Over the last few weeks, we have started to think that things might work out better here in the US than most people currently expect. This brighter future would emerge from the confluence of two unrelated, but equally important, developments:

1. The recently identified – and astonishingly large – accessible deposits of gas and oil in the US, and

2. The potential benefits of a massive, across-the-board forgiveness of principal on underwater mortgages.

Here is how events could unfold.

Oil and Gas Could Fuel Expansion

Tapping into the previously inaccessible oil and gas liquids concentrated in the country’s geographic center should accelerate growth for several reasons, not the least of which would be the increasing demand for – and thus increasing development in – investment in exploration, drilling and development, as well as the manufacture of all the tools, parts and pieces needed to explore, drill and develop.

As economic activity and job growth pick up in these and related areas, we can expect a ripple effect to make itself felt through the entire middle of the country, one of the areas hardest hit by successive recessions.

Cheap oil and gas would lead to cheap energy for businesses as well as gas – a plus for energy-intensive industries like aluminum smelting. Petrochemicals are the feedstock for the plastics and carbon fibers that, in turn, are the raw material of manufacturing. Conversion of coal-powered facilities to gas would provide further employment growth. Cheap real estate in the downtrodden middle of the country could undergo rapid re-pricing, raising collateral potential and facilitating leveraged construction.

From Underground Assets to Underwater Mortgages

A mortgage principal forgiveness program could stop the downward spiral of housing prices by sharply reducing the foreclosures that continue to be dumped on the market. It would also allow formerly underwater homeowners to refinance at historic low rates, increasing both their available cash and their confidence in their future. In addition, once they could afford to sell their houses, they would become mobile again, and able to go further afield to seek employment.

Ending foreclosure dumping would allow residential construction to resume (except in overbuilt locations such as Arizona and Nevada) as it would no longer be possible to buy a house for two thirds the price of a new build.

The Net Effect

Once the full implications of these developments sank in, we would expect a jump in US equity markets and an increase in domestic interest rates (more credit demand for a growing economy, as unemployment shrinks) as well as rapidly improving state and local budget situations.

Even the federal deficit would likely stabilize, as higher funding costs would be offset by improved tax revenue. Because we expect nothing good to come out of Europe and think that emerging markets will still be working out their inflation and credit bubble problems, the probable results would be strong capital inflow to the US and an appreciating dollar. These developments would give US investors the opportunity to buy into emerging market growth potential on the cheap.

Whoever is lucky enough to be president in 2014 would then reap a true and truly undeserved windfall.

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

IMPORTANT NOTE: Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), a registered investment adviser and a nonbank subsidiary of Zions Bancorporation. Investments are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of the amount invested. Some representatives of Contango are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. CCA1011-0177

The US economy has slowed significantly in recent months compared to late 2010 and early 2011. We’re not forecasting a recession … yet. But we are talking about a marked deceleration in the growth rate of our gross domestic product (GDP) – from about 3% in the second half of 2010 to about 2% at best this year.

However, if the huge cuts in government spending now being contemplated in Washington do occur, we could see a recession emerge either late this year or in early 2012. The course of events is likely to be similar to that of the late 1930s, when the government cut spending dramatically after years of fiscal stimulus and thus drove the economy into recession. In 1937, the Dow fell from 180 to 120 – a one-third drop.

US Markets Continue to Fare Well

Despite the economic slowdown and all of the “macro” uncertainty surrounding the economy as a whole, US markets remain reasonably well supported. As of July 25, the Dow was up about 9% for the year, while both the small-cap Russell 2000 and the Nasdaq were up about 7% – certainly decent market returns. We’ve been calling the recent schism between the micro economy – focusing on individuals, households and businesses – and the macro economy “the decoupling of the micro from the macro.” Simply put, although the economy stinks, corporations have, generally speaking, been doing rather well.

Here are reasons for their relative success in an otherwise soggy economy:

—Very low interest rates reduce costs, make more projects profitable, and provide positive operating leverage for a lot of public companies.

