U.S. and EU Leaders Discuss European Financial Troubles

Today in Brussels, Jacob Lew discussed European financial problems with European Union leaders, which continue to hurt the global economy. Lew, who took office as U.S. Treasury Secretary in February, fully understands the strong influence the European economy has on our own economy. He realizes the issues in Europe cannot exist independent of the US economy and therefore we have the incentive to help alleviate this issues as best we can.

European Council President Herman Von Rompuy is working with Lew to try to bring European banks under a unified banking union. This would give the EU more power to stabilize failing banks without having to go through individual national governments. Increased efforts in this area would help prevent flare-ups in the financial crisis like we saw recently when the bailout efforts in Cyprus failed.

Lew is especially concerned about the European economy in light of recent disappointing unemployment statistics. Although the unemployment rate dropped to 7.6%, only 88,000 jobs were added to the economy last month. Lew is concerned about sources of demand abroad during a tough period of unemployment.

Annie Howard

Sources:

http://online.wsj.com/article/SB10001424127887323550604578410310488074782.html?mod=WSJ_Deals_LEFTTopStories

http://www.guardian.co.uk/business/2013/apr/08/eurozone-crisis-portugal-spending-cuts-bailout#block-5162c204b579a0655085fc6c

Expanding the Unemployment Rate

Friday’s unemployment rate dropped to a four-year low of 7.6%.  While at first glance this looks like a step in the right direction for the economy, the unemployment rate does not take into account that only 88,000 jobs were created during the month of March, compared to February’s 268,000.  

What’s more, unemployment was driven down primarily by nearly half a million people leaving the workforce.  Since unemployment only tracks the employment status of people actively searching for work, it does not give a completely accurate estimate of how many people are without jobs.  

The Wall Street Journal’s table below shows a peak in labor-force participation rate from January-April 2000 with 67.3%.  In March, that percentage dropped to 63.3%, the lowest since May 1979.

One of the groups hit hardest is the under-25 population.  Over 236,000 young people left the labor force last month.  When the recession began in December 2007, 59.2% of the u-25 population was in the workforce.  That number has since dropped to 54.5%, which means that, if the u-25 participation rate remained unchanged, there would be 1.8 million more young people in the workforce.  Additionally, if these 1.8 million young people were to be counted in the workforce, the unemployment rate would rise to 22.9%.  

The US Labor Department’s table below shows the unemployment rate for 16-24 year olds in blue.  The green line represents what the actual unemployment rate for that age group would be if so many hadn’t dropped out of the workforce.

Granted, many people in this age group are still pursuing undergraduate or postgraduate degrees.  But many are graduating and facing a job market that demands work experience.  Many young people are forced to take low-skilled jobs if they want anything at all.

The restaurant industry has historically picked up some of these young workers.  Between the first quarters of 2012 and 2013, eating and drinking establishments added jobs at a 3.1 percent rate, doubling the 1.6% gain in total non-farm payrolls during the same period. Since March 2010, the sector has added 856,000 jobs, behind only the professional-and business services and health care sectors. 

But even restaurants slowed in March, adding only 13,000 jobs, the smallest gain since May 2012, according to the Bureau of Labor Statistics.  Additionally, according to the March 2013 Restaurant Industry Tracking Survey, only 25% of restaurant operators expect economic conditions to improve in the next sixth months.  It’s tough to be positive when representatives of the third largest job-producing sector are that pessimistic, but, for statistical purposes, for now March represents a dip in an otherwise positive trend in job market growth.

Andy Soergel

Sources:

http://economix.blogs.nytimes.com/2013/04/05/the-employment-rate/#more-162035

http://blogs.wsj.com/economics/2013/04/06/number-of-the-week-youth-unemployment-at-22-9/?KEYWORDS=unemployment+rate

http://online.wsj.com/article/SB10001424127887324600704578404271558802706.html?KEYWORDS=unemployment+rate

The Next Financial Crash

The next financial crash, whether you know it or not, may be happening as you read this.

But this crash is not tied to real estate, a foreign banking system, or student loans. Its a currency crash, one that you might never have heard of.

The currency I'm referring to is known as Bitcoin, a currency that is traded online and used to buy goods and services. Initially put into circulation in 2009, Bitcoin prices have recently risen in dramatic fashion. In the past several months, the Bitcoin has garnered increasing amounts of press due to attacks on Bitcoin exchanges by online hackers and its popularity in purchasing illicit substances. The following chart shows the price of Bitcoins over the past three years.

