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Scrooge Reports In: Economy's Great? Bah Humbug   (December 2, 2005)

It's hard to know where to start, everything's going so great in the U.S. economy: stock markets are hitting four-year highs, the cost of oil has dropped, consumer sentiment is rising, housing prices and sales are still strong, interest rates are historically low, consumers are still spending more than they earn...hey, wait a minute. Is that good?

Scrooge is reporting in, and he says: Bah Humbug.

Yes, the American consumer continues to spend more than he/she earns, as reported on Yahoo News:
With incomes rising faster than spending, the personal savings rate improved to negative 0.7% from negative 0.8%. The record low was in August at negative 2.2%. The savings rate has been negative for six of the past seven months.
Then there's the recent report from the Organisation for Economic Co-operation and Development (OECD) which outlines the rising imbalances and hence risk in the global economy:
The OECD said oil prices and other imbalances, such as the U.S. current-account deficit, pose increasing risks. The deficit in the U.S. current account, which reflects the balance of trade and other payments, is projected to rise to a record 7% of gross domestic product in 2007.

"These imbalances largely reflect inadequate macroeconomic policies," the report said, singling out the U.S. deficit, as well as "mercantilist" exchange-rate policies in some Asian economies that the OECD said were aimed at winning global market share. It didn't name the offenders, though China has faced the most criticism for its exchange-rate policies.

Adjusting such policies is becoming "increasingly pressing," the report said, warning that inaction raises the risk of large and destabilizing movements in currencies, asset prices and interest rates "and, finally, weakening world growth."
Then there's the weird and troubling phenomena of U.S. corporations not knowing what to do with all the $1.3 trillion in cash they've accumulated from 14 straight quarters of record profits. As reported in the Wall Street JOurnal,(paid registration required) this suggests they don't foresee any rosy prospects for future growth; otherwise, they'd be pouring all that dough into new ways to make more money instead of buying back their own stock:
This year, the companies in the Standard & Poor's 500-stock index are on track to pay out more than $500 billion to shareholders in the form of dividends and share repurchases, or buybacks, according to S&P. That's up more than 30% from last year's record -- and equivalent to nearly $1,700 for every person in the U.S.

The outpouring of cash from corporate coffers in the U.S. is just one aspect of a world-wide phenomenon. With interest rates low, unprecedented amounts of capital are sloshing around the globe, in search of better returns. Pension funds, mutual funds and insurance-company accounts, for example, have some $46 trillion in assets, up almost a third from five years ago.

But there could be an economic downside to the cash glut. The fact that companies have been sitting on so much cash is, in some respects, a vote of no-confidence in U.S. economic prospects: At least some companies may be signaling they can't find enough profitable ways to reinvest their earnings, so they are simply returning it to shareholders.

Some economists call the payouts this year an ominous development that may be stealing from future economic growth, since they suggest companies are having trouble spotting new products, projects or services they think will boost their growth. Indeed, capital spending by the companies in the S&P 500 has grown only modestly over the past two years, after two years of declines, according to S&P.

For a record 14 consecutive quarters, companies in the S&P 500 have reported double-digit profit growth, according to S&P's Mr. Silverblatt. His firm's projections have the record streak lasting at least two more quarters.
Or not. The 14 quarters of double-digit profit growth is already a post-war record. With consumers spending money they don't even have, one wonders if Scrooge's assessment might not turn out to be prescient for 2006, if not for Christmas 2005. Since American consumers are spiking their eggnog with such heavy dollops of borrowing, the hangover is sure to be severe.

In other news: Thank you, readers, from around the globe, for taking an interest in the offerings here. Unique visitors to the site are up from 619 last December to 3057 in November, hits went from 7294 to 40,805, pages visited climbed from 2640 to 12,125 and bandwidth useage rose ten-fold from 44 MB to 472 MB. A passel more folks stopped by, and I thank you kindly.

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copyright © 2005 Charles Hugh Smith. All rights reserved in all media.

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