy going…we must put people back to work.

Show Me The Money

Stimulus. Health care reform. Financial reform. Entitlement programs. These programs all cost money and America is racking up trillions in debt to pay for them.

You may be wondering – how does America rack up debt? They issue Treasuries. And lately, they have been auctioning tons of this paper at an alarming pace, in my opinion.

Here is how it works…the government borrows money by issuing Treasuries. Investors purchase this debt and receive a fixed rate of return. Think of the government as a borrower and the investors as the banker. This borrowing (incurring debt) provides the government operating capital.

The government’s borrowing has mostly been financed thru the auctions of short term treasuries… 1, 3, 5, and 7 year notes. This is very much like a homeowner taking out an ARM (adjustable rate mortgage) on your home instead of a fixed rate mortgage. Don’t get me wrong – oftentimes an ARM is the right instrument, it just depends on the situation.

Why didn’t the government go for the longer term instruments? Well…higher rates didn’t look so good on the books. So they opted for the short term picture instead…which offers a bit more attractive rates than longer term. However, here is the catch. They can’t pay the debt back when it matures. And what happens when you can’t pay off your loan? You must refinance. So as these shorter term instruments begin to mature, the government will be forced to “refinance” them, and at higher rates. Why?  Because rates will begin to move higher over time.

As rates move higher, the cost of borrowing becomes more expensive, and the hole gets bigger. A large part of this debt – currently 40% – is in the form of 1 year Treasuries .  In the very near term, the U.S. will be looking to refinance this.  Digging out of this mountain of trillions is going to be even harder as rates move higher. See for yourself the US Debt clock – and see your portion. Our country could have chosen a wiser path.

Currently the U.S. spends $1.42 for every $1.00 she takes in revenue. What would happen if you operated your household budget this way?

Homeownership Builds Wealth

Home. Just the word usually conjures up mental images, smells, sounds in our minds eye. Home is where the heart is. Home is where we make memories. Owning a home… that’s the American Dream.

While it may be the American Dream, don’t overlook the benefits that come with home-sweet-home. Let’s take a peek…

1. Real Estate is a great long term investment. Real Estate – just like interest rates – move in cycles. It is important to keep in mind it is a long term investment and a hedge against inflation. Home appreciation has averaged 6% in the 50 year period from 1977 to 2007. And since the bubble burst in 2007, the past 50 years from 1979 to 2009 the average is 4.51%. What does the math look like on this? If you bought a home today for $300,000…the same home appreciating at 4.51% for 30 years would be worth – $1,126,825!

2. Home prices are currently at a discount. It’s like getting the price roll back at Walmart. Homes are more affordable now than at any other point in time since 1970 according to the National Association of Realtors’ housing affordability index.

3. Rates are the lowest in the history of mortgage ratesdid you hear that? Mortgage terms affect your monthly payments. Check out this historical chart.

4. There is plenty of inventory. In most places it is taking many months to sell a home, creating loads of inventory…both new homes and existing homes. This gives you more choices than before.

5. It’s typically cheaper than renting. Renting deprives you of the tax benefits, which in can help in many households. Mortgage interest is fully deductible on your tax return in most cases. In addition, real estate taxes for both a first home and a vacation/2nd home are fully deductible.

6. Homeownership builds wealth in two ways – through the forced savings of paying down a mortgage and thru appreciation – (the rise in the home value over time). But don’t take my word for it – According to VIP Forum, Federal Reserve Board – the average net worth of homeowners vs renters is much greater. Its Survey of Consumer Finances consistently documents the gap between the wealth of homeowners versus renters. Take a look:

Great long term investment. Prices are at a discount. Rates are the lowest in my lifetime. Plenty of choices in inventory. Tax benefits. Build wealth. Seems like a no-brainer to me.

Where Are Rates Headed?

Interest rates have been dancing around a ceiling of resistance for about 5 days now. This ceiling marks the high water mark for mortgage back security pricing…translation – lowest rates in my entire life. These rates were last seen in the late 50’s.

