This article was posted on Monday, Apr 01, 2013
Obviously, the most significant economic news in recent weeks was the surprising January 30 report showing that fourth quarter GDP declined by 0.1% (annual rate). While that report may be revised slightly upward later this month, it was still a big surprise. As a result of that unexpected report, most economists have been revising their 2013 growth forecasts down.

The bad GDP report came just one day after the Conference Board reported that the Consumer Confidence Index plunged far more than expected in January. But at least there is some good news on this front. The University of Michigan’s preliminary Consumer Sentiment Index climbed to 76.3 in February from 73.8 in January, the best reading in three months and well above the pre-report consensus.

The University of Michigan cited increased property values, a strengthening job market (?) and stocks at five-year highs as reasons for the boost in consumer sentiment this month. They suggested that the increase in personal wealth from the stock market advance is helping to make up for the recent sharp increases in gasoline prices and the hit to take-home pay from the resumption of the full payroll tax.

Retail sales rose a modest 0.1% in January. On the manufacturing front, the ISM Index improved from 50.1 in December to 53.1 in January (latest data available). On the housing front, data overall continues to improve modestly, especially compared to year-ago readings.

Record High Gas Prices Could Get Even Higher

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If the economy weren’t sluggish enough already, there is yet another significant drag on growth. Gasoline prices have spiked so far this year. The national average price for a gallon of gas was $3.73 in February. That’s a jump of 40 cents, or more than 13% in the last month alone. In California and New York, the average gas price is $4.16 per gallon.

Gas prices were the highest they’ve ever been in the month of February. So what’s driving this? It’s a confluence of factors, from rising crude oil prices, to production cuts and refinery closings. The price of crude oil – which is two-thirds of the price of a gallon of gas – has jumped over 10% in the last two months. OPEC is believed to have cut oil production by one million barrels per day in the last two to three months.

Adding to that, several refineries are either preparing to, or have already, shut down for maintenance before their annual switch to summer gasoline, which is formulated differently. As more refineries close temporarily just ahead, this could put more upward pressure on gas prices, which increases the drag on consumer spending and the economy.

CBO Issues Latest Long-Term Forecasts

Earlier in February the non-partisan Congressional Budget Office released its latest Budget and Economic Report for years 2013 to 2023. I won’t bore you with all the details, but here are a few highlights.

The CBO lowered its economic forecast for 2013 to only 1.4% GDP growth. It forecast unemployment to remain above 7.5% through 2014, which would mark the sixth straight year with a jobless rate above that mark, the longest stretch in 70 years.

The good news in the latest CBO forecasts (if you can call it that): The federal budget deficit is projected to fall to $845 billion in 2013 and to $430 billion by 2015. The CBO forecasts only consider current laws on the books. They do not address the myriad of new federal spending programs outlined by President Obama in his inaugural address and his State of the Union speech.

Even without those new spending programs, the CBO’s long-term forecast projects that budget deficits will near the $1 trillion mark again by 2023, when it forecasts a $978 billion budget deficit. But it could happen as soon as next year or the year after, especially if the Democrats retake the House of Representatives in 2014. Fortunately, that doesn’t look likely – for now.

The CBO forecasts are always helpful, but they are limited in scope in that they do not take into account potential new federal spending programs. Nevertheless, one of the CBO’s charts is especially insightful. Take a look:

This chart shows the federal “debt held by the public” at approximately. 80% of GDP. The chart shows that this debt held by the public will remain at 80% of GDP until at least 2020. It never goes down materially over the next eight years, and goes up significantly beyond 2020 (not shown).

But as is consistently the problem with almost all federal reports on the national debt, they only show the debt held by the public. Currently that debt is approximately $10 trillion. What these graphs fail to include is the approximate. $6 trillion in additional debt held by various government agencies. Add this in and the national debt is now approximately $16.4 trillion.

Plug that into the chart above, and the national debt is now over 100% of GDP and rising. Without meaningful federal spending reduction, this number is headed for 150% of GDP and even higher longer-term. Think Japan.

The Debate Over Increasing the Minimum Wage

In his State of the Union address, President Obama called for raising the minimum wage from $7.25 per hour to $9. This was the one surprise in the speech that did not get leaked to the media in advance. I doubt he’ll be successful in getting it raised by that much all at once, but we will see. The debate over raising the minimum wage is always a spirited one.

Raising the minimum wage is good politics, since polls generally show solid majorities support raising it. And it is true that the minimum wage of $7.25 set in 2009 is worth less than that today since things get more expensive over time. The Labor Department’s inflation calculator tells us that $7.25 in 2009 is worth only $6.77 in today’s dollars.

But there are pros and cons to raising the minimum wage, of course, and I will touch on a few of them below.

Liberals argue that raising the minimum wage is good economics, and that it does not hurt job creation (questionable). Further they argue that lots of low-paying American companies, including some extremely large ones (e.g. – Walmart and McDonald’s), make a good chunk of their money peddling goods and services to those on the lower rungs of the income ladder.

Lower-income workers tend to spend almost everything they make, so more wages would very quickly translate into higher spending at a lot of businesses. That assumes, of course, that few or none of minimum wage workers get laid off as a result of the increase.

In addition, the libs point to the fact that CEO pay in the US has never been higher, while average family incomes have languished for years. Thus, it’s time for the government to ensure that ordinary workers get a larger share of the fruits of whatever prosperity is being created.

Conservatives, on the other hand, cite figures which show that raising the minimum wage actually destroys jobs. In addition to job losses, the increase to $9 represents a 24% wage increase for businesses that employ minimum wage workers.

Likewise, they argue that raising the minimum wage means increasing their product prices to consumers. This is inflationary. If they don’t raise prices, then they will have to cut staff to pay for it in many cases.

And conservatives argue that if employers are forced to pay higher costs for entry-level workers, they are likely to stick with experienced workers rather than younger workers entering the workforce.

Finally, conservatives argue that raising the minimum wage disproportionately hurts small businesses. With three million more people out of work today than in 2007, why would we want to make it harder for small employers to hire people, they ask.

There are more pros and cons than those noted above, but you can see why emotions tend to run high on both sides of this issue.

And my opinion: We should raise the minimum wage when the economy is strong, not when it is weak. Obviously, President Obama doesn’t agree.

[In AOA’s opinion, there should be no minimum wage – a free market works best and at this time would assist in lowering unemployment.]

Gary D. Halbert is the president and chairman of Profutures, Inc.  Subscription rates for Forecasts & Trends is $197 for 12 issues and may be obtained by visiting his website at



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