State of the Economy in the USA - Good or Bad? Why do you think so?

Wow, a lot of great answers. The majority of posters are using the brains God gave them to not swallowing hook, line & sinker what the spinmeisters in Washington & Wall Street are saying - except for Kirby.

The vast majority of people look at the superficial data and then make their conclusion, ie, I have a job, my wife has a job, my friend has a job, we have nice houses and cars, ergo, the economy is doing well. Rssr is correct in that using the Dow (or any equity index) is flawed. Let me tell you why, Kirby cites corporate profitablility. Some spinmeister on wall street throws that out and people take it as gospel. But, why is corporate profitability "strong"? It's because of the devaluation of the dollar (some 31% from 2001 to now) that foreigners are finding American goods "cheaper" and thus purchasing more goods, not because American's are flooding U.S. corporations with money.

Also, take into consideration this, from July 1, 2006 to June 29, 2007, the fed has add a little over $2.2 trillion in liquidity to the excess banking reserves through both is Temporary and Permanent Open Market Operations. First, that's a lot of money, but it doesn't end there. Through the mechanics of fractional reserve banking, banks can lend out 10 times reserves, so in reality, over the past year, over $22 trillion in liquidity has been added to the economy. All that money has to go somewhere. That's why the economy has a "semblence" of prosperity. What's been driving this economy of late is not productivity, but monetary liquidity.

And the poster that said the gov't is lying through their teeth about statistics is indeed correct. The gov't has a bad habit of massaging the numbers so they look better then they really are. For example, most normal people would report new home sales based on how many homes actually went to closing (which could be collected from all the title companies in the country). But how does the gov't report it? They report new homes sales based on "signed contracts". Well anyone with two brains cells knows that just because a contract is signed doesn't mean the house will go to closing. Considering that homebuilders have been experiencing record cancellation rates, it would seem that the gov't new home sales data is over-estimated. In addition, when a new home sales doesn't go to closing, the gov't does not subtract that from the data and does not add the home back into available inventory.

And jobs data is a laugh. When the gov't says that unemployment claims dropped by say 13,000, the assumption is that those people found work. Well, some may have, but they may have only found a job that pays enough for them to survive, ie, under-employed. Also, how many of those people that didn't file are no longer eligible for benefits because the unemployment benefits have run out? And to top it off, the gov't has it's "birth/death model" it uses to estimate job growth. Now, this birth/death model is not people being born or dying, it's established company's closing down and new company's starting up. Now, get this, the gov't birth/death model is pure estimation, they have no clue how many company's are starting and closing down, and just because a new company has started, doesn't mean it's in the position to hire anyone.

And the thing about inflation being low, what a crock. Any normal person would take the price of an item and track it monthly/yearly, etc. and compute inflation based on price increases of that item. Not the gov't. If price increases too much, they replace the item with something else. And when the gov't says that core inflation is up say .2%, that doesn't include food and fuel, which is not a part of core inflation data. That's like saying, "hey, the price of this car only went up 2% if you don't include the cost of the engine and electrical system, which if add would reflect that the price of the car is actually up 8%". Considering everybody uses food (at least the last time I checked) and practically everyone uses fuel of some sort (except the hermit that lives in the woodshed in my back yard), it's ubsured to not include fuel & food.

Now, get this, Q1 2007 GDP came in at .6% annualized growth. The key word there is ANNUALIZED, meaning that if taking quarterly, Q1 2007 GDP was a paltry 0.15%.

Now, take a look at this; according to the BLS, the average American in 1972 was making approximately $7400 per year. Now, according to the BLS, the average American today is making just slightly above $36,000 per year. Now, adjusting for inflation, for the person in 1972 to maintain the same purchasing power they had back then, they'd need to be making approximately $37,000 a year now. So, in other words, the average American hasn't gotten a raise in the last 35 years. Yes, nominal wages have gone up, but real wages have actually fallen. Someone posited the question to me, "Well Steve, if that's the case how are people buying SUV's, Plasma TV's and iPods"? Simple -- it's called debt. Currently consumer debt is approximately 228% of GDP. Read that again -- 2.28 times greater then GDP.