—Exposures to fast-growing economies outside the US have helped boost earnings for many companies.

—The weak-dollar policies of the Federal Reserve Board and the Treasury have aided US corporations that operate globally.

—Productivity gains continue to be reasonably strong and corporations have generally been able to grow sales without significant upgrades to plant, equipment and labor.

We’ve already received about half the earnings reports for the second quarter. A lot of big reports came in last week, including earnings from Apple, which once again beat forecasts handily, with earnings 16% above expectations. The key metrics for the second quarter so far are pretty impressive: 18% growth in year-over-year earnings per share (EPS), 13% top-line growth and 0.10% of margin expansion to 8.8%. Some 55% of firms have beat revenue projections so far, which is well above the long-term average of 35%.

Market Risks

We’ve been saying that the biggest risks to the markets, at least through the first half of the year, were related to policy rather than earnings – and that hasn’t changed. So if a major fiscal austerity plan is enacted, it could 1) give a boost to the dollar, which would not be good for the stock market and 2) cause a contraction in the government component of GDP so great that it could drive us into recession.

This means that the best short-term scenario for the markets in our view would actually be relatively modest efforts to curb the deficit this year and next, combined with major long-term structural reforms to the tax code, Social Security and Medicare.

How important has the weak dollar been to US stocks? Well, look at the numbers. Although the Dow is up about 9% on the year, other world markets have been lackluster in 2011. The German DAX is up 6%, the Japanese Nikkei is down about 2%, the UK exchange is flat, and Canada is flat as well. China and Brazil? Down 4% and 13%, respectively. And Germany is probably doing as well as it because of the euro’s global weakness. Certainly, there is no doubt that the weak dollar has bolstered US companies.

Of course, as Americans, it’s unnerving to think that we need a weak dollar to support our markets. However, a weak economy needs pressure-release valves, and currency depreciation is one of those right now. A weak dollar makes our products and services more competitive in the global marketplace. That increased competitiveness is reflected in the great earnings numbers posted by US multinationals so far this year.

We remain mostly fully invested in the majority of client accounts, but we are keeping a finger on the sell button should we see a policy action or mistake that we think would end the party prematurely.

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

Neither current or anticipated economic growth rates are likely to be sufficient to offset the high levels of household, government and corporate debt the nation has accumulated.

With years to go before sectors such as residential construction recover fully from the credit crisis and ensuing recession, households are saving rather than consuming, while the corporate sector remains cautious. At the same time, regulators – coming in late and, arguably, with an inappropriate response – are focused on clamping down on “risky” loans. Unfortunately, in today’s environment, most loans are viewed as risky.

Slow Growth Ahead

As a consequence, the US financial system is only slowly regaining strength and building capital. Further, we expect that years of residential mortgage defaults, restructuring and defaults on commercial real estate and other business loans will continue to be a significant drag on economic growth.

Just as the economy offers few signs of accelerating, the federal deficit shows no sign of reversing, prompting virtually all economists to forecast large deficits five and more years into the future. The good news is that things could be worse. If interest rates were higher, the interest component of the federal budget would be much higher as well – possibly even higher than the $671 billion for defense that President Obama has proposed for fiscal 2012.

The Federal Reserve can control the short end of the yield curve (representing very short-term interest rates) for a while longer, but rates are very likely to rise at the long end of the curve. As the economy recovers, private credit demand will rise, adding to federal demand – and making investors nervous about how the government is going to deal with even more debt. These rising rates could push the government into a debt spiral à la Greece, a situation in which debt service grows so fast that tax revenue cannot offset the deficit’s rise.

Change Is Possible

The United States is not Greece. Both the president’s deficit commission and the Republican “Ryan proposal” illustrate that the government’s tax and expenditure structure can be adjusted to avoid the debt trap. The problem, then, is political rather than economic. With a presidential election coming, no one is willing to press for the needed changes in spending, tax and fiscal policy.

