We consumers now have a few more credit protections than we did before, but to get the Act passed, Congress had to water down the wording somewhat.  It would not do to pass a law that would put many of Congress’s biggest campaign contributors out of business. So, there are still a few areas left for issuers to extract profits. 

Students

Before this law went into effect, students were sent credit cards that they ran up like free money while the parents got stuck with the bills, since they were under age.  Now, students under 21 years of age cannot qualify for a card without a co-signer.  How will the issuer know the applicant is a student?  They will likely only have income from summer employment.  The real qualifiers are the applicant’s age, and their income. 

Interest Rate Hikes

The new law does not protect consumers against interest rate increases.  It does protect them against increases on existing balances, but as long as the card issuer notifies the consumer at least 45 days in advance, interest on new purchases can jump considerably. 

This is supposed to give the consumer the option of jumping to another card for new purchases.  The consumer has three billing cycles to decline the new terms, close the account to future purchases, and pay off their balance at the old rate and payment schedule. 

Payment Allocation

If you have separate interest rates in force for old balances and new purchases, be aware that the CARD Act requires the card issuer to apply the minimum payment amount to the greater balance, which most likely has the lower interest rate. 

The CARD Act requires payments to be applied to the highest-rate debt on the account, so watch carefully that any payments exceeding the minimum payment are “accidentally” applied to the lower rate balance.    

Universal Default

Under the old shell game, issuers could raise a consumer’s interest rate if they were late on a totally unrelated account, like a utility bill.  This is now prohibited under the new law. 

But card issuer’s legal wizards have left some language in some offers that will activate a penalty APR.  Some of the reasons are exceeding credit lines, credit report information, and bounced or late payments.  Some catch-all language might be “market conditions”, or “at any time for any reason.” 

Read the small print. 

Penalty Rate

If a consumer is more than 60 days late on a payment, the card issuer can initiate a penalty rate, which averages nationwide slightly less than 30 percent.   That means for every thousand dollars that remains on your credit card by the end of the year, you will owe another $300 in interest, or nearly an additional one-third of your balance.  This is the way card issuers generate cash flow and keep consumers imprisoned in their cycle of debt. 

The new law provides a way back down the interest ladder.  It is meant to require the credit issuer to return the customer to their previous interest rate after six consecutive months of timely payments.  In reality, the law states that the card issuer is “supposed to” review and reduce a cardholder’s rate after six months of consecutive on-time payments. 

The law also states that this review must include market conditions (what others are charging) and the creditworthiness of the card holder.  This gives the card issuer an out if you caught up on the penalty account but your other accounts are still behind. 

Another method card issuers have been known to use is a technique known as “pigeonholing” where your payment arrives on time, and due to the card issuer’s workload, it is not posted until after the due date.  Remember one late payment will result in a lot more income for at least six months for the card issuer while you straighten things out. 

It is more important than ever to keep records of the exact dates payments are made.  Sending a check in the mail has no basis for verifying the date it was received, since the card issuer will discard the envelope with the postmark proof as quickly as possible, and the date on a check can be any date. 

Paying a bill by electronic banking will issue recordable dates of payment receipt.  Remember that many banks still issue a bank check that is mailed, and the process can take up to four days until the check is in the mail.  Be sure to add the four days plus a comfortable mail delivery time for your payment to be received.

The language of the new law is loosely worded.  Expect some creative moves when it comes to the card issuer backing off penalty rates.

Mail Notification

The highest court has judged that putting a notice in the U.S. Mail is proof of delivery, whether or not the addressee receives it. 

The new CARD Act requires payments to be accepted as timely when paid before 5pm EST on the due date or mailed at least 7 days before the due date. 

That concept seems to work fine for businesses that say they notified you, but doesn’t work that well for consumers mailing payments. 

Discontinued Cards

The 45-day rule will “probably” apply if the card issuer decides to discontinue your card.  The law is not clear about this circumstance, but issuers will most likely notify the consumer 45 days ahead to avoid running afoul of the law.  That’s good news for a consumer standing at a register with a big purchase.   

Added Fees

Credit card issuers have lost a bundle of expected revenue with this new law.  Estimates put the loss at around $12 billion per year.  It comes at a time when banks are already in bad shape because of the housing market, double the number of defaults from unemployed workers and others, and consumers cleaning up their balances. 