For instance, you hear that the national debt is $9 trillion - what people fail to realize is that that $9 trillion is only CURRENT FEDERAL debt. In late 2005, congress mandated that the treasury report the financial condition of the US based on GAAP and not cash basis. On Dec. 15, 2006, the treasury released it's financial report based on GAAP. When you take into consideration all federal debt -- current, long-term, unfunded liabilities and off-budget expenses -- the total federal debt at that times was $53 trillion. At last count, it's $59 trillion. Now, when you take into consideration all gov't debt (federal, state, local), corporate and private debt, the figure is somewhere north of $100 trillion. Read that again ---- $100 TRILLION. How do we ever pay back that amount of money? We don't.

Now, here's the kicker -- on March 23 or 26 (I forget which exact date), 2006 the fed stopped publishing the M3 money supply figures - they used some lame a** excuse that it wasn't relevant. Excuse me, Repurchase Agreements (Repo Market) is included in M3 - the Repo Market is the mechanism the fed uses to add or remove liquidity from the excess banking reserves. Now, why is the halting of M3 data significant? When a gov't can no longer pay it's bills, it has 1 of 3 choices:

1) Default - the U.S. won't do that.
2) Raise taxes - if you took every cent of the US GDP, which is about $13 trillion (take every cent American's make in taxes) it would barely cover 10% of the Total U.S. debt. Besides, how high can you raise taxes before you have a revolt on your hands.
3) Monetize - print the money.

Now, considering that the Fed stopped publishing M3 and M3 contains the Repo Market data which shows how much liquidity the fed is adding to the money supply, I believe the fed made that move to mask it's money printing activity. Remember, price inflation is a direct function of monetary inflation. The "massaged" inflation data the gov't is releasing is having inflation growing at around 3%, when in reality inflation in the U.S. is at around 6% to 7%.

Let's look at the dollar. At the end of trading today, the US Dollar Index closed at 81.69. Now, in 2001, the USDX was at 120, ie, the dollar has lost 31.925% of it's value in the past 6 years. Now, what's really significant about the USDX is that key/critical support on the USDX is 80, just a measley 1.69 points below it's current close. A break below and prices staying below 80 on the USDX would more than likely trigger a dollar crisis. In 2000, when the equities bubble popped, in order to prevent a contraction in the economy, the fed lowered interest rates to 1% and flushed the system with liquidity. It worked, but it created another dilemma - a national housing bubble not like anything this country has ever seen. With so much money floating around and interest rates at 45 year lows, the housing market went through the roof, that's why in the past 5 years, house values have launched into the stratosphere. But, with so much liquidity around and such low interest rates, the dollar went into freefall, ie, the USDX falling from 120 to just below 82. To keep the dollar from falling further, the fed had to raise interest rates (remember a depreciating currency value is inflationary), ergo, the 17 consecutive 25 basis point rate hikes. Those rate hikes began to put the squeeze on the housing bubble and now we have the mess with the subprime market. Now consider this, when housing values shot through the roof, home owners used their houses as ATMs, extracting some $3 trillion in equity to feed their consumption. Now that housing values are falling, home equity extraction is disappearing. When you consider that 70% of GDP is consumer spending, and consumers losing their primary source of funding for their consumption, ie, equity extraction, what do you think is going to happen to GDP?

When the housing market took off, many people couldn't afford to purchase a home, but leave it to wall street to save the day. They started coming out with these exotic mortgage instruments like Interest-only loans and Option ARMs, which has substantially lower rates than fully amortized mortgages. The problem is is that these loans all had ARMs. Problem -- these ARMs were taken out when interest rates were at historically low levels. Well, in 2007, these ARMs are beginning to reset. Now check this out, the default and foreclosure rates in the U.S. are at record highs and the ARM resets have only begun, there is still some $2-3 tillion in ARMs that need to reset. It is estimated that some 2 million home owners will face foreclosure. The subprime fiasco is now starting to spread to areas outside the housing market - this can be seen with the meltdown in the 2 Bear Stern Hedge funds that are holding Collatoralized Debt Obligations (CDO's) based on the securitized mortgages that were purchased by them. Basically, what happenes is after a loan is orginated, the loan is securitized (packaged into a bond offering) and sold. Many investment banks bought these securitized bonds in the Mortgage Backed securities markets. These CDO's where then divided into various tranches of default risk and returns. All but the lowest grade tranches (known as "toxic" tranches) were sold, no one would by the toxic tranches, so Bear Sterns created 2 hedge funds to hold these tranches. Now that the housing market is going into meltdown, these tranches are experiencing huge loses (1 of the Bear funds has experienced some $7 billion loss). Now, because these tranches are illiquid and thinly traded, there's no way to accurately price what they're truly worth. They way they are being priced is against a computer model that says this is what they should be worth. The problem is this computer model is flawed from the gitgo, because the model looked at what the real estate market did for the last 5-6 years and projected that this would continue to happen into the future -- failing to take into consideration that people could default and housing values could fall. Well, with the meltdown in the 2 Bear hedge funds, the ramifications for funds holding these tranches worldwide is going to be painful as they will experience huge losses as these tranches are price "marked to market" instead of "marked to model".

