- Posted July 26, 2012 by
The Cornfield Eye on the US Economy
The US economy and markets continue to sway, dip and rise, with each new piece of news from Europe and Asia. Compounding the volatility in the markets are the political bickering in Washington DC.
The Markets: Hope for a real solution to Europe's ailing economy lifted U.S. stocks Thursday, after European Central Bank president Mario Draghi said the central bank would do whatever it takes to preserve the euro.
The Dow Jones industrial average rose 212 points, or 1.7%, the S&P 500 added 22 points, or 1.7% and the Nasdaq gained 39 points, or 1.4%.
US Jobless Claims: The number of Americans applying for unemployment benefits dropped by 35,000 last week, a figure that may have been distorted by seasonal factors.
The Labor Department said Thursday that applications fell to a seasonally adjusted 353,000. That's down from a revised 388,000 the previous week and the biggest drop since February 2011.
The four-week average, a less volatile measure, declined 8,750 to 367,250. That's the lowest level since the end of March.
Food Prices: On Wednesday, the government said it expected the record-breaking weather to drive up the price for groceries next year, including milk, beef, chicken and pork. The drought is now affecting 88 percent of the corn crop, a staple of processed foods and animal feed as well as the nation’s leading farm export.
The government’s forecast, based on a consumer price index for food, estimated that prices would rise 4 to 5 percent for beef next year with slightly lower increases for pork, eggs and dairy products.
Mortgage Rate Falls: The average rate on the 30-year fixed mortgage fell again, this time dropping below 3.50 percent for the first time on records dating back 60 years.
Mortgage buyer Freddie Mac said Thursday that the rate on the 30-year loan declined to 3.49 percent. That's down from 3.53 percent last week and the lowest since long-term mortgages began in the 1950s.
The average rate on the 15-year fixed mortgage, a popular refinancing option, dipped to 2.80 percent. That's below last week's previous record of 2.83 percent.
Commodities: Consumers can expect to pay more for beef, poultry and milk, as the worst drought in 50 years spreads across the Midwest, destroying crops and sending corn and soybean prices spiking.
The U.S. Department of Agriculture said Wednesday that meat prices would rise significantly, with the consumer price index for beef and veal expected to gain between 3.5% and 4.5% this year.
Scorching heat has caused crops to wilt, sending feed prices higher and prompting many ranchers to reduce their herds.
Meanwhile, corn prices for December delivery, the most active contract, rose as high as $7.96 a bushel Wednesday. That's still just about a nickel shy of the record high set in June 2010. The front month September contract continued to trade above $8 a bushel.
Still, prices are up nearly 50% over the past three months.
And soybean prices have also been on the rise, gaining 25% since early June.
Last week, Secretary of Agriculture Tom Vilsack said 78% of this year's corn crop was in drought-impacted areas, and 77% of the soybean crop was being threatened.
Poultry prices will be the first to feel the effects of the drought.
The USDA is forecasting a 3.5% to 4.5% jump in chicken and turkey prices this year.
Duke Energy: Standard & Poor's says it has lowered the credit rating for Duke Energy Corp., citing the utility's lack of transparency in hiring a new CEO.
The move by S&P follows news of a shareholder lawsuit using sworn testimony by Duke Energy executives and directors to support claims that investors were misled by a surprise shuffle of top executives.
Duke stock is down 6 percent since the merger.
Fed Easing?: Everything that happens in Washington these days is politicized, so it's reasonable for investors to wonder if a third round of quantitative easing by the Federal Reserve, if it comes, might be timed to help President Obama win reelection in November.
But that might be backward logic. If the Fed eases again, as seems increasingly likely, the stimulative effect could be so short-lived that it has completely worn off by the time voters head for the polls in November. If easing happens soon, it could even leave markets in a downward swoon by Election Day.
China Making Its Move?: Chinese direct investment in the United States could hit a record high in 2012, according to a new research report released Wednesday.
Total Chinese foreign direct investment in the U.S. is on pace to reach at least $8 billion this year, according to the report from research firm Rhodium Group.
Economists Tout 6 Policies: Don't expect anyone in government to seriously consider any of these policies.
One: Eliminate the mortgage tax deduction, which lets homeowners deduct the interest they pay on their mortgages. Gone. After all, big houses get bigger tax breaks, driving up prices for everyone. Why distort the housing market and subsidize people buying expensive houses?
Two: End the tax deduction companies get for providing health-care to employees. Neither employees nor employers pay taxes on workplace health insurance benefits. That encourages fancier insurance coverage, driving up usage and, therefore, health costs overall. Eliminating the deduction will drive up costs for people with workplace healthcare, but makes the health-care market fairer.
Three: Eliminate the corporate income tax. Completely. If companies reinvest the money into their businesses, that's good. Don't tax companies in an effort to tax rich people.
Four: Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you're taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.
Five: Tax carbon emissions. Yes, that means higher gasoline prices. It's a kind of consumption tax, and can be structured to make sure it doesn't disproportionately harm lower-income Americans. More, it's taxing something that's bad, which gives people an incentive to stop polluting.
Six: Legalize marijuana. Stop spending so much trying to put pot users and dealers in jail — it costs a lot of money to catch them, prosecute them, and then put them up in jail. Criminalizing drugs also drives drug prices up, making gang leaders rich.
From the Cornfield, this election will be centered dead square on the economy, jobs and the unsustainable national debt.