It is predictable that inventive fees not mentioned in the new law will surface.  There are countless fees that can be added to your bill, and interest rates can soar, if everyone in the credit market does the same and they notify you 45 days ahead. 

Although the prime rate for banks is low now, as it cycles upward, consumers can expect 45-day notices from their fixed-rate card issuer that they will be switched to a variable rate, tied to the prime rate.  Variable rates rise and fall with the economy and will not require the 45-day notice as the prime rate climbs. 

Be careful of ordering merchandise online.  If the merchandise comes from a foreign retailer or American territories, you can incur foreign transaction fees, even if the merchant allows you to pay in U.S. currency. 

Fee Avoidance

Be your own consumer advocate.  Consolidate your credit to one or two widely accepted cards with the lowest interest rate (beware of the balance transfer fee).  Join a credit union (lower interest rates).  Drop annual fee cards.  If you want to keep some cards, reduce your credit used to below 10 percent of your available credit to preserve your credit score.  For cards with inactivity fees, swipe them at a convenience store once a year (check the inactivity period).  If one of your issuers offers a rewards program, take the cash-back option. 

Pay your bills on time.  Read the fine print.  Read each piece of mail from your card issuers.  Stand up for your rights.  Play hardball.  Speak to supervisors.  Threaten to take your business elsewhere if they don’t retract an unjust fee, and do it if they don’t (I also like emails to the president or CEO,  factually detailing why you left).

The CARD Act was a big step in the right direction, but there will always be loopholes discovered by highly-paid legal eagles working against you.

It is officially known as the Restoring American Financial Stability Act of 2010. 

Purpose and content

The purpose of the new law strives to protect both consumers and economic stability.  It awards the government new powers to dissolve failing companies or break up companies that threaten the economy, creates a new agency to shield consumers, and focuses more light on the financial markets that previously escaped the oversight of regulators.

The president attempted to put the complex law in consumer-oriented terms for the average person.   He said it would help root out fine print and hidden fees for people, and provide deeper analysis of the sophisticated financial transactions on Wall Street. 

He claimed that this crippling recession was primarily caused by a breakdown in the financial system that cannot happen again.

There are many good provisions in the bill. The best characteristic of the bill is the provision to permit free markets to work and allow mismanaged financial firms to fail rather than require taxpayer bailouts adding to the federal deficit. 

The law assembles a council of regulators to look out for risks across the finance system.

• On the consumer level, borrowers will be protected from hidden fees and abusive terms, but must provide evidence that they can repay their loans.  Retailers will have a choice of at least two networks on which to run debit cards, introducing competition where there was none.  Retailers may also decline debit card use for small purchases where fees exceed profit. 
• On the banking level, a council of regulators will monitor bank solvency levels, make them increase their reserves when necessary and move the reserves into investments easily converted to cash.  They will also identify failing financial institutions, dissolve them before they trigger a crisis, and spread the costs incurred across surviving peers. 
• On the government level, the Federal Reserve will be awarded new powers through a consumer protection bureau that will write new rules to protect consumers from unfair credit card and mortgage terms, but also live under expanded congressional oversight.  The bureau will also establish procedures for liquidating giant financial firms where necessary, so there are no more “too big to fail” financial institutions. 
• The law restricts banks owning hedge funds (3% maximum of capital) from trading for themselves in their own accounts (which allows betting against themselves if more profitable).  This has become known as the “Volker Rule” (proposed by former Federal Reserve Chairman Paul Volker. 
• Financial institutions must separate their commodity derivatives trades into a separately capitalized entity completely walled off from federally insured deposits.  This will moderate the amount speculators profit when trading crude and heating oil contracts. 
• Other provisions include the Commodity Futures Trading Commission (CFTC) authority to regulate swaps, OTC, energy-related and electronically traded transactions by closing the so-called “Enron swaps” and “London” or “foreign-exchange” loopholes. 

Many of the law’s features won’t be in effect until regulators write new rules and implement them.

Obama explained them all as common sense reforms that will help people in the financial aspects of their daily life, from being made aware of risks, to understanding fees and signing contracts.  He called the reforms “the strongest consumer protections in history,” and said, “Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes.” 

