The New Economy
As 2013 draws to a close, analysts across the United States are drawing up economic predictions for 2014. The precise facts and figures may vary, but there are a few general trends economists mostly agree on for the coming year:
1. The economy will grow faster:
US gross domestic product (GDP) expanded slowly in 2013, probably growing a paltry 1.9 percent or so when the final figures come in. Economists expect that to increase roughly a percentage point in 2014, as the fiscal drag from fiscal policies like the sequester lifts and improvement continues to be made in strengthening sectors like housing and consumer spending. IHS Global Insight's chief economist, Nariman Behravesh, forecasts 2.6 percent GDP growth; analyst David Berson at Nationwide Economics predicts 2.7 percent growth. “Stronger growth will come from lower oil prices, improved international growth, rising household net worth, and less fiscal drag,” Mr. Berson writes in an e-mailed report.
“The US recovery lost steam in 2013 because of massive fiscal tightening,” Mr. Behravesh writes in his own e-mailed release. “The drag from fiscal policy will probably be far less over the coming year – especially in light of the budget deal made by US Congress. This will allow the underlying strengths of the economy to become more visible.”
Though growth will be faster in 2014, it's still expected to be below the long-term trend of about 3 percent.
2. Unemployment rate will fall to near 6.5 percent:
The Federal Reserve recently lowered its US unemployment forecast for the year, projecting it to fall as low as 6.3 percent. As late as September, the Fed was projecting between 6.4 and 6.8 percent. Influenced by that rosier outlook, the Fed took its first step toward trimming its monetary stimulus efforts, cutting back on bond purchases by $10 billion. ( Continue… )
Beyoncé continues to rewrite the book on how to sell music.
On Friday night, the pop star walked through a Wal-Mart store in Tewksbury, Mass., pushing a cart like any other shopper before stopping to announce that everyone there would get a $50 gift card. The store manager told Us Magazine that she gave out 750 cards totally $37,500.
Clearly, Beyoncé was sending Target and Amazon.com a message: Boycott my new album and I'll give my love and dollars to a competitor.
The controversy surrounding the release of Beyoncé's latest album, "XO," illustrates how the music business is changing.
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On Dec. 13, Beyoncé surprised fans and brick-and-mortar retailers with the sudden release of the album only at Apple's iTunes store. The 14-track, 17-video digital album was priced at $15.99. The album became an overnight bestseller, and more than 1 million copies have sold so far.
But some retailers, such as Target and Amazon, were not amused by her one-week exclusive deal with Apple.
Target released a statement explaining that Beyoncé's fifth studio album would not be carried by its stores.
"While there are many aspects that contribute to our approach and we have appreciated partnering with Beyoncé in the past, we are primarily focused on offering CDs that will be available in a physical format at the same time as all other formats. At this time, Target will not be carrying Beyonce’s new self-titled album ‘Beyonce.’”
Amazon, in protest, also decided not to sell the physical album. Amazon is selling, but not promoting, the digital download version of "XO." Part of the Beyoncé surprise release plan included a ban on pre-sales of the album, normally an effective way to build sales.
Amazon was miffed that the album distributor, Sony Music Entertainment, had prevented pre-sales, according to Billboard magazine.
Amazon is reportedly still steaming that Sony Music Entertainment handed down an edict that Amazon, or any other retailer for that matter, couldn't pre-sell the Beyonce title. Pre-sales of new titles has proven to be an effective marketing tool and the Sony edict was interpreted as further protecting the iTunes exclusive window.
According to sources, Amazon may be considering further reprisals against Sony Music Entertainment and Columbia down the line, although conversations are said to be still ongoing between the label and the merchant.
The Beyoncé album sales strategy reflects the major shifts underway within the music industry. According to Motley Fool, in 2013, physically packaged music sales will total about $13 billion – only half the sales of six years ago. Meanwhile, digital music sales have now reached $10 billion annually.
Who are the big players? Billboard reports that iTunes has 41 percent of today's retail music market. Wal-Mart has 10 percent, Amazon has 9 percent, and Target comes in at 5 percent.
While Beyoncé challenged the traditional brick-and-mortal retailers with this album release, she also challenged the business model of digital music vendors, including iTunes, by refusing to sell single-tracks of her new CD. The "XO" songs can only be purchased as a complete album.
