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Some Notable Events That Grabbed My Attention This Week

Last update on: Jun 15 2020

We’re starting to see the secondary effects of the pandemic.

One surprising effect is higher prices for beer and soda, as explained in an article in The Wall Street Journal. These drinks literally have bubbles, and those bubbles usually are generated using carbon dioxide.

Carbon dioxide is a byproduct of ethanol production. Ethanol is produced in this country primarily to be mixed into gasoline.

Purchases of gasoline declined substantially because people were driving less during the Hibernation Economy. In response, many ethanol producers stopped or greatly reduced production.

The result is a much smaller supply of carbon dioxide. Specifically, carbon dioxide production now is 30% lower than a year ago. Businesses that need carbon dioxide must pay higher prices from local suppliers or pay to have it shipped from elsewhere.

Though economic activity and driving are rising, the increases still aren’t high enough to cause ethanol production to resume.

Major users of carbon dioxide are brewers, soda fountains and pork producers. Until ethanol production picks up, these businesses will face restricted supply and higher prices.

This is one example of why I believe many forecasts about the economy aren’t well-reasoned. They overlook such secondary, or second- and third-order, effects of closing down large portions of the economy. The big question is: How hard will it be to restart a lot of these activities?

American Retirement Behavior is ‘Sticky’

“Sticky” is an economist’s way of saying that some traditions and habits are difficult to change.

The 1983 Social Security reform gradually increased the full retirement age from 65 to 67 for people born after 1943. Those born in 1960 and later have a full retirement age of 67.

The full retirement age (FRA) is when a person is eligible to receive the full retirement benefit. Begin Social Security retirement benefits before FRA, and you’ll receive a lower benefit, with the benefit reduced for each month when you claim it early. Benefits can begin as early as age 62, but they will be about 30% lower than the full retirement benefit.

But delay benefits past FRA, and the benefit amount is increased for each month you delay through age 70.

When you begin receiving Social Security retirement benefits is independent of when you actually retire from work. If one goal of increasing the FRA was to encourage people to stay in the workforce longer, the goal isn’t being met.

A new study says the change in full retirement age hasn’t been affected when people retire, though it is affecting when benefits are claimed.

People still are most likely to retire at 65, with another large cluster retiring when they are first eligible for Social Security benefits at 62.

The change in Social Security rules did cause a strong shift to people claiming their benefits after age 65. But that decision is independent of when they retire from work.

The study’s authors said employers have more of a role in when people retire than the FRA does. If the government wants people to delay retiring, it will have to work with employers or use other methods.

How Likely Are You to Need Long-Term Care?

It is tough to make a decision about purchasing long-term care insurance without good information about the potential need for long-term care.

There’s a lot of misunderstanding about the percentage of older Americans who need long-term care, especially extended long-term care.

A new study published on AdvisorPerspectives.com compares data from several sources. This gives us a better idea of the probability one of us will need long-term care and for how long we might need it.

The probability that a person is likely to need less than a year of long-term care during his or her lifetime is a little under 20%.

There’s about a 10% probability of needing one to two years of care.

The probability of needing two to five years of care varied a lot between the studies, from about 10% to 20%. Likewise, the probability of needing long-term care for a period of five years or longer-ranged from less than 10% to 20%.

Women are more likely to need long-term care than men, according to the Society of Actuaries, the only study that separated the probabilities by sex.

The probability of needing long-term care for two years or less is about the same for both men and women, with women having a slighter higher probability.

But women are about twice as likely to need two to four years of care (20% vs. 10%), and significantly more likely to need five years or more of care. The probability of a woman needing five years or more of care exceeds 10%, while for men it is less than 3%.

This data should help you decide whether to buy long-term care insurance, which type to buy and how much coverage to buy.

The Data

New unemployment claims for the latest week were 2.123 million, down from 2.446 million the previous week. That makes eight weeks of claims declining each week, the longest streak of declining claims going back to 1962.

Consumer Confidence, as measured by The Conference Board, didn’t change much in May. The index was reported at 86.6, compared to a revised 85.7 for April. The Present Situation component of the index declined a little, but the Expectations component that indicates a consumer’s outlook six months ahead increased a little.

Pending home sales declined by 21.8% in April, following a 20.8% decline in March, according to the National Association of Realtors (NAR). Over 12 months, pending sales are down 33.8%. That’s the largest 12-month decline since NAR began the data in January 2001.

NAR says the declines are due to government-ordered shutdowns that prevented showings of homes. There is significant pent-up demand and signs that sales will increase as shutdown orders are eased.

Home prices continued to rise in March, according to the S&P Corelogic Case-Shiller Home Price Index. Prices rose 1.1% for the month and 3.5% over 12 months.

The FHFA House Price Index reported that prices rose 0.1% in March compared to 0.8% in February. Over 12 months, prices rose 5.9%.

Sales of new homes increased by almost 1% in April. Economists expected a decline of about 22%. Even so, sales were down about 6% over 12 months.

Consumers purchased lower-priced homes. The median home price was $309,900, the lowest level since July 2019. The median price declined 8.5% over 12 months.

I don’t usually report on mortgage applications, but the latest data indicate low-interest rates and other factors are spurring interest in home buying.

Mortgage applications for home purchases rose 9% last week from the previous week. That marks six consecutive weeks of increases in applications and a total 54% increase since early April.

The Mortgage Bankers Association also said the purchase loan amount in the applications has steadily increased and is at the highest level since mid-March.

The coming weeks will tell us if this activity is a cluster of pent-up demand from the Hibernation Economy or sustained interest in home buying.

Durable Goods Orders declined by 17.2% in April. The March report was revised to a 16.6% decline in orders. Excluding transportation, orders declined 7.4% in April. Core capital goods, a key measure of business investment, declined 5.8% in April, compared to a revised 1.1% decline in March.

The manufacturing sector continues to be depressed, but less depressed than a month ago, according to surveys by the regional Federal Reserve banks.

The Dallas Fed Manufacturing Survey resulted in a negative 28.0 reading for the Production Index in May, which is better than the negative 55.6 in April. The General Activity Index was reported at negative 49.2, compared to negative 74.0 for April.

The Richmond Fed Manufacturing Index was negative 27 for May, compared to negative 53 in April.

The second estimate of the first-quarter GDP reported a 5.0% decline, compared to a 4.8% decline in the first estimate.

The Markets

The S&P 500 rose 2.22% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 4.09%. The Russell 2000 increased by 6.78%. The All-Country World Index (excluding U.S. stocks) added 1.78%. Emerging market equities declined by 0.74%.

Long-term treasuries lost 0.68% for the week. Investment-grade bonds increased by 0.20%. Treasury Inflation-Protected Securities (TIPS) fell 0.32%. High-yield bonds gained 1.18%.

In the currency arena, the U.S. dollar fell by 0.26%.

Energy-based commodities lost 1.54%. Broader-based commodities fell 1.86%. Gold declined 2.09%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations on key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Seriesclick here.

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If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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