Average Weekly Earnings - May 2009

The U.S. Bureau of Labor Statistics (BLS) reported today that the average weekly earnings of private Americans fell by 0.3% from April to May. What does this mean for ECONtrepreneurs who monitor changes in the broader economy and its effects on their personal economies? Let's explore this in light of other recent economic news.

To begin, Average Weekly Earnings is an Economic Indicator (see May 8th post). From this we speculate on take-home pay trends for average workers. Average Weekly Earnings are reported monthly along with the Employment Situation Summary, also published by the BLS.

The Consumer Price Index (CPI), also from the BLS, was released today as well. For simplicity, the CPI is synonymous with inflation. The CPI is a gauge to determine if Americans are paying more or less for the same goods/services as they were last month or last year. Consumer prices in May increased 0.3%.

So earnings are shrinking and prices are rising. If this trend continues, your consumer spending could be threatened! You may not be able to buy the same quantity (and quality) of goods and services you previously could, although your paycheck is the same amount. In layman's terms, situations where there is too much money chasing too few goods, causing the price level to increase are called inflationary. Conversely, situations where there are too many goods and not much money, causing downward pressure on prices are called deflationary.

Thankfully, we are not experiencing neither inflation nor deflationary effects yet. But the threat of both linger. The Federal Reserve, America's central bank headed by Ben Bernanke, is responsible for monitoring inflation levels. If prices continue to rise unchecked, inflation is well on its way to a reality near you.


Let's dig a little deeper into the CPI figure. Total CPI rose 0.3% from April, but core CPI rose only 0.1%. Core CPI does not include food and energy prices. Why? These products are considered volatile and susceptible to wild fluctuations. If the supply of oil or corn is restricted, the prices of these commodities changes immediately and drastically. Taking these components out leaves us with a more stable rate: the core inflation number. Keeping food and energy prices in the CPI number is called headline inflation, because it does just that: makes news headlines!

According to Federal Governor Kevin Warsh, the risks aren't as prevalent as many would have us to believe:

The recent data on inflation shows that the risks of deflation, which entered the minds of many central banks around the world over the last 18 months...seem to be significantly attenuated. [Inflation dynamics are] "closer to a zone of price stability....

Warsh is undoubtedly looking at the bigger picture. While headline inflation is up, core inflation not so much so. And, looking at CPI figures from the same time last year, inflation levels are lower in 2009. Core inflation is steady, but headline inflation is a little trickier. Energy prices - specifically gasoline prices - increased in May but not like we're used to seeing this time of year (Memorial Day usually kicks off the summer driving season; when people need or demand more gas, the price of gas will rise). Here at The Delasol Group we anticipate June gasoline prices to be higher, thus contributing to a higher headline CPI number next month. However, American productivity is lagging and more modest GDP numbers will likely keep core inflation in check as well.

U.S. Trade Gap - April 2009

Today the U.S. Department of Commerce reported that the national monthly deficit in international trade of goods and services increased to -$27.2 billion in the hole. That's a long way to climb out.



The International Trade Gap is also known as the Balance of Trade. It is one way to determine how healthy an economy is. The Balance of Trade is a summary of the monetary value of a country's exports and imports. Exports are goods and services a country sells. Imports are goods and services a country buys. When a country exports (buys) more than it imports (sells), the balance of trade is positive and is called a trade surplus. If a country imports (sells) more than it exports (buys), the balance of trade is negative and is called a trade deficit. The United States has been facing a trade deficit (buying more than we sell) since 1976. Interestingly, if you look at goods and services separately, the balance of trade for services has always been positive.

International trade is a necessary evil. It allows a business or country to expand; like most expansions, smaller, less competitive agents are usually hurt or allowed to fail for the benefit of the majority (In a future post, we will look at the effects of globalization on the Jamaican economy and the rise of Wal-Mart). Although the United States has many natural resources, for example, it cannot provide it's citizens with everything they want or need. For this reason the U.S. engages in international trade with other countries. The U.S. Trade Gap is the balance of trade between America and the rest of the world.

During the month of April, the deficit worsened by about a billion dollars from March. Deficits, per se, aren't necessarily a bad thing. It's really about when they occur and what effects other economic events have on them. In a recession, highly developed countries like the U.S. may want to export more, thus selling more goods to foreigners than they purchase from them. In theory, this would create jobs (to manufacture, distribute, market and transport the good) and demand for said good. This would help an economy fight the effects of a recession. In prosperous times, a country may be in a position to build capital or invest in machinery for future growth and will choose to import (buy) more goods and services.

Well, right now the United States is in the middle of recession and we're on the wrong side of the import/export fence. The widening deficit means that at a time when money is already tight from individuals all the way up to our national government, we are still outspending what little bit of revenue we're making. What are we spending our money on? Wait for it....Oil.



American oil imports are up and instead of gassing up our cars, in reality we are fueling the deficit! America has the most powerful economy in the world, measured by a Gross Domestic Product (GDP, another measure of economic health) figure of $48,000 per person, for roughly 300 million people. Wow! Additionally, U.S. firms have more flexibility and independence in their business decisions than their Western European and Japanese counterparts. But oil is the proverbial monkey on our back. Higher gasoline prices a year ago ate into our pockets and inevitably, into our trade budget. Imported oil accounts for about two-thirds of all U.S. consumption so it's a big part of national GDP (Remember, GDP is the economic determinant of how big and bad a country we are). According to the CIA World Factbook, America produces 9 millions barrels of oil and consumes 21 million barrels each day. We import 14 million barrels and and export 2 million. Something has got to give.

Oil is a natural source of energy, but not the only source. President Obama has issued a call for Americans to find other ways of getting the energy they demand - without going into debt or depending on someone else to negotiate the supply. On June 1st of this year, U.S. Department of Energy Steven Chu announced a $256 million investment from the President's American Recovery and Reinvestment Act. The initiative will support energy efficient improvement in industry. The funding is set to reduce energy consumption - especially in manufacturing and IT sectors - create jobs, and help grow the economy. We'll have to hold our government accountable for weening us off of our addiction and developing environmentally-friendly, long-term solutions.

Here's an interesting and ironic video clip of a Barack Obama painting done entirely in motor oil. The artist is David Macaluso.