Moreover, and of equal importance, huge amounts of federal money are still being used to protect various special interests, primarily through the use of tax concessions.

Some people expect inflation to be used to disarm the debt trap, as it has in many other countries (and, indeed, in the US between 1945 and 1960). However, high rates of inflation are unlikely in a world of unemployment, excess capacity and reluctant lenders.

Moreover, it is not clear that our leaders really believe that inflation will be able to bail them out.

If inflation should spiral higher, interest rates will rise as well, not only pushing the federal government closer to the debt trap but significantly slowing the economy and further cutting government revenue.

Next Steps

What should a prudent investor do? For the moment, holding a broadly diversified portfolio, mainly in US dollars (which we think are oversold), significantly in blue chip equities (they are the most resilient), and with short-to-moderate bond duration makes sense. However, watch for the crisis to come. Capital preservation will then require a move toward a globally rather than a domestically oriented set of investments.

George Feiger is chief executive officer of Contango Capital Advisors, the wealth management arm of Zions Bancorporation (www.contangoadvisors.com).

]]> http://think.zionsdirect.com/2011/06/02/defusing-the-debt-trap/feed/ 0 http://think.zionsdirect.com/2010/11/16/economy-recovering-but/ http://think.zionsdirect.com/2010/11/16/economy-recovering-but/#comments Tue, 16 Nov 2010 10:00:02 +0000 Anne D'Innocenzio http://think.zionsdirect.com/?p=6856 Layaway, once the province of the poor, has gone mainstream. At the Mall of America in Minnesota, shoppers dart in for just one or two things. In New York, socialites do the unthinkable: They wear the same ball gown twice.

During the Great Recession, people made drastic changes in how they spent their money. They stopped treating credit cards as cash. They learned to save and learned to wait . . . read more Read More]]>

NEW YORK (AP) — Layaway, once the province of the poor, has gone mainstream. At the Mall of America in Minnesota, shoppers dart in for just one or two things. In New York, socialites do the unthinkable: They wear the same ball gown twice.

During the Great Recession, people made drastic changes in how they spent their money. They stopped treating credit cards as cash. They learned to save and learned to wait. Now the recession is over, at least technically, and the economy is growing again, at least a little. But many changes in spending habits that most Americans first saw as temporary have taken hold, perhaps for good, some economists say.

This is the reality of the new American consumer — focused, cautious and tactical. In Jacksonville, Fla., Bernie Decelles and his wife both have jobs and own their home. They recognize that the economy is still fragile, though, and that they work in industries still struggling. They scrutinize every purchase they make.

“It used to be if we saw something, and liked it, we bought it,” says Decelles, a salesman for a company that makes storage equipment. “Nowadays, no way.” In dozens of interviews nationwide with shoppers, retailers, manufacturers, economists and analysts, The Associated Press identified key changes in consumer behavior that have endured after the recession. They include:

— Americans are buying brands and shopping at stores that they shunned before. They are trying more store-brand products for things like detergent and beer. Goodwill and consignment shops are attracting customers across the income spectrum. And people are putting big-ticket items on layaway rather than whipping out charge cards.

— Consumers are taking a surgical approach to shopping, buying only what they need, when they need it. Pantries are no longer filled with weeks’ worth of food, nor closets with clothes bought seasons in advance. Shoppers are visiting fewer stores, both traditional and online, and getting only what’s on their shopping list.

— The wealthy are spending again, but their behavior is much like everyone else. They are buying more timeless and classic goods: watches and handbags that won’t go out of style quickly. They are even — gasp! — recycling some of their most expensive clothes and wearing them twice. These behavioral shifts aren’t at the extremes of the Great Depression, which produced changes so drastic that many who lived through it adopted frugality as a lifelong habit.