“I proposed a set of reforms to empower consumers and investors, to bring the shadowy deals that caused this crisis into the light of day, and to put a stop to taxpayer bailouts once and for all,” Obama said to supporters. “Today, thanks to a lot of people in this room, those reforms will become the law of the land.”

Republicans against

The House first passed a bill in December 2009. After months of disagreement, the Senate passed a bill in May 2010 pretty much along party lines with only four Republicans joining to gain the required votes.

It took the whole month of June for the House and Senate to work out the differences.  The conference committees voted strictly along party lines, 20-11 with House negotiators and 7-5 for Senate negotiators, . 

The House passed the final bill on June 30, by a vote of 237-192, with all but three Republicans in opposition. 

The Senate passed the bill on July 15, by a vote of 60-39 with all but three Republicans voting against the legislation.

One Democratic Senator, Russ Feingold (D-WI), opposed the measure, saying it did not go far enough.

In spite of some misgivings, Republican Senators Olympia Snowe (R-ME) and Scott Brown (R-MA) joined with Susan Collins (R-ME) as three crucial votes for passage.

“While not perfect, the legislation takes necessary steps to implement meaningful regulatory reforms, create strong consumer protections and restore confidence in the American financial system,” Senator Snowe said in a statement. 

Republicans are attempting to capitalize on the wave of voter disillusion with current Members of Congress with regard to the slowness of recovery and the growing debt and deficit of the government.  By voting against any issue that increases debt (and implied to raise taxes), Republicans are hoping to unseat their opponents. 

A few of those issues are state education, unemployment benefits and health care.

The purpose of the CARD Act is to ensure that borrowers with a poor credit score and a history of late payments get treated as fairly as borrowers who have kept their credit record clean. 

Claims by credit card issuers that changes would lead to higher rates has been fulfilled.  Many issuers raised their interest rates and fees since the President signed the CARD Act on May 22, 2009.

In desperate attempts to take advantage of their customers before the new laws kicked in, credit issuers raised minimum payments and lowered credit limits for customers with bad credit, and closed accounts of customers who do not use their cards often and good payers who pay their entire balance each month.

The act does not limit how high interest rates can go and does not apply to business or corporate credit cards.

The Act was passed to beat several consumer-unfriendly practices, including:

• prohibiting credit issuers from arbitrarily changing the terms of their contract with a cardholder, the practice of “any-time, any-reason repricing.”
• requiring a customer option of a fixed credit limit, and preventing the credit issuer from charging over-the-limit fees.
• requiring 45 days notice before raising a customer’s interest rate.  The customer has three billing cycles to decline the new terms and pay off their balance at the old rate and payment schedule. 
• prohibiting rate increases on existing balances for fixed rate accounts or for universal default, which is a late payment on an unrelated account. 
• requiring the credit issuer to return customer to their previous interest rate after six consecutive months of timely payments.
• requiring a minimum of 21 days from the date the bill is sent out to the due date (increased from 14 days).
• requiring monthly due dates to be the same each month or next business day if a weekend or holiday. 
• requiring payments to be accepted as timely when paid before 5pm EST on the due date or mailed at least 7 days before the due date. 
• prohibiting the charging of additional fees for payment methods including online, mail, electronic transfer, or telephone.  The exception is an expedited payment to avoid a late fee. 
• requiring payments to be applied to the highest-rate debt on the account. 
• prohibiting the charging of interest for payments made during a grace period.
• requiring credit card statements to contain a schedule of time required and interest paid to pay off balance with minimum payments, and how much the payment must be to pay the balance off in three years. 
• requiring the customer agree to either a hard credit limit, or approval with an over-the-limit fee applied and limits the number of over-the-limit fees to three.
• requiring the up-front payment of all fees, before issuing of subprime cards, where fees will exceed 25 percent of the credit limit.

The CARD Act also prohibits issuance of credit cards to minors under the age of 21 without a co-signer unless they can prove they are able to repay.  This will stop the issuing of cards to minors where parents are responsible for their debts until age 21. 

Although the idea was to treat poor payers as fairly as good payers, the Act causes credit issuers to treat all borrowers the same.  Credit issuers say they have no way of knowing who will lose their job, get sick or other financial situation that will cause payment default, so they will treat everyone the same.  They believe the past does not guarantee the future.