Two years ago, one Bitcoin was worth less that $1. Two months ago, a Bitcoin was worth $20. Last Wednesday, the Bitcoin reached a record high of $147, before falling back to $130 on Tuesday.

The Bitcoin initially began as a niche currency for hackers and cryptologists, and has gained immense popularity due to its anonymity; Bitcoins are very hard to trace back from a purchase. The lack of paper trail has helped spawn an online black market. By using certain browsers, internet-users can have their IP address bounced around the globe from computer to computer in a way that makes websites untraceable. In this little-known corner of the internet known as the "deep web," websites offer everything from delivery drugs to exotic pets. And all of it can be purchased with Bitcoins.

Supporters of the currency believe it to be capitalism at its purest form. It is an absolutely free market, free from any effects of monetary and fiscal policy. There is no regulation, and there is also no insurance; in recent weeks, hackers have targeted a website that provides online "wallets" for Bitcoins. Unlike an FDIC insured deposit-holder, anyone who had their Bitcoins stolen will receive little or no compensation.

There is evidence that federal authorities are cracking down on Bitcoins in order to curb the illicit trade that it facilitates. And while I think its prudent that the government does what it can to shut down the illegal websites, I think the Bitcoin market offers unique opportunities for economic research.

The Bitcoin market has a total value of about $1.4 billion. While that is minute compared to most currency markets, it is enough to support an entire underground, black market economy. Some computer hackers have given up their day jobs in order to trade Bitcoins. It is significant enough that it might be able to provide valuable insight into how currency markets operate in the absence of political and regulatory influences.

The Bitcoin market is truly unchartered territory. There has never been a currency so widely used and yet so mysterious, and I imagine a great deal can be learned from studying its trends. For example, the rapid increase in prices over the past month has triggered speculation that there is a Bitcoin bubble. It seems like the Bitcoin market could be used almost as a model to study how currencies react to potential crises.

Then again, the Bitcoin is so unorthodox that it might not offer any practical insight at all. For example, every ten minutes a new "block" of Bitcoins is created. Individuals and groups from all around the world run computer programs in order to unlock the 64-digit code that controls that block. However unlocks the code first is awarded the block of Bitcoins (blocks currently hold 25 Bitcoins.) This is how Bitcoins are created and circulated. This is slightly less precise than Federal Reserve open market operations.

Regardless of how valuable the Bitcoin market's economic insights may be, it is a fascinating story to follow. The underground cyber-economy may been in danger of an unprecedented monetary disaster if the Bitcoin collapses. Lucky for us, we don't have much use for the deep web.

-Alex Gannon

Sources:

http://buzz.money.cnn.com/2013/04/05/bitcoin-bubble/

http://www.forbes.com/sites/timothylee/2013/04/07/four-reasons-bitcoin-is-worth-studying/

http://articles.washingtonpost.com/2013-04-04/world/38280106_1_bitcoin-satoshi-nakamoto-monetary-policy

CEOs who took pay cuts

Though The New York Times published a long winded article about the increase in how much CEOs made last year in both salary and perks, two particular CEOs were mentioned for other reasons.

JC Penney CEO Ron Johnson worked for only two months in 2011, and made $53.3 million in stock and cash. In 2012, that number was cut by 96 percent to land Johnson at $1.9 million in pay and perks. That boiled down to a $1.5 million salary with the rest representing transportation and security costs. That's a huge drop in payment, obviously, but should we be surprised? JC Penney reported a $1 billion operating loss for the year, and a huge drop in stocks, which can be largely attributed to Johnson's failed attempt at changing the way JC Penney operated and advertised.

At Ford, where shares and earnings were down, Alan Mulally took a 28 percent pay cut.

Isn't that the way it is supposed to be? If profits go down and stocks go down, it seems only fitting that the highest paid executive's salary would also go down, both for financial reasons and to show solidarity with the company workers.

But instead, other than Johnson, Mulally, and a handful of others (think James Gorman and Morgan Stanley and Tim Cook at Apple), the NYT report shows that most high powered CEOs are earning more than ever in salary and perks, and have no problem discussing it.

Emily Mosh

Pay-as-you-weigh: how future airfares policy should be?

CNN on Monday delivered the news of Samoa Air introducing a policy that charges passengers only by their weight. According to the airline’s chief executive Chris Langton, Samoa Air would be the first airline in the world to issue such a fare structure.