Still, some experts say the changes from the recession of 2007, 2008 and 2009 could last. “This was a massive cultural event for our society,” says John Gerzema, a branding executive at marketing and advertising firm Young & Rubicam and co-author of a new book about the changing ways we spend money. “Eighty percent of Americans were born after World War II, so essentially this is our Depression.”

The impact is hard to overstate. Consumer spending represents 70 percent of economic activity. Every business feels the pullback in some way, and it’s more pronounced for those that sell things directly to people. The new patterns of spending represent a radical turn from the boom years of the last decade. Americans up and down the income ladder piled on credit-card debt and used their homes as ATMs by taking out home-equity loans to pay for third cars, clothes and far-flung vacations.

During that time, the savings rate plunged to nearly zero. Americans accumulated debts that far exceeded their incomes. Household debt, including obligations for mortgages and credit cards, rose to about 140 percent of disposable income, double what it was before the boom years.

Credit was easy, and money seemed readily available. Until it wasn’t. “We saw a period of consumption that was unusual and unstable,” says Jarrett Paschel, vice president of strategy and innovation at The Hartman Group, a consumer research firm in Bellevue, Wash.

A plunge in housing prices set off the economy’s slump. Most Americans were left financially stressed in some way. Millions of people abandoned all but the necessities; for some, the necessities became luxuries.

The worst recession since the Depression ended in June 2009, according to the National Bureau of Economic Research, a group of academic economists that officially declares the starts and ends of recessions. Americans’ psyche hasn’t recovered. An index of consumer confidence from The Conference Board has been in a tight range from the high 40s to high 50s. A reading of 90 indicates a healthy economy, and that level has not been seen since December 2007, the month the recession began. U.S. households lost 17 percent of their wealth over in the past three years, more than $10 trillion, according to the Federal Reserve. The labor market remains in shambles, with nearly one in 10 Americans unemployed. One in six Americans now receives some form of government assistance, including food stamps and extended jobless benefits.

You may not see soup lines, but only because “the soup lines are in the mail,” says David Rosenberg, chief economist and investment strategist at the Toronto-based money management firm Gluskin Sheff.

This stressful economic climate isn’t just affecting Americans who are struggling to get by. Those who are more fortunate also have a new approach to spending. Before the financial meltdown, philanthropist and socialite Allison Weiss Brady didn’t think twice about dropping $20,000 each season on posh accessories. One prized possession she bought at the height of the boom? A $4,950 Fendi lizard handbag.

Brady still springs for luxury labels like Chanel, but she’s snubbing the “it” handbags in favor of clothes and accessories that have staying power beyond a season. She won’t buy a new dress for every occasion, and will be wearing a Lanvin gown bought for a charity event last year to a few parties this year. And for the first time, she bought a peach-colored Chanel bag at a second-hand store, saving $2,000.

“I do think my mentality is more need-based now,” says Brady, who lives in Florida and is a vice president of marketing for Florida Dental Benefits, a dental insurance company. “Am I going to show up with a new pair of diamond earrings every times I go to a ball? That’s not happening.” Brady is also buying more items at charity auctions — not only to save but to give to others. Tempered spending by Americans of most income levels means the economic recovery is having a harder time gaining steam. Rosenberg says that at this point of the economic cycle — two years and 11 months since the recession began — things should be much better.

Retail sales are off by 2.6 percent since the recession began in December 2007. That’s a stark contrast to the last 60 years. At this stage in an economic recovery, retail sales on average were up 25 percent, according to Gluskin Sheff. Retail sales include food, autos, clothing, furniture and electronics.

Decelles, of Jacksonville, acknowledges his spending was more careless a few years back. Saving was barely on the radar. Now he eats out far less, doesn’t entertain much and spends little time shopping.

“Things certainly feel a lot different now,” he says, “than they did back then.”

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

BUTTE, Montana (AP) — Some of the biggest names in business said Monday, September 13, that they see a bright future for the economy, with famed investor Warren Buffett declaring the country and world will not fall back into the grips of the recession. “I am a huge bull on this country. We are not going to have a double-dip recession at all,” said Buffett, chairman of Omaha, Neb.-based Berkshire Hathaway Inc. “I see our businesses coming back across the board.”