Credit issuers are continuing their research into ways they can apply fees that are not covered in the CARD Act.  Fixed-rate cards could be switched to variable rates that give the issuer more flexibility.  Card issuers may increase transaction fees to retailers, causing them to stop accepting those cards or raise prices.

Congress is working on more transparency and oversight of the credit issuers, requiring reports on company profits, fees and rates that will be presented to Congress each year. 

Banks are now focusing on increasing profits from debit cards, since credit has now been limited.  The best course is to use cash when possible and ask for a discount equal to the Merchant fee.

What ever happened to old-fashion cash?  We remember, those small paper bills with the pictures of notables long past on them.  They used to be green, but are getting more colorful.  The questions is why use cash when we can swipe our credit or debit cards.

Credit cards were started so people could temporarily borrow to purchase expensive goods today on the promise they would repay the lender with interest in the future.  They were for the collection of goods before we could pay for them.  And the key word here is borrow.

It wasn’t long before borrowers discovered that the cards could also be used for inexpensive goods such as newspapers or cups of coffee.  And it wasn’t long before the lenders discovered that the cards provided more interest income than any other investment type. 

And as credit cards were used more and more, people ignored the balances, and simply charged what they wanted.  The system was perfect for the consumer.  Keep buying goods as if they were free with only an easy payment every month. 

Then lenders discovered they could raise interest rates without consequence.  They also discovered that their debtors were having trouble meeting their agreed-upon payments.  And so the late fee was added. 

We are now all forced to be part of the credit card system.  We must have at least one credit card to get a FICO score, necessary for big-ticket items like new cars and mortgages. 

The problem arises when we swipe away, unaware exactly how much credit is outstanding on our account.  When one credit card gets too near the maximum, we just whip out another one. 

We soon find we can only pay the minimum payment on each card each month.  The trap has been sprung.  How does this happen?  How do responsible people like us get into such a fix?

The brain wants what it wants.

In his book,
The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom
psychology professor Jonathan Haidt compares people’s behavior to a person riding atop an elephant.  The rider represents our rational outlook, newly developed as we became civilized.    The elephant represents our older, primitive attitude.  A complex maneuvering exists between our rational, analytic side and the older, impulsive, primitive side.  When the two sides work together, our brains can accomplish amazing things.  But sometimes, the elephant asserts its dominance and ignores the rider’s rational voice. 

The brain wants what it wants.  And the elephant has learned that wishes do come true as long as the card swipe is approved. 

Payday spending

In today’s recession economy, the credit card bubble is shrinking rather than bursting.  Both lower-price and middle-income major retailers are commenting on the major shift away from credit to cash and debit cards, and the trend toward payday spending.

Interviewed customers reported being unable to purchase even necessities shortly before paydays.  Retailers are reporting spending spurts in the days immediately following normal paydays.   

The last time that happened was around 1991 when the U.S. was entering recession.  In recent years when home prices were soaring, consumers tapped their inflated home equity to fund purchases made with credit cards.  It was a fantasy with no end. 

But it did end with high mortgages and no equity, high credit balances, and in the worst of conditions, no job income to pay off any of it.

Limiting credit 

Facing the decrease in credit card usage, lenders are focusing on monetizing cards to produce the highest income possible for them.  For the many people unable to live without credit, lenders are raising interest rates and late fees as well as other financial trickery to receive the most income from those who have difficulty making their minimum payments on time or at all. 

For consumers who don’t use their cards or pay their full balance every month, lenders are severely cutting credit limits or canceling the account as unprofitable. 

And consumers are receiving fewer credit card offers from all sources. 

The CARD Act

The CARD (Credit Card Accountability, Responsibility and Disclosure) ACT of 2009 taking effect in February 2010, limits lenders from:

