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About Me

Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.

Tuesday, 27 January 2015

US Employment Data, Savings and Rates Forecast

There is a mix bag of news out from the US regarding the latest employment data. The good news is that the unemployment rate fell to 5.6% from 5.8% with the economy generating 252,000 new jobs in December, The US Bureau of Labour Statistics.

Average hourly earnings was the disappointing piece of data, registering a fall of 0.2 percent in December. That is plunging wage growth back to 1.7%Year on Year from 1.9%.

Some pundits believe that the continuing fall in US unemployment will fuel consumption going forward, which might provide the US Treasury with a reason to raise interest rates in second or final half of the year.

But while the US economy appears to be absorbing labour, household savings remain low. That might dampen consumption and deter the Fed from raising rates.

The US household savings picture, frankly, isn't good. Apparently, near two thirds of Americans are unprepared for a financial shock, such as a loss of job due to an illness, or redundancy because of a downturn in the economy. In other words, in the most wealthy nation on earth, most Americans are living a hand to mouth existence. Only 38 percent of Americans have enough money on hand to cover “a $500 repair bill or a $1,000 emergency room visit”, according to a recent survey. So 62 percent of the people in the US don’t have an emergency fund. That’s a sobering thought in a country where health care costs can be crippling.

Despite the financial crisis of 2008 and the worst recession in living memory that followed, people are still living from one pay check to the next.

The majority of people are just one pay check from the street and are totally unprepared in the event of a major economic downturn.

What this could mean is that if costs fall, due to lower input costs such as low oil prices or wage rises (in actual fact real wages are falling according to the latest data), then households might defer consumption and instead use the surplus income to build up emergency saving reserves.

Bear in mind the last recession was a major wake-up call for millions of people. Suddenly, they lost their jobs in the sharp economic downturn. Then millions couldn't pay their daily household expenses because they had no emergency funds to fall back on.

Financial planners recommend households to build emergency fund reserves, a safety nest egg to cover at least six months of expenses to weather the rainy days.

Regretfully, a recent poll in the Wall Street Journal confirmed that only 38% of those polled said they could cover a $500 repair bill or a $1,000 emergency room visit with funds from their bank accounts, a new Bankrate report said. Most others would need to take on debt or cut back elsewhere.

“A solid majority of Americans say they have a household budget”, said Bankrate banking analyst Claes Bell. “But too few have the ability to cover expenses outside their budget without going into debt or turning to family and friends for help.”

The survey found that an unexpected bill would cause 26% to reduce spending elsewhere, while 16% would borrow from family or friends and 12% would put the expense on a credit card. The remainder didn’t know what they would do or would make other arrangements.

Another poll from the US Federal Reserve Survey also confirmed the same worrying findings. The Fed surveyed 4,000 adults last year and the survey confirmed the following;

“Savings have been depleted for many households after the recession”, it found. Among those who had savings prior to 2008, 57% said they’d used up some or all of their savings in the Great Recession and its aftermath. What’s more, only 39% of respondents reported having a “rainy day” fund adequate to cover three months of expenses and only 48% of respondents said that they would completely cover a hypothetical emergency expense costing $400 without selling something or borrowing money.

So it would appear that the Great Recession has taken its toll on household finances.

“They’re 40% poorer today than they were in 2007. The net worth of American families — that is, the difference between the values of their assets, including homes and investments, and liabilities — fell to $81,400 in 2013, down slightly from $82,300 in 2010, but a long way off the $135,700 in 2007”, according to a report released last month by the non profit think tank Pew Research Center in Washington, D.C.

The US jobs market may have improved and the Affordable Care Act has given an estimated 15 million American access to medical care. Nevertheless, many have come out of the Great Recession with a lot less wealth, depleted savings and no emergency cushion to fall back on.

In view of the above, I don't envisage a US rates rise for the foreseeable future. Real wages would need to improve and that’s not happening. Saving rates would also need to rise to a point where most households have built emergency savings provisions and that is a long way off. Unless that happens, consumption is unlikely to take off and a rise in US rates would seem unreal.

A low US rate environment is likely to support US equities and Treasuries going forward.


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