Buffett said the same things that worked for the country through a century of two world wars, a depression and more — all while increasing the standard of living — will work again. He said banks are lending money again, businesses are hiring employees and he expects the economy to come back stronger than ever. “This country works,” Buffett said during a question-and-answer session via video at the Montana Economic Development Summit. “The best is yet to come.”

The likes of Buffett, Microsoft Corp. CEO Steve Ballmer and General Electric Co. Chairman Jeff Immelt told the nearly 2,000 business leaders, government officials, aspiring entrepreneurs and others at the summit that things are getting better. They also offered some ideas for what needs to be done. Ballmer said there soon will be more technological advancement and invention than there was during the Internet era. That will help drive business growth, he said. “I am very enthusiastic what the future holds for our industry and what our industry will mean for growth in other industries,” said Ballmer, whose company is based in Seattle.

He envisions new technologies that move beyond the Internet to tie together computers, phones, televisions and data centers to create amazing new products. And the pace of innovation will increase as technology makes workers more productive. “All areas of science today are moving forward more quickly,” Ballmer said. “The speed of scientific breakthrough is accelerating.” The conference was organized by U.S. Sen. Max Baucus. The Montana Democrat said it leaves “bickering and name-calling” back in Washington, D.C., so leaders can find good ideas.

Immelt said angry political rhetoric is not helpful and headlines are too focused on finding negative indicators. He said business at GE, one of the world’s largest companies, is improving. Immelt said the country is going to need to adjust, though. The economy since the 1970s has been driven by consumer credit and a misguided notion in building a “lazy” service economy, he said, and manufacturing, with an aim to reduce the trade deficit, is the key.

“It was just wrong. It was stupid. It was insane,” Immelt said of the push for a service-based economy. “The future of the economy has to be as an exporter.” He said Fairfield, Connecticut-based GE is now finding it profitable to build manufacturing and service centers in the United States rather than overseas, because it is more competitive to do so.

More investment is needed in technology innovation, exports need to be rejuvenated, and clean energy and affordable health care need to be given top billing for policymakers, Immelt said. But the corporate leader said he recognizes a polarizing environment in Washington makes it unlikely a national energy policy and other helpful guidance will ever take hold. Instead, he urged local business leaders and government officials in the audience to come up with their own local solutions. “Anger is not a strategy. Anger does not create growth. Only optimism creates growth,” he said. “Be the contrarian. Everyone is mad today. Be happy.”

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Observe that the revised 1.6% real annual growth pace of the U.S. economy during April-June 2010 comes at a time of the most aggressive combined fiscal (government) stimulus and monetary (the Fed) stimulus on record.

Take one more peek at the direction of the U.S. economy. Economic growth is declining rapidly even as the U.S. government will spend $1.4 trillion more this year than it takes in…just like last year…with a similar deficit forecast for next year…with $1 trillion deficits for years to come.

Humor me with one final peek at the chart. The U.S. economic slowdown is occurring even as monetary stimulus (money creation) is the most aggressive in the Federal Reserve’s 97-year history. Short-term interest rates are effectively zero. Long-term interest rates are at 50-year lows. The Fed announced new steps to stimulate the economy in recent days.

Still, the U.S. economy sags. It shows what can happen when the business sector and the consumer sector lose confidence in Washington DC.

Revisions Many

The U.S. Commerce Department’s first official revision of U.S. second quarter GDP (the most complete measure of goods produced and services provided across the U.S.) to 1.6% was announced on August 27. The first estimate late last month was of a 2.4% real annual growth pace.

The U.S. Commerce Department’s second and third official revisions will occur during late September and late October. The number crunchers will then revise the data again at least one more time over the next few years.