• increasing interest rates on existing balances or in the first twelve months of a new account except when the interest is variable, an introductory period ends, or the consumer fails to comply with an agreed-to plan (almost all credit cards have variable rates)
• increasing interest rates based on unrelated account payments (e.g. utilities, other cards)
• failing to review accounts and decrease interest rates to previous levels when reasons for previous increases no longer apply (e.g. creditworthiness)
• mailing monthly statements less than 21 days before the due date
• making significant changes to accounts with less than 45 days notice
• not allowing consumers to ‘opt out’ or freeze the further use of their cards
• double-cycle billing or adjusting finance charges on previous billing cycles
• changing payment dates
• creating late fees if the due date was a weekend or lender changed address within 60 days
• charging fees for consumers to pay by mail, electronic transfer, telephone or other methods
• charging gift card fees such as dormancy fees, inactivity fees or service fees unless fully disclosed prior to purchase or expiring them within 5 years of activation
• charging more than 25 percent of the credit limit in upfront fees for sub-prime cards
• charging over-limit fees without consumer approval to accept the fee in place of credit rejection

Lenders won’t give up

Although the CARD Act attempts to limit lending practices the Federal Reserve labels “unfair or deceptive,” it will not stop lenders from poring over the legislation to find what lawmakers have missed and what is not explicitly prohibited. 

Fees and hidden calculations that are already being applied include:

• charging inactivity fees for card holders who do not use their cards, including those who have been forced to ‘opt out’ and freeze their use by aggressive term changes (they are prevented from activity and charged a fee for inactivity)
• extending the time period from 30 days to 90 days to calculate variable interest rates based on the highest prime rate in the period
• issuing a base or “floor” rate on which the interest rate will be calculated, even if the prime rate goes lower
• raising fees and removing caps on finance charges for cash advances and balance transfers so the card holder pays the higher of either the percentage fee or the minimum finance charge (can be $20 per transaction)
• calculating and charging late fees based on the card balance
• charging expedited payment fees to avoid late payments
• charging foreign transaction fees for any transaction that touches a foreign bank, instead of just currency exchanges (e.g. a foreign bank can change U.S. dollars to U.S. dollars and charge a currency exchange fee) 

CreditCards.com gives more examples of creative charges.

Retail challenge

Stores are also facing financial challenges with the pressure of controlling their credit accounts from defaults and still making customers feel welcome.  They are tightening credit and still trying to boost sales with moves like purchase discounts if a customer just applies for a card, and interest-free financing and delayed payments on secured purchases. 

Debt to Debit

To avoid going further into debt, comsumers are migrating to swiping their debit cards, with the thought that if it comes out of their checking account, it is not debt.  In 2009, membership in debit card programs increased 45% over the previous year.

And lenders are encouraging consumers to do it by offering debit-card reward programs.

Some banks are offering cash incentives to a narrowly focused segment of consumers.  But less than half of consumers who sign up actually qualify for the cash benefit.  The hooks are in the small print, requiring customers to set up direct deposit, maintain a minimum account balance, and swipe their debit card a minimum number of times per month. 

Direct deposit tends to encourage customers to stay with the bank longer because of the perceived bother to change.  Minimum account balances give the bank the use of the depositor’s money, perhaps without interest.  Using a debit card creates cash flow for the bank from interchange fees.   And having our personal checking account information allows the pitching and cross-selling of more products and services. 

Budget Affordability

We all, I’m sure, feel sorry for lenders and retailers and their financial problems, but we are probably more concerned for our own business of family and home.   It may mean hardships for some, giving up the extra expense items and buying only what we can afford, but our grandparents would be proud of us. 

We may still have to swipe on occasion, but we still have choices of how to use the system to our advantage.  The situation arose because we were unable to see our entire financial picture at once, and how much we owed in total.

Knowing that, we can keep a close eye on our statements, what things are costing us, how much per month we are spending and how much we should spend.  We can avoid and negotiate some fees and leave banks that gouge us, perhaps dealing with smaller banks or credit unions where customers are more than just a number. 

We can begin to stop being victims.

Purchasing big-ticket items like a home or a car or home appliances will still require lender dealings, but once our debts are paid down, our bookkeeping ledger will turn from red to black and that will make us feel wealthier. 

This new way of life will be strange to many, and we may have to resort for a time to payday spending, but paying for a product with our current funds, knowing that it is ours, rather than future funds and sharing ownership with the lender will give us a great sense of satisfaction.

This type of commitment requires a budget.  It doesn’t have to be a to-the-penny budget, but we can set affordability targets and limits on how much we will spend for everything from groceries to holiday gifts.  We can also see the total of what we owe in one place, all at once.    

Remember Christmas clubs and layaway plans?  They were methods of putting aside funds for holidays and gifts.  The good news is that the concept can be applied for any purpose with any steady contribution. 