The tiny South Pacific air carrier owns just three aircraft, including two 10-seaters and one four-seater. Samoa Air serves Samoa, American Samoa, Tonga, Niue, Tokelau, the North Cook Islands and Wallis and Futuna islands in French Polynesia. 

The company is planning to purchase a larger Airbus this year for service to international destinations in the region including Australia, New Zealand and Fiji.

Such a small-sized airline should not have a large influence on supply and demand with its controversial policy. But it argues that the pricing system is not only fair but the future for other airlines. 

"What makes airplanes work is weight. We are not selling seats, we are selling weight," said Langton. The airline’s website also states that, "your weight plus your baggage items is what you pay for. Simple."

To book online, travelers enter their approximate weight and that of their luggage and prepay based on that "guesstimate." Passengers and their luggage are weighed again at the airport.

As people are getting heavier and bigger, flight seats and fuel are becoming major issues. Airlines are consuming more and more fuel each year because of people’s increasing weight. Forbes cites government statistics to say that "the average weight of an American has increased 24 pounds since 1960." Writer Emily Stewart then does the math: 

 

Airlines flew 735 million passengers last year. Multiply that by 24 pounds and airlines are flying 17.6 billion pounds of extra weight around. It takes roughly a gallon of jet fuel to move 100 pounds on a domestic flight. That means 176.4 million gallons of fuel, costing $538 million (at an industry average price of $3.05 a gallon).

Airlines and experts have been arguing if there should be a fat tax, i.e. heavier people should pay more to fly. Last month, Dr. Bharat P. Bhatta, associate professor of economics at Sogn og Fjordane University College, Norway, recommended that air ticket costs be calculated according to a passenger’s weight in a published research. 

Some major U.S. airlines have policies for passengers of size, requiring those who do not fit into a seat comfortably to buy a second seat.

Some travelers have criticized the weight-based fare concept. They argue that they should get a larger seat if they pay more than someone who weighs less and pays less for the same type of seat. 

Anyway, as a 5-feet, 100-pound person, I totally support this “pay-as-you-weigh” policy.

By Clara Tran

The profitable* Final Four

Four teams remain in the NCAA Men’s Division I basketball championships.

Tomorrow, the number one-seed Louisville Cardinals will square off against the upstart Wichita State Shockers, a nine-seed, for a spot in the national championship. Four-seeds Michigan and Syracuse will play for the other.

If your bracket had those teams in the Final Four, you are in the minority.

In a tournament that reminded us why it’s called 'March Madness', each will play out the Final Four in Atlanta, Georgia. A tremendous sporting event that is sure to draw massive crowds and excitement to the city.

An estimated 100,000 visitors will descend on Atlanta this weekend for the games and festivities. Hotel occupancy rates are through the roof, and the weekend is projected to inject $70 million into the local economy.

But is it all worth it?

At first glance, a major sporting event like the Final Four, the Super Bowl, or even the granddaddy of them all, the Olympics, seems like great exposure for a city. They bring crowds, dollars, and put them squarely on the national, and often international stage. Cities and countries compete fiercely over the right to be a host for such draws and attention.

However, there is much debate over what the true costs of hosting such events are.

In a 2003 report from the College of the Holy Cross, economics professors Victor Matheson and Robert Baade conducted a study of the economic impact on Final Four host cities from 1970 to 1999. In their model, the median estimated economic impact came out to a loss of $6.44 million. Even if a city came out even, they’d be considered lucky.

This problem isn’t just isolated to the Final Four, or the United States for that matter.

The Olympics are the biggest drainers. Every Olympic host city since 1960 has overspent their budget, by an average of 179 percent. The influx of cash from tourism is typically negligible, if not negative considering the costs going into the games and infrastructure. And in the long run, the total financial impact is usually adverse.

Commentators love to talk about how great the Final Four and like-events are for cities, just be ready to take those statements with a grain of salt.

This is not to diminish the all the great things that go along with an exciting weekend like this one, but there is hidden side to all the glitz and the glory.

- Logan Allen

Painting the Economic Picture

We've studied all the traditional economic indicators: Gross Domestic Product, the Consumer Price Index, consumer confidence. We've even studied some unique, superstitious indicators, like the Superbowl outcome and lipstick prices.  But I recently heard about another economic indicator, and I think it has the potential to paint an accurate forecast of the strength of the economy:

Paint prices.

Specifically white paint.