It would be nice if weak second quarter American economic growth was simply a pause before a reaccelerating growth pace…don’t hold your breath. Most estimates for third quarter U.S. economic growth are just slightly stronger than the 1.6% second quarter pace. In fact, given extremely soft (and depressing) data regarding existing home sales and new home sales reported over the past two weeks, a few more bearish economists expect a slight contraction in third quarter growth.

It shows what can happen when business executives and consumers are fearful of more and more costly and painful government encroachments into the private sector.

More Complete Data

The sizable downward adjustment to second quarter 2010 GDP was primarily tied to three factors, two of which could actually be considered somewhat positive. Government bean counters had overestimated the level to which U.S. businesses had added to inventory levels, i.e. the stuff on store shelves and in warehouses, subject to future sale. Lesser levels of inventories suggest that production will need to be boosted further in coming quarters when and if sales improve.

The second positive revision was to overall consumer spending, which grew at a revised 2.0% annual rate, versus the 1.6% initial estimate. A large detractor from second quarter growth was the fact that imports rose more quickly than initially estimated. Imports of oil, autos, electronics, etc. surged at a 32.4% annual rate, the largest increase in a quarter century. Producing “stuff” in the U.S. boosts GDP…buying it from Saudi Arabia, Japan, China, etc. does not. U.S exports of goods and services, which do add to GDP, grew at a modest 9.1% annual rate.

The Unknown

Logic would suggest that the unprecedented amount of stimulus in the U.S. economy should be leading to much stronger growth and solid employment gains. Instead, people are scared. Uncertainty is sky-high.
Large U.S companies are sitting on nearly $2,000,000,000,000 in cash, fearful of where the nation is headed. Corporate anxiety leads to cautious spending and the hoarding of cash. The number of mergers and acquisitions is rising modestly as shareholders are complaining about these enormous cash balances not being used to pay dividends.

It shows what can happen when the business sector is fearful of more and more regulation…more and more costly mandates from an anti-business Washington in regard to health care, rising taxes, possible energy legislation, unwieldy red tape in the financial services arena, and so on.

One of my favorite economists, Irwin Stelzer of the Hudson Institute in Washington DC, notes in a recent piece that “large swathes of the economy are now subject to political rather than market forces.” He notes tightening regulations of the health care industry, many subject to the whims of politicians and bureaucratic staffers.

He notes that “regulators are busy drawing up the estimated 10,000 regulations needed to implement the 2,319-page financial reform bill” with acceptable lines of business, fees, and compensation now unknown. He notes that “the housing sector is also hostage to government policy.” Tax rates? Low mortgage rates continuing? The future of Freddie Mac and Fannie Mae?

He notes the anxiety within the energy sector. “Utilities have no idea what penalties will be imposed if they construct new fossil-fuel plants, mining companies don’t know what market there will be for coal if Congress enacts an energy bill, and oil companies haven’t been told what regulations will be imposed on off-shore drilling. The only things that are known are that taxpayers will pay for subsidies to wind, sun and other forms of power generation that are not economically competitive.”

Too Much Government

An editorial in The Wall Street Journal last weekend summed things pretty well. It noted that “He (Treasury Secretary Timothy Geithner) and President Obama and their economic coterie really believe that government spending can stimulate growth by triggering private ‘demand,’ that tax rates are irrelevant to investment decisions, that waves of new regulation can be absorbed by business with little impact on costs or hiring, and that politicians can assail capitalists without having any effect on the movement of capital.” The editorial continues later, “If prosperity were a function of government stimulus, our economy should be booming.” And finally, “Never before has government tried to do so much and achieved so little.”

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 31 August 2010 issue of Jeff Thredgold’s Tea Leaf newsletter.

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All rights reserved. Cartoon Copyright © by Gary Varvel and they are used here with permission. Used with the permission of Gary Varvel and the Washington Post Writers Group in conjunction with the Cartoonist Group. All rights reserved.

