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Chicago Fed Data is Alarming

About the Author | Mike Dunn – Mutual Fund Marketing Services

According to the Chicago Fed their index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories is now starting to decrease again.

Headwinds for the US Worker and the US Economy

  • Employment is still soft in most areas. Many workers that are finding jobs that are forcing them to do more work for less compensation. This puts a squeeze on disposable income which impacts personal consumption.
  • Many unemployed with expired benefits and underemployed workers are having to pay the 10% penalty for employmentearly withdrawal of their IRA. This is draining their last line of defense of homelessness unless they can turn their cash flow around. This further creates a new class of poor and temporally inflates the Federal and State tax income numbers. How will this affect the future economy? It’s devastating for the family involved, but is also devastating from a macro-economic bubble for the Federal Government and State Government budgets.
  • Home prices are up due to lower inventories which are usually a good indicators.  However, one of the reasons for lower inventory is many homeowners are still upside down in their mortgage and can not afford to bring the additional funds to closing. Hence, many would be sellers can’t afford to sell.

Reasons for Optimism for the US Worker and the US Economy

  • The stock market is up, inflation is low and interest rates are down. Workers with 401Ks and IRAs are feeling more confident as their retirement nest egg grows.
  • The hardest hit real estate markets are coming back to life and short sales and foreclosures are decreasing. Even with many would-be sellers stuck in their homes (see above) with an upside down mortgage, it appears according to the data, they will at least survive the foreclosure process.
  • I’m hearing anecdotal evidence of houses being sold above their asking price in hot areas.
  • Commercial Property prices are up.
  • Apartment Housing occupancy is beginning to tighten. Since many former homeowners don’t have the credit to purchase another home for several years, they are going to the rentals in droves. The good news is this will drive more growth in construction as companies meet the new demand in this new economy.
  • Many homeowners with too much of their total net worth in their home are opting to cash out of their home to downsize and rent to avoid rising property taxes, repairs and volatility of their housing price.   This may in fact be a smart option for the former homeowners to rent. One of my financial mentors, Ramesh Gokal, once told me owning a home is a luxury and is not always the best personal financial decision. You may be better off to rent and put your resources into income producing investments. This philosophy was validated in Robert Kiyosaki’s, “Rich Dad, Poor Dad”.

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