Beyoncé's husband, the rapper Jay-Z, also has a creative flair when it comes to challenging traditional marketing models. The first 1 million copies of "Magna Carta Holy Grail" album were initially only available on a free app by Samsung. Jay-Z reportedly sold Samsung the initial exclusive rights for $5 million.
Jay-Z has described the music business today as the "Wild West." If so, keep your eye on this pair of gunslingers. You can expect to see more creative marketing plays from this power couple.
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In an effort to curb abusive lending practices, the US government has finally issued guidelines – long overdue – on short-term bank loans tied to consumers’ income. The new federal limits will help to protect consumers and, surprisingly, the banks who make such loans.
The benefit for consumers is obvious. These deposit advance loans (which are really just payday loans offered by legitimate banks rather than shady neighborhood dealers or online outlets) hit consumers with a myriad of expensive fees and charge up to 120 percent in interest. The new guidelines, issued last month by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., rein in the interest rates that banks can charge and the balloon payments they require.
Here is how the loans work: A bank advances money to existing customers against their paycheck, Social Security, or other benefit that is due to be deposited into their accounts. When the expected deposit hits, the bank withdraws its principal plus interest directly from the account.
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So far, such an advance could be construed as a valuable service for cash-strapped consumers. Deposit advance lending exists because some people cannot meet their near-term financial obligations and need a little extra time to round up the necessary funds. ( Continue… )
Cyber Monday, the Monday after Thanksgiving, has become one of the biggest sales days for online retailers. This year, a group of independent bricks-and-mortar stores in New England are fighting back with "Cider Monday."
"How many millions of dollars are spent on Cyber Monday? We thought it would be fun to play on the words, and have Cider Monday be the day when people would go into their local store. We're all offering cider!" says Willard Williams, owner of the Toadstool Bookshops in western New Hampshire and the originator of "Cider Monday."
"People are seeing the 'Cider Monday' and coming right in," says Kenny Brechner, owner of DDG Booksellers in Farmington, Maine. "The turnout has been amazing, especially considering the snowy weather."
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“We are confident that 'Cider Monday' will very quickly overtake 'Cyber Monday' as the shopping event of the year,” says Mr. Williams.
"Our servers aren't going to crash – and might even smile. And we can promise no bugs in the cider," he laughs, referring to the crashing network servers and 'buggy' software that can plague digital retailers.
Williams shared the Cider Monday idea with a network of bookstore owners, who then spread it to other locally owned businesses in their communities. Today over 100 businesses are taking part, according to local estimates.
"I took one look at it and said, 'That's a great idea,' and then printed something up and walked around town," says Mr. Brechner. He first heard the idea last Monday and started drumming up interest immediately. By Friday, 10 other shop owners in the small town had signed on.
"I 'seeded' it throughout the community," puns Brechner. "I think the idea all along was to make it more of a widespread 'Shop Local' idea, not just focus on individual bookstores," he says. "It's just that we were the ringleaders."
Profits from locally owned stores stay and re-circulate in the area, notes Williams.
"I'm a big believer in the buy-local movement, and I think it's making a difference," he says. He points to recent reports from the American Booksellers Association showing that, since May 2010, one or two new bookstores have opened every week.
He credits growing public awareness of the link between the arrival of big-box stores and the closing of locally owned stores. "People start worrying that their local bookstore is going to close. They mention that to other people, and it builds a community of bookbuyers who want to support their local stores," he says.
"That's ultimately what we're trying to do with Cider Monday," says Williams. "Thank the people who have decided to spend their money locally."
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To be good enough for government work, as the saying goes, average is the standard. It’s a strange saying, because government work is often mission critical and can affect millions: Think NASA or the Department of Defense. Yet the cliché has a basis in reality, as the immense snafus with the Obamacare website demonstrate.
One tempting solution is to have the private sector run HealthCare.gov. The private sector generally performs more efficiently and reliably. And certainly, the website would have been created and vetted in a more cohesive and professional manner in a business setting than in the depths of the Department of Health and Human Services bureaucracy.
But costs have a funny way of escalating when the private sector intersects with government. Would anyone call the Pentagon procurement process cost-effective? Are health-care costs really lower because profit-motivated hospitals, health maintenance organizations, and insurance companies are competing? Turning over management of major initiatives entirely to the private sector could become prohibitively expensive for taxpayers.
