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Friday, June 15, 2012

Investors See Healthcare Cost Crisis

Given that the Supreme Court will rule on healthcare legislation in the near term, the most recent Wells Fargo/Gallup Investor and Retirement Index poll sought to assess investors' views of the current state of U.S. healthcare. Overall, investors see a crisis in healthcare generally but not in the quality of care they receive. In turn, no matter how the Supreme Court rules, it seems clear the healthcare goal going forward should be to reduce costs while maintaining the current level of quality.

Three in four investors are dissatisfied with the total cost of healthcare in this country. Over the past year, two in three investors who have health insurance through their employer say their cost has increased a lot (23%) or a little (44%). No wonder, then, that eight in 10 investors say the current health system is in a state of crisis or has major problems.

At the same time, most investors are very happy with both the quality of their healthcare and their health insurance coverage. Nine in 10 investors rate the quality of healthcare they receive as excellent or good. Eight in 10 rate their insurance coverage as excellent or good.

These concerns about healthcare costs and high ratings for the current quality of healthcare and insurance coverage extend to both nonretirees who rely mostly on their employer or union for health insurance, as well as retirees who rely on Medicare.

Reducing costs while maintaining quality is difficult for any business. Add in the costs of dealing with the uninsured, and policymakers face a major healthcare challenge. However, many parts of the economy and many major U.S. companies have faced similar challenges successfully.

Thursday, June 7, 2012

Bernanke Should Consider Harm Done by Low Interest Rates

Two in three investors (63%) say policymakers should take into account the harm low interest rates do to older Americans when they seek to keep interest rates low for an extended period of time, according to a Wells Fargo-Gallup Investor and Retirement Optimism Index poll. This point that investors are making is even more important now, because throwing more money at the U.S. economy right now may do the economy more harm than good. Taking potential costs and benefits into account, the Federal Open Market Committee (FOMC) may be wise to avoid new quantitative easing -- in any form -- at its June 19-20 meeting.

The most recent Wells Fargo/Gallup Index survey sought to assess the impact of extended low rates on American investors. Some of the findings are stunning:

  • One in three investors say low rates have forced them to delay retirement. This suggests that low rates are indirectly putting additional pressure on the job market. It also raises questions about the idea that the U.S. labor force is shrinking due to an increase in voluntary retirements.
  • Forty-two percent of investors say low rates make them fear they may "outlive" their retirement savings. As Americans' average life expectancy has increased, so has the need for a steady source of income over an extended period of time for retirees. Low rates make this more difficult, with 27% of investors saying as a result, they've been forced to take a principal distribution from their investment portfolio. 
  • Thirty-eight percent of investors say low rates will force them or are currently forcing them to live less comfortably in retirement. For many investors, comfort in retirement depends on what they can earn on their investment portfolio. In turn, artificially lower interest rates on relatively safe investments make it more difficult for investors to earn as much as they may have planned in the past -- when financial conditions were more normal. 
Given the significant impact of low interest rates on retirees and on retirement planning, Federal Reserve Board Chairman Ben Bernanke and the FOMC may want to carefully weigh the potential benefits of flooding the U.S. financial system with additional funds. Today's already-low interest rates and the flight to quality during recent weeks due to concerns about the financial crisis in Europe suggest that the benefits of another quantitative easing in terms of stimulating economic growth may be limited.

More importantly, pouring more money into the economy may have the harmful impact of raising commodity prices on Main Street. For example, after the poor jobs report on Friday June 1, oil prices tumbled and prospects for a continued drop in gas prices seemed likely. However in the days that followed, talk of another round of quantitative easing on Wall Street seemed to have commodity prices reversing course.

In sum, the potential net benefits of additional quantitative easing seem to be minimal, at best. At the same time, low interest rates continue to harm many older Americans. It may not be time to reverse the course of interest rates and allow them to return to something approximating normal, but neither does it seem appropriate for policymakers to flood the economy with money -- barring another financial crisis.

Friday, June 1, 2012

BLS Unemployment Numbers No Surprise

Today's government unemployment report sent the markets plunging and the 10-year treasury note yield to a historic low. The creation of only 69,000 new jobs in May, combined with an increase in the unemployment rate to 8.2%, set off alarm bells not only on Wall Street but on Main Street as well. Politically, it was very bad news for the Obama administration.

As it turns out, no one should have been so surprised. Gallup's unemployment numbers for May were 8.0% on an unadjusted basis and 8.3% on a seasonally adjusted basis. The government's unadjusted rate for May was 7.9% and its adjusted number was 8.2%.

Gallup's unadjusted numbers and those of the government were also very close in March and January of this year, and during much of late 2011. However, they diverged in February and April. It appears that the Household Survey is just too volatile to predict on a monthly basis -- overshooting to the downside in April, but returning to trend in May.

This volatility tends to strain the credibility of the government's unemployment rate numbers. For example, last month this blog discussed the government's report showing that a million Americans left the ranks of the unemployed in April -- and how this seemed unlikely -- even as the workforce declined by 400,000. This month, the government report shows the workforce increased by a million Americans in May, while the ranks of the unemployed increased by 361,000.

The problem with this volatility in the government unemployment reports is that it can create a distorted perspective that job market conditions are getting better faster than they really are, as has been the case in early 2012. Then this positive economic psychology is dashed when the numbers correct, as they did in May. The unadjusted unemployment rate's sharp drop in recent months simply made no sense, given 1.9% GDP growth.

Wall Street can largely ignore the unemployment rate and focus on the Payroll Survey results. However, the politicians and Main Street will not. In turn, this suggests checking the Household Survey results against those of an independent survey such as Gallup provides before drawing conclusions about the real state of the unemployment situation.

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