Bob’s Journal for 8/12/21

Consumer, Business Spending Strong and Likely to Remain Strong

Recent reports showed household spending has been strong, but it might be stronger and more sustainable than the data show.

Household spending, as measured by the Personal Consumption Expenditures report, rose by 1% in June and was well above the pre-pandemic spending level.

Some economists expect spending to decline soon, as stimulus payments from the government end and the Delta variant of COVID-19 spreads. But there are good reasons to expect continued strength in consumer spending, as well as business spending.

For example, some analysts point out that credit card balances are well below their pre-pandemic highs. They say that means spending isn’t strong and doesn’t have much momentum.

But a study by the New York Federal Reserve concluded that much of the decline in balances was due to consumers paying down debt. They said that consumers are spending as much or more using their credit cards as before the pandemic, but more consumers now are paying their balances each month and have paid balances they were carrying before the pandemic.

In addition, more new credit cards are being approved and more borrowers are being approved for higher credit card limits than before the pandemic.

Business spending also looks poised to increase. Plus, businesses have obtained lines of credit that currently sit unused. The two biggest banks in the U.S. recently reported their business clients have unused business credit lines that total more than $1 trillion and are 20% higher than a year ago.

Many businesses also are holding a lot of cash in addition to their lines of credit.

The likelihood is that businesses are ready to spend this money to hire more workers, pay current workers more and invest in new equipment. That’s all to meet rising demand for products and services.

The main obstacles to investing this money are supply chain problems and labor shortages.

James Brown’s Estate Settled After 15 Years

The many litigants involved in the estate of the famous singer James Brown recently reached an agreement to settle their disagreements over how the assets should be distributed.

Brown died on Christmas Day, 2006. He left a will that provided most of his estate was to be used to fund a charitable organization that would provide scholarships to underprivileged children in Georgia and South Carolina.

A few of his children were bequeathed some of his costumes and personal effects, and $2 million was set aside for scholarships for his grandchildren.

His children, grandchildren and last romantic partner fought over the estate, engaging in dozens of lawsuits. They couldn’t even agree on the value of the estate, with their estimates ranging from $5 million to $100 million.

A previous settlement agreement was overturned in 2009 when the South Carolina attorney general ruled that the settlement strayed too far from the wishes expressed in Brown’s will.

The terms of the settlement weren’t announced. But we do know that, for 15 years, scholarships didn’t go to children who would have been awarded them under the will. In addition, a lot of money from the estate was spent on legal fees and other costs related to the litigation.

Brown’s estate is another example of how important it is to nail down the details of an estate plan.

A key to a successful estate plan is to anticipate any objections to the plan, such as unfulfilled expectations of heirs and potential heirs. Often, those can be dealt with ahead of time. When they aren’t, family disagreements and litigation often are the results.

Does Carrying More Insurance Increase Your Wealth?

An intriguing new study found that wealthier people tend to carry more insurance than others.

The study was testing the theory that people with more wealth can and probably do buy less insurance, because they have enough resources to self-insure against many potential losses. They should prefer to spend less on insurance premiums and use their personal resources to pay the occasional losses they suffer.

The researchers examined data for 63,000 individuals. They found that, contrary to expectations, those with more wealth were more likely to have higher levels of property and life insurance coverage than others.

The study indicates the preference of the wealthy is to have higher fixed expenses in insurance premiums, so they are protected from the occasional large losses. Perhaps people with less wealth would be better off if they carried more insurance, so that their wealth accumulation wouldn’t be derailed by uninsured losses.

The Data

The Consumer Price Index (CPI) increased 0.5% in July. This rise follows a 0.9% increase in June. During the past 12 months, the CPI increased 5.4% through July, the same 12-month increase as reported through June.

The core CPI, which excludes food and energy, increased 0.3% in July following a 0.9% increase in June. Over 12 months, the core CPI increased 4.3%, which is down from a 12-month increase of 4.5% reported through June.

New unemployment claims declined by 14,000 to 385,000 in the latest week, bringing them to within 20,000 of the low during the pandemic.

Continuing claims declined below three million for the first time during the pandemic. They declined by 366,000, the largest one-week decline during the pandemic, to 2.93 million.

The number of people receiving some kind of employment benefit declined by about 200,000 to around 13 million.

Last Friday’s Employment Situation reports were better than expected. They found 943,000 jobs were created in July, and June’s number of new jobs was revised higher to 938,000 from the 850,000 initially reported.

Once again, the most jobs were created in the leisure and hospitality sector, which gained 380,000 jobs. Bars and restaurants accounted for 253,000 of those jobs.

Average hourly earnings increased by 0.4% for the month and now are up 4.0% over 12 months.

There were two interesting findings in the latest JOLTS (Job Openings and Labor Turnover Survey) report. The JOLTS report lags the Employment Situation reports by one month but has more details.

The first interesting finding is that in June, there were 10.7 million job openings and 9.5 million people who were unemployed.

In other words, there were enough jobs available for all the unemployed to be hired. Economists assume the gap exists because the skills required, and the geographic locations of the job openings, don’t match those of the unemployed workers.

The number of job openings is the highest since the JOLTS report was initiated in 2000.

The other interesting point in the JOLTS report is that the rate at which workers quit their jobs in June was just below the record high “quits” rate recorded in April.

A high quits rate indicates workers are confident the labor market is favorable to them and that they’ll be able to find satisfactory new jobs.

Optimism among small business owners declined in July, according to the Small Business Optimism Index from the National Federation of Independent Business (NFIB).

The index declined to 99.7 from 102.5 in June. Labor shortages and the quality of labor remained the primary concern of small business owners. Business owners also reported that they are less confident about the rate of business growth for the rest of the year.

The Markets

The S&P 500 rose 0.35% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.47%. The Russell 2000 increased 0.79%. The All-Country World Index (excluding U.S. stocks) added 0.02%, while the emerging market equities are 0.02% lower.

Long-term treasuries lost 2.77% for the week. Investment-grade bonds decreased 1.85%. Treasury Inflation-Protected Securities (TIPS) fell 0.85%. High-yield bonds were 0.53% lower.

The dollar rose 1.01%.

Energy-based commodities fell 1.56%. Broader-based commodities lost 1.09%. Gold declined 4.52%.

Bob’s News & Updates

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