Apparently, titanium dioxide, a commodity pigment that is used for making white paint (and keeping your nose from getting sunburned), is a leading indicator for how the economy will boom or bust. It makes sense. White paint is used to paint cars, buildings, and commercial homes. So the price of the paint would reflect how much paint producers think should be made. So if the price of white paint goes down, it might forecast a drop in demand, and therefore a shift in supply-- think back to Econ 101, basic Supply and Demand curves.

So economists track the price of titanium dioxide as another way to tell what's happening in the economy.

Along those lines, the paint industry seems to be recovering with gusto after the housing bust in 2009.

Sherwin Williams closed at $165.62 yesterday. A year ago, the stock closed at $110.77, and the stock bottomed out at $42.19 in February 2009.  It has recovered nicely and its growth is outpacing that of the Dow Jones Industrial Average.

Another paint brand, Valspar, is seeing similar strength. The brand closed yesterday at $61.43. A year ago, it closed at $50.00, and it hit a low of $15.13 in March 2009. The brand is also outperforming the Dow Jones Industrial Average. 

I take it as a good sign. 

-Katy Stewart 

A Response To (Yet Another) Generalizing Article About Millennials

Prepare yourselves for a shock: a 45+-year-old journalist wrote yet another pessimistic-depressive article about either:

a) the laziness of Millennials, 

b) the unemployment rate of Millennials, 

c) the unemployability of Millennials, and/or 

d) the harsh, terrible future ahead for, you guessed it, Millennials... 

Really groundbreaking stuff, I know! 

I apologize for the sarcasm, but really, how many articles does one country need about the downfall, moral incompetence, or lack of financial stability facing one age group? It seems that journalists are too often falling into the temptation to wax poetic about how things used to be "back in my day," about the quality of work performed by fellow baby boomers and how the youngest generation of adults cannot possibly hope to be as successful as they have been.

Give me a break.

On March 26 Annie Lowrey, an economics reporter for the New York Times, published an article entitled, "Do Millennials Stand a Chance in the Real World?" As if the title didn't already hint at the author's predilection for doom and gloom, the article that followed clearly answered that question in one word: No. 

According to Lowrey, Millenails are materialistic. Millennials have long-lasting psychic and financial scars having come of age in a recession period. Millennials walk around with a chip on their shoulder, wondering why they are facing such as income gap. (This being a marked change from the "use it up, wear it up, make it do, or do without" mentality of the young during World War II.) Millenials are boring, showing "declining alcohol use, declining drug use,... declining sex."All of these attributes make the generation unprepared for the financial stresses and realities facing them in the real world.

As a member of the Millennial generation, I find this article and these assumptions ridiculous on many levels. First, Millennials are not the only materialistic generation; America on the whole has a materialistic culture. My grandfather did not buy that sports car because he's "using it up, wearing it out." The only thing he's wearing out is the road. Second, I certainly don't feel scarred by the recession, merely conscious of the importance of money and proper spending. Third, the only chip on my shoulder is a defensiveness for my generation as a whole against authors and journalists like Lowrey. Finally, I find myself to be pretty thrilling. I acknowledge that this could be personal bias, though. 

All kidding aside, I was exceedingly annoyed by the low quality of this article. It doesn't take much to create and propagate stereotypes about another generation, and it takes even less to use one study as evidence for all of the author's assumptions and gross over-generalizations. 

I agree that many new or recent graduates these days are facing high rates of student debt as well as the challenge of finding paid work. Many companies are looking to hire for unpaid internships (a topic discussed by Courtney Ridenhour earlier this month), which do not help graduates make strides toward paying off debts or bills. Many still choose to take these opportunities, though, seeing them as a gateway into permanent employment. The effectiveness of this employment strategy is still to be seen. There are also rising costs of living and stagnating wages to be considered. Still, I do not fell that Millennials are any less equipped to faced these challenges than other generations.  Highly educated, the generation knows the value of money having seen family and friends deal with the challenges of a bearish economy. 

Millennials are consistently reported as being optimistic about their future regardless of these issues. It is an optimism that I feel will carry the generation through these times, an optimism similar to that of children of the Depression and baby boomers. See, Lowrey? We aren't that different, after all.

Ashley Astolfi

Investing: A family tradition

This morning, I came across what many would consider a rather surprising article in The Wall Street Journal. A survey from Bank of America Merrill Lynch’s Private Banking & Investment Group found that Millennials, those aged 18-to-35-years old, are likely to adopt their parents’ investment strategy – the “investing gene,” they call it.