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A better solution would be to apply the fundamental principle that drives performance in the private sector to the public sector itself, and that is to pay competitive wages. Not all government jobs are underpaid. Those requiring only a high school education are actually more lucrative in government than in the private sector. But according to a 2012 study conducted by the Congressional Budget Office, wages for federal jobs requiring the highest level of skill and professional qualifications are on average 23 percent lower than for similar jobs in the private sector. In other words, for higher levels of skill, the public sector actually pays less, which is absurd and a recipe for failure. ( Continue… )
Ask tax reformers what they most want from the tax code and you invariably get one answer. It doesn’t matter whether they’re liberal or conservative, progressive or libertarian. Everyone wants taxes to be simple and fair.
It’s a beguiling mantra. Unfortunately, it means radically different things to different people. As Congress gears up to tackle tax reform this fall, Americans will have to watch carefully. True tax simplification would broaden the income base, increase the number of people and corporations who actually pay into the system, demand more of high-income earners than low-income earners, and make filing simpler. Often, however, proposed tax reforms are simplistic – and unfair.
For example: Some in Congress argue that to be both simple and fair the income tax must be a flat tax. It’s an attractive idea: one simple form and one tax rate for everybody. Unfortunately, many flat-tax proposals presented in the past decade eliminated taxes on investment income altogether, which effectively shields a big source of income for the richest taxpayers. If Americans are worried today about millionaires and billionaires paying income taxes at rates effectively lower that the tax rates paid by their secretaries, what would they say when a flat tax kicks in and the disparity becomes even larger?
Other members of Congress are once again pushing the “fair tax,” which would simplify taxes by scrapping the current system entirely. Instead of federal income, payroll, and estate taxes, Americans would pay a national sales tax. This proposal does not consider how such a drastic change will accommodate other tax systems used by the United States and its international partners. States, most of which define income using federal standards, would have to institute new tax codes and tax return filing procedures, which would be even more complex for businesses and individuals dealing with multistate income and taxes. ( Continue… )
Remember the term “robo-signing”? You know: what all the mortgage companies were doing a couple of years ago when they kicked people out of their homes without following the process of law. Did you know that robo-signing is still happening tens of thousands of times every day?
Most people don’t know. But it is true. This time, it involves buyers of credit-card debt who are robo-suing. Every day, about a dozen of these companies take this procedural shortcut by filing lawsuits to try to use the courts to force people into paying back the debt they've defaulted on. These suits have no true legal standing because they violate the most basic principle of the burden of legal proof. That's because the robo-signers, signing hundreds or thousands of documents a day, don't take the time to check whether the people they're suing really owe those debts. These credit-card debt buyers have done this about 40 million times since the financial crisis began in 2008. And they will do it again over and over – about 10 million times a year.
How did robo-suing start in the credit-card industry?
For the past 20 years the major banks who issue credit cards sell the accounts that are defaulted on. This makes perfect sense for the bank because it frees up time and resources that are better spent growing the bank. No bank wants to do business with third parties who trick and abuse consumers in the manner that this small group of corporate debt-buyers has done. Doing so reflects badly on the bank and creates financial risk. So, why did the banks go along with this plan? For the simple reason that they did not know about it. ( Continue… )
Government shutdown: The economic impact of a shutdown of the federal government depends on how long it lasts. "It's not a disaster provided it doesn't go on a long time," says Nariman Behravesh, chief economist at IHS/Global Insight in Lexington, Mass. "For every one week that the government is closed, GDP growth in the fourth quarter will be reduced 0.2 percentage points." But if it goes on for three or four weeks, the effect on GDP (gross domestic product, which measures the nation's output of goods and services) would be big, Mark Zandi, Moody's Analytics chief economist, told a Senate committee last week. And if it lasts longer than two months, it would probably tip the economy into recession, he added.
The political fallout is so great that economists expect a quick resolution should the shutdown occur. Washington is already responsible for cutting annualized growth in the current quarter by a full percentage point because of the restoration of the federal payroll tax and the spending cuts under the budget sequester, says Mr. Behravesh. The result is that the economy is growing only weakly.
The latest numbers tell the story:
Consumer confidence down: The Conference Board’s monthly read of consumer confidence fell to 79.9 in September, revised downward from 81.8 in August. Meanwhile, the University of Michigan’s Consumer Confidence Index fell 4.6 points in September to its lowest monthly reading since April. “Unease over the budget and debt ceiling uncertainties emanating from Washington may have played some role in the decline in sentiment since the summer, although other factors, such as stock market gains and improvement in the housing market, likely continue to support a gradual upward trend,” Barclays Research economist Peter Newland wrote via e-mailed analysis.