And let's not forget the regular consumer banks. Because of all the liquidity that's been floating around and virtually all asset classes rising because of it, banks got wealthy in the derivatives markets and are making a killing in them. But, when you get a good thing, some fool always has to go overboard, in this case the banks. According to the Office of the Comptroller of the Currency, the top 25 banks in the U.S. have $6.17 trillion in assets. Do you know what their derivatives risk exposure is? Get this --- $131.04 trillion -- 21 times total assets. That's insane - just 1 counter party default would trigger a massive meltdown in the banking sector.

In other words, what you're seeing in the housing market is only the beginning. All these excesses are going to come home to roost and will have to be worked out, and when they do, it's going to be very painful. The US economy has the appearance of doing well, but it is hiding the rot festering below the surface. The economic collapse coming upon this country and the world in general is going to make the Great Depression of the 1930's look like a picnic in comparison.
Bad. The massive inflation is being hidden in the cost of goods. Yet again another subtlty. It's there staring right at us. We're in trouble. Wait till it really rears its ugly head, soon i'm willing to bet.

Ron Paul 2008.
well, let's see. Look at the unemployment rate, then look at its minimum wage compared to other developed countries, then look at the cost of a good education compared to other developed countries, then look at the price of health care compared to other countries, and there is your answer!
The state of the economy depends on where you live in this country, what your job status is, and a lot ou your age and of course your present wealth.
For those that consider the economy good and use the "DOW" averages as an indicator, are those that are already wealthy, as those in the fast disappearing middle class cannot afford to invest in the market, so the dow means nothing to them, and for most the economy is not good.
For the people that live in the major industrial sections of our nation, the economy sucks, and is near a full blown depression.
Also, for the majority of the retired people in this country, the economy is terrible, as the cost of living increases in their pension checks in no way keep up with the high cost of fuel needed to heat their homes or the ever increasing cost of medications, which the government does nothing about. This drug plan is no more than a sick joke, written buy the pharmaceutical companies themselves.
One has to but look at the items on the shelves of our stores, check to see where they are made and then try to determine if our economy is good. You cannot have 95% of durable goods made elswhere and claim we are in good condition, can't be done.
They can claim all they want about how many jobs are had today, and how many people are working, but at what wages and how many people working in every houeshold to make ends meet. no, the economy is bad and getting worse.
Give rssr27 the best answer, but I'm taking 2 points for saying it.
The answer by rssr27 say's it all. the answer can't be improved on
In a word, terrible. The fact is, the government and media LIE about unemployment statistics; it's actually far higher than what they tell the public. From my own experience and what I read about my area, although there are a lot of jobs available, the high cost of living due to inflation and the cost of gasoline is making more people poorer. I have read that many more bankruptcies have been filed in the last few years than ever before--mainly personal ones. Businesses in my area of southeast Louisiana are hurting for workers, but the high cost of housing, particularly in my native city of New Orleans, creates more of a labor shortage. Wages are higher in New Orleans now, post-Katrina, but again the high cost of housing, insurance and gasoline negates the higher pay.
The economy will NOT improve until the BIG Changes come, which will happen very soon. Once we get rid of the worthless fiat money and the corrupt politicians, everything will get better.
The economy is strong because corporate profitability is robust while inflation expectations remain contained. Should inflation accelerate, however, the economic picture would deteriorate quickly.

The answers post by the user, for information only, does not guarantee the right.

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