Our Tea Leaf issue dated January 27, 2010 reviewed a handful of the major disincentives emanating from Washington DC that were currently sending shock waves through American businesses…and very likely to stifle solid levels of U.S. job creation in coming months and years.

Job creation has been substandard during the past six months, with seemingly not much improvement ahead. The following is an update of where we stand at this point.

Business owners and managers of any size company see a number of major impediments to new hiring over the next few years…

1) Higher and higher health care costs for their employees, with more and more complex and costly government mandates to come. Almost weekly, new and higher estimates of the costs of Obamacare to the business sector are released, either by various government departments or via private sector studies. New information about all of the “hoops” that need to be jumped through by employers in order to avoid penalties or fines makes it simpler to look to shed workers, rather than to add new employees

2) Potential “cap & trade” legislation to boost business costs. This is one more issue to keep managers awake at night. The good news here is that a weakened Administration and Congress are unlikely to move quickly in this area. At the same time, however, talk of a Democratic “surprise” to pass new onerous “cap & trade” legislation, as well as other items in December—between the November 2 election day and the date new members of Congress take office in early January—continues to rise. This could be particularly likely if Republicans regain control of the House of Representatives or the Senate, or both, in early November

3) Employers see sharply higher taxes on the horizon, one more impediment to new job creation. Successful employers see higher income tax rates coming, higher dividend tax rates coming, higher capital gains tax rates coming, and a variety of new taxes on investment income. Why bother to knock yourself out?

4) Many states and local communities are imposing or will impose greater costs on local businesses as a means of generating greater “fee” income to help offset declines in sales taxes, property taxes, and income taxes. Many already high-cost states will simply drive their most valued businesses across state borders to more “business friendly” environs

5) Business owners and managers are fearful of government out of control when it comes to budget deficits, and fear the longer-term implications on their children and grandchildren. Aggressive government spending and associated massive budget deficits can be “justifiable” at times of great economic weakness. However, excessive ongoing government spending and projected budget deficits of $1 trillion annually for years to come are simply too much

My simple definition of economics is “people respond to incentives.” The disincentives to add jobs in this country remain formidable.

Still Gaining

The estimated net worth of the American household rose again during the first quarter of this year. This marks the fourth quarter in a row that total household wealth increased…following seven consecutive quarters of declines. Total household net worth now stands at $54.6 trillion, an increase of $1.1 trillion ($1,100,000,000,000) versus the prior quarter’s $53.5 trillion total.

Net worth is derived from the Federal Reserve’s quarterly flow of funds report. The total represents the difference between all household assets, including stocks, mutual funds, real estate, CDs, etc., minus all debts, including home mortgages, consumer debt, bank loans, etc.

The first quarter increase was driven by rising stock values. Stocks owned by households gained an estimated $330 billion in value, a 4.4% rise, during the January to March period. The Dow rose 428 points (up 4.1%) to 10856 during the first quarter, but fell sharply during the second quarter to close at 9774 on June 30, before rising again in recent days. Household net worth for the second quarter (to be released in September) will be negatively impacted by the poor performance of the stock market during the April to June period.

Real estate owned by American households declined in value by 0.4% during the first quarter, shaving $65 billion from total net worth. Household real-estate holdings had been gaining in value during the previous three quarters and had added $888 billion to net worth before the first quarter decline.

In addition, households reduced total debt at a 2.9% annual rate during the first quarter, with reductions in both mortgage debt and consumer credit. Consumers have been aggressive, where possible, in paying down debt during the past few years in response to serious recession, painful job cuts, and higher levels of anxiety.

The rise in net worth is a positive sign and will likely be followed by more gains in coming quarters as the housing and stock markets rebound. Still, the $54.6 trillion total is 17% below the peak of $65.9 trillion during 2007’s second quarter, just before the Great Recession hit. It may take “awhile” to get back to that level.

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 13 July 2010 issue of Jeff Thredgold’s Tea Leaf newsletter.