And to really feel in control, we can pay for purchases and put aside funds in good, old-fashioned cash. 

We can do it.

If you would know the value of money, go and try to borrow some.
–Benjamin Franklin

Old-fashioned Cash

In our jobless recovery, some landlords are offering big incentives to retain their tenants. 

The national unemployment problem has driven some renters to seek roommates, or move into cheaper quarters.  Some are moving in with family. 

The national apartment-vacancy rate is now at a 23-year high. 

The worst thing for a building or house owner is an empty living space.  They can minimize utilities, but mortgage payments and taxes remain in force, and there is less to collect to pay the bills. 

When an apartment or house is vacated, it can remain empty for months, exposing it to vandalism, and requiring painting, marketing and commissions to attract a new occupant.

Landlords are offering incentives and becoming easier on requirements for occupancy.  In a tight market, landlords would deny prospective tenants with living space credit issues like foreclosure or eviction, but in today’s market they are more open-minded.   

New tenants on average are paying roughly ten percent less than previous tenants.  Renewing tenants are being offered items like free months, waived pet deposits, flat-screen TVs, cash, new carpet, painting, or upgraded appliances. 

Landlords generally are not initially offering incentives to renewing tenants.  Since tenants can easily check the Internet for comparable rents in their area, landlords will respond to negotiation and many times offer incentives or match rents to renew.

Lower rents nationwide are pressuring house prices as well as the CPI (Consumer Price Index).   This will keep inflation down.  However, the good news for renters will be offset by more apartment complex defaults, and in turn, losses for small local banks.

So if you are in the market to rent, renew or buy, this is the ideal time to exert pressure on landlords and sellers for concessions. 

Don’t be greedy.  Negotiation involves both parties calculating how much it will cost the landlord or seller to wait for and attract the next prospect.  In the case of landlords, they are losing the rental amount each month.  Sellers will have to pay their mortgage payments and taxes until the property is transferred. 

It is not taking advantage.  It is business. 

Rental Vacancy Rates from 1956

Existing Home Sales from 1987

New Home Sales from 1963

Images posted by CalculatedRisk on 11/01/2009

Jobs:

Nonfarm payroll employment continued to weaken this month (down 263,000 in September) ending a slowdown trend (201,000 in August (revised), 304,000 in July (revised), 467,000 in June, 345,000 in May, 539,000 in April and 633,000 in March). 

After the lowest level of job losses in a year, employment slipped by about 50,000 jobs from last months level. 

The average 3-month job layoff figure of 256,000 for July through September 2009 dropped 21 percent from the same average last month, when it was 324,000 for June through August, and 57 percent from the previous 3-month period (April through June) when it averaged 450,333 (also down from 505,667 for March through May). 

Although the unemployment slowdown has lost its momentum this month, the numbers still indicate that companies are approaching their maximum “leanness” and sustains perceptions that the economy gradually will swing to recovery.

Unemployment has increased steadily by 0.4 or 0.5 percent every month from December 2008 through May 2009.  August was the first month the increase was 0.3 percent.  September is similar.

The number of unemployed persons increased in September by 214,000 (August by 466,000, a decrease in July of 267,000, increases in June of 218,000, May of 787,000, April of 563,000 and March of 851,000.  Since the start of the recession in December 2007, 7.8 million workers have lost their jobs. 

Total unemployment has risen from 11.6 million (7.6%) in January to 12.5 million (8.1%) in February, to 13.2 million (8.5%) in March, 13.7 million (8.9%) in April, to 14.5 million in May (9.4%), 14.7 million in June (9.5%), 14.46 million in July (9.4%), and 14.9 million in August (9.7%).

The current rate is 9.8% and the number unemployed is at 15.1 million. 

Unemployment is the highest since June 1983 and has doubled since the start of the recession in December 2007.  In a healthy economy, around 125,000 jobs a month must be added and filled just to keep the unemployment rate stable.

There is little doubt at this point; we will hit 10% unemployment in the near future. 

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) rose to 9.2 million from the 9.1 million in August (8.8 million in July, and 9.0 million in June).  These persons had their hours cut back or were unable to find full-time jobs.  Since the start of the recession, the number of such workers has increased by 4.4 million, and has remained relatively constant since March 2009. 