The survey found 83 percent of respondents “somewhat or fully understand” their parents’ investing plan, while 65 percent said they adopt the same mentality. Surprisingly, less than half (46 percent) of respondents said their parents discussed investing and financials with them directly. Merrill Lynch survey 153 people with more than $1 million in investible assets. Given the response base, the data may be skewed toward the behaviors of those with larger bank accounts than their peers. Michael Liersch, a director of behavioral finance at Merrill Lynch, believes the findings can be universalized.

Liersch’s white paper looks at the generation further, analyzing everything from their investing habits to their attitude toward finance in general. Merrill Lynch found Millennials to be conservative, practical, and thoughtful when it comes to investing, a far cry from the stereotypical flippant new investor. Planning matters.

In light of a recent report that only 23 percent of Americans do not believe they will have enough savings to retire comfortably, the highest percentage recorded, it is comforting to hear the younger generations are smart investors. Yes, the data bias may be a factor in the results of Merrill Lynch’s survey.

Merrill Lynch's findings verified what I knew from experience. I grew up in a banker’s household. Finances were always a part of the discussion. Saving a percentage of my monthly paycheck and investing the maximum in my 401K have been ingrained into my head. Coupled with investing advice from my finance professor, I’ve had an investing strategy since my unpaid internship. It looks like I am not alone.

By Courtney Ridenhour

Lucky us! College grads earn more than high school dropouts

The U.S. Census Bureau said today that in the final months of 2011, a typical college grad earned three times more than a high school dropout in the same time period.

While this may seem like a logical pay difference, some estimates say that 50 percent of college grads are in jobs that do not require a college degree.

The value of a college education has come into question recently due to inflating tuition costs, increases in student-loan debt, and the high unemployment rate. College graduates no longer feel like they are always in a great position to find a job worthy of their degree.

So the news that a college grad will likely earn more than a person who did not graduate high school is nice to hear, even if the job search is not going well for many college seniors.

The Wall Street Journal reported that the unemployment rate for adults with a Bachelor's degree was 3.8 percent in February, while the national rate was 7.7 percent. The unemployment rate for people without a high-school diploma is 11.2 percent, while high school grads who did not attend college faced a 7.9 percent rate.

The U.S. Census Bureau also released data on the highest and lowest earning majors late last year, giving more encouragement to some college students, and taking away from others. Engineering majors and computer science majors earn the most on average, while education majors earn the least. For a class that is full of business, politics, and journalism majors, among other liberal arts topics, all we can do is hope that our degrees provide us jobs and a steady income.   

Emily Mosh

Housing Bubble 2.0

In January, prices of homes gained 8.1 percent from the previous year according to the latest stats from the S&P/Case-Shiller home price index.

The index tracks home prices in twenty major cities, and prices rose in all twenty.

Another home price tracker, CoreLogic, found that home prices jumped even further, 9.7 percent nationally over the past year. Coincidentally, the year-over-year gain was the biggest since 2006, just before the burst. With this seemingly rapid recovery, the question is: is it too fast, too much, too soon?

With interest rates at unprecedented lows for an extended period, more and more consumers are taking advantage of mortgage rates, and housing markets are in recovery, pushing prices back up. Improving unemployment numbers are also correlated.

Or is this recent boom in the housing market simply a correction?

Since remaining unchanged from 2006 to 2007, housing prices fell year-over-year a full 37 percent until 2013. From CNNMoney:

Housing starts have also been on the rise. Earlier this month, the Census Bureau reported that housing starts on single-family homes had risen to their highest levels since 2008: 618,000 in February.

As a leading indicator, housing starts could signal confidence in continued recovery and growth in the housing market.

However, many think that the persistent quantitative easing on behalf of the Fed should have already caused the Fed’s unemployment target of 6.5 percent to be reached. Analysts at Bank of America Merrill Lynch believe that QE3 is creating an inflation of assets, most notably in the housing sector.

Other signals like increases in first-time homebuyers and institutional investors have resulted in a demand that has not been met by the current housing supply, fueling the price balloon.

Karl Smith, assistant professor of public economics and government at the University of North Carolina at Chapel Hill, wrote in a March 25th article for Forbes “the rapid increase in the number of buyers and their purchasing power will likely drive home prices into a bubble. Likely not as large as 2005, but it’s not out of the question that the bubble could be even larger.”

So while we may be building and buying more houses, driving prices up, this kind of growth does not appear on the surface to be sustainable in the long run. We could be creeping, or sprinting, toward the burst of yet another housing bubble.

- Logan Allen