Mixed data for housing: Home prices climbed 0.6 percent in July and 12.4 percent since July 2012, according to S&P/Case Shiller’s monthly index of home prices in 20 cities – the index’s biggest annual increase in 7-1/2 years. New home sales, meanwhile, jumped 7.9 percent in August. But pending home sales fell by 1.6 percent in August, suggesting to some analysts that existing home sales could drop in September.
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Mortgage rates sliding: The average rate for a 30-year fixed rate mortgage fell to 4.47 percent since last week, and the purchase application volume increased by 7 percent. Rates are falling in the wake of the Federal Reserve’s announcement that it wouldn’t scale back its asset purchases. The mortgage market had already anticipated the start of the taper, causing rates to rise through the summer. ( Continue… )
Fed's “taper” move could come in October: If the economy picks up, the central bank could begin cutting back its bond purchases as early as October, James Bullard, president of the Federal Reserve Bank of St. Louis, told Bloomberg television Friday. Mr. Bullard, a voting member of the Fed committee that sets interest rates, said it was a "close decision" not to begin trimming back its $85-billion-a-month in purchases of Treasury and mortgage-backed securities.
The Fed's decision, announced Wednesday, sent the markets into a tizzy. The dollar tanked, stocks surged to record highs, and the price of gold went up. The housing market, too, could see benefits: the mortgage market had been bracing for a Fed taper since early summer, causing interest rates to rise over 100 basis points since May. Now, with no taper in sight, mortgage rates are falling again: According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage fell seven basis points since last week to 4.5 percent.
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A good week for housing: Housing starts and existing home sales, both released this week, showed positive signs of growth. Housing starts edged up 0.9 percent in August, slightly under expectations, but single-family housing starts jumped by 7 percent. The single family report in particular was strong, but economists worry that August’s month-to-month gain may have been a blip rather than a trend. “The big question now is if single family starts are in the relatively early stages of a sustained move that will lift them to near the pace seen in the past when the homebuilder survey was registering readings similar to current ones,” MFR Inc. chief US economist Joshua Shapiro wrote via e-mailed analysis. “We do not believe that gains of this magnitude will occur given a massive supply overhang of existing homes that will present brutal competition to the new home market for the foreseeable future.”
Existing home sales, meanwhile, rose 1.7 percent in August to a 5.48 million annualized pace – their highest level since February 2007. The rise may have had less to do with actual demand and more to do with buyers being motivated by rising interest rates to close the deals on home purchases, argue IHS Global Insight economists Patrick Newport and Stephanie Karol.
Inventory also inched up from 2.24 million to 2.25 million homes, suggesting that higher prices are motivating sellers to put their homes on the market.
JPMorgan pays up for “London Whale”: JP Morgan Chase & Co. agreed to pay $920 million in penalties and admitted to violating securities regulations in what resulted in the disastrous $6.2 billion trading loss known as the “London Whale.” The fines were spread out among several US and UK-based agencies, including the Securities and Exchange Commission (SEC), the Federal Reserve, and the UK Financial Conduct Authority, among others.
Red Lobster, Olive Garden in trouble: Darden Restaurants, which owns the Olive Garden and Red Lobster restaurant chains, reported disappointing earnings despite efforts to revamp their menus and offer cheaper, healthier fare. Sales fell 4 percent and 5.2 percent at Olive Garden and Red Lobster restaurants, respectively. The company is reducing its workforce by 80 to 85 jobs, and president and chief operating officer Drew Masden is retiring and being replaced by Gene Lee.
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The Federal Reserve's surprise announcement that it would not taper its economic stimulus program this month is rattling through world markets: the US stock market surged into record territory, gold rose sharply, and interest rates on US Treasury securities fell.
But one of the biggest and direct impacts could be on the housing market. Wednesday's unexpected move – actually, the lack of a move – could cause mortgage rates to fall and give a boost to housing. The rate on the Treasury's 10-year note – a bellwether for mortgage rates – fell sharply after the Fed announcement. At 3:45 p.m, the rate had fallen 15 basis points to 2.71 percent. It had been as high as 2.98 percent earlier this month.
Rising interest rates were a key factor in the decision by the Fed's Federal Open Market Committee, which sets short-term interest rates.
"The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction," the Fed announcement read. "Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative." ( Continue… )