I’m not sure that anyone expected rates to remain low – and more especially move even lower – after the Fed ended their MBS purchase program. But a few unexpected events around the world impacted us, thus impacting (positively) home loan rates.

Taking a look at the market and where rates currently dance, folks might be wondering if they will continue to improve. It is important to keep in mind that our present environment is a gift – with a big bow attached.

Here are a few things that would likely prevent rates from continuing to move lower:

  • Sovereign debt in Europe
  • Moody & Fitch warning of a possible down grade of the U.S. Triple A rating
  • Inflation, not present now, but could be a big threat once it begins to manifest
  • Fed, when they remove the “extended period” language
  • Fed – when they begin to sell their MBS

Any one of these would trigger a sell-off in the bond market putting pressure on bond pricing. Those “dancing” bonds will be falling fast and rates will rise.

The Fed meets next week. It will be interesting to hear what they have to say. In the meantime remember the proverb, “the best time to plant a tree is 20 years ago, the second best time is now.”



Just One Big Thing…

Whenever I go to the beach, it doesn’t seem to matter if I step onto the sand gingerly, or with the full force of unbridled enthusiasm…I will get just as much sand on me either way. And I am covered…more than halfway up my calves. As I begin to attempt to dust myself off, somehow I manage to be more covered in it. I don’t have an aversion to sand being all over my legs. I guess it is just a natural behavior to dust myself off.

Not too long ago, I reached out to my friend and highly sought speaker, Jason Womack. Jason travels like there is no tomorrow. He is always jetting off to some cool place. He speaks overseas as well as around the US. On top of his heavy travel schedule, he is constantly writing his blog, on social networking sites, and producing valuable content for his business relationships. I just don’t know how he keeps up. It truly is amazing. So I asked.

Jason shared this tip with me (and I tried it yesterday). He said each day in the morning he sets his mind on the one big thing in his big list that he really wants to accomplish. The one thing that will make a difference. The one thing that will move him one step closer to where he is headed. I would imagine that any typical day for Jason would be full of busyness. He says that at the end of the day, he checks in with himself to see how he did. He asks himself the question of “what big thing did I accomplish today that will get me further down my path.” Like all of us, he is human…so some days he doesn’t stack up as well as he would like. But he says that it really does help him stay tuned in.

Yesterday I tried it. But I had 3 big things. Three things that really were important and I didn’t want to procrastinate or delay. I committed to myself that I would not be derailed by emails, interruptions, and other mundane busy work. It took me about four hours, but I did what I committed to do. And my attitude during the afternoon was in the clouds. I felt so good about what I had tackled and completed, that I accomplished even more.

Just like on the beach, when the sand jumps all over you…don’t get overwhelmed. Dust it off. Most of the stuff on your list could be just “stuff”. Some of it, if ignored, may become irrelevant in just a few days. Some of it can wait. And some of it – the big things – get them done now! You’ll be amazed at how great it feels.

Remember this…one grain of sand at a time.



Unintended Consequences?

Just a few days ago, President Obama signed the Financial Reform bill into law.  There is considerable uncertainty among businesses as to how this will impact them.

Financial Reform

It is likely that as legal counsel for companies begin to dissect the 2,300 page document, there will be differences of opinion of what the language means.

While there might be some good elements buried somewhere in this legislation, it is difficult to see just yet.  However, unintended consequences are popping up.  Here are just a few…

Rating agencies won’t allow their ratings to be printed on the offering documents which caused the asset backed debt market to shut down Wednesday afternoon.  In order for deals to happen, it is an important legal measure to have the ratings printed on the offerings.

Wednesday night, Ford Motors pulled a financing deal because they could not get a printed rated on their offering.

Some good elements?  Well, it seems that there is some relief for unemployed homeowners tucked inside this bill!  That should make us smile.  HUD hasn’t released the details on how the $1 billion emergency homeowners’ relief fund will work, however the legislation states the program will start Oct 1.

As the details unfold, I’ll keep you posted!

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