The unemployment numbers look to be peaking.

Long-term unemployed persons (jobless for 27 weeks and more) has tripled since the start of the recession to 5.4 million since December 2007, adding 450,0000 to that number in September.  One in three (35.6%) unemployed persons are in this category. 

Ed.Note: It is possible that as consumer and business confidence is improving, more workers are starting to look for jobs again, returning to the workforce in anticipation of better employment conditions.  This drives the unemployment rate higher.

Construction job losses led the month (down 64,000 for September, 65,000 for August, 76,000 for July, 79,000 for June, 59,000 for May, 110,000 for April and 161,000 for March) with a total of 1.5 million since December 2007. 

Manufacturing was a close second (down 51,000 for September, 63,000 for August, 52,000 for July, 136,000 for June, 156,000 for May, 149,000 for April and 161,000 for March) with widespread job losses totaling 2.1 million since December 2007. 

Education and health services continued to add jobs, with payrolls increasing by 19,000 (52,000 in August and 21,000 in July).  Government employment fell by 53,000 (18,000 in August and 28,000 in July).

Retail trade employment dropped by 39,000 (9,600 for August, 44,00 for July, 18,000 for June and 47,000 for April). 

Service-providers stayed relatively the same after cutting 80,000 workers in August, while the goods-producers lost 136,000 jobs.

Professional and business service also stayed relatively the same after decliningby 22,000 in August, less than the 38,000 in July, 118,000 in June, 51,000 in May, 122,0000 in April and 133,000 in March. 

Unemployment spreads stayed relatively the same with the highest among teenagers (25.9%), followed down by African-Americans, then Hispanics.  The lowest unemployment started with Asians (7.4%) followed up by Adult women (7.8%), Whites, then Adult men (10.3%). 

The good news from this data, is that the job losses seem to be lessening.  It is perhaps due to fewer jobs available to lose, but the lower figures are an encouraging sign. 

The average workweek edged down by 0.1 to 33.0 hours in August.  This figure closely correlates with overall output and gives clues on when firms will start hiring. 

Average hourly earnings (reflecting the recent increase in the legal minimum wage) edged up to $18.67 ($18.65 in August, $18.59 in July), rising for a fifth straight month.  

 Workforce:

The total Civilian labor force stands at 154.0 million (down 571,000 from August).  There are nearly a million fewer workers in the work force than in June.   There are now 15.1 million people unemployed putting the rate at 9.8% of the available work force, last reached in June 1983. 

The Civilian labor force usually grows as a recession winds down and optimism about finding work grows.  But as long as Americans remain anxious about their jobs, consumer spending is not expected to grow enough to power an economic rebound. 

The employment population ratio, at 58.8 percent, has declined by 3.9 percent since the recession began in December 2007.

Comparing now with the final month of the last major downturn in November 1982, the total Civilian labor force then stood at 111.1 million.  In that month, there were 11.9 million people unemployed accounting for 10.8% of the available work force (average for the year was 10.6 million unemployed with the rate at 9.7%). 

Looking at jobs needed to reduce unemployment
with the total Civilian labor force at 154.0 million:

.
To restore employment to the 5.5% level of 2008, about 6.6 million people will have to regain their job or start new jobs.  It is a tall mountain to climb. 

Ed.Note:  Government and economists foretell that the “normal” unemployment rate will move up to 8% from its current 5.5% level.  With the current Civilian labor force, that means that on a permanent basis there will be roughly 12.5 million people unemployed — more than 4 million more than at the “normal” level today. 

Update: October 5:  The U.S. service sector grew in September for the first time in 13 months.  The Institute for Supply Management (ISM) reported that its service index hit 50.9 last month, up from 48.4 in August.   A reading of 50 is the dividing line between growth and contraction. 

Other encouraging signs were that the new orders index rose to 54.2, climbing over the dividing line for the first time in a year.  New orders are an indicator of future activity.  In addition, business order backlogs rose for the first time in 14 months.

Five industries grew in September; wholesale trade, retail, construction, utilities and health care.  In addition to healthcare and educational services, support services for companies added jobs, another encouraging sign. 

 Data collection:

The Census Bureau surveys 60,000 households across the country to insure an accurate demographic survey.  The unemployment rates are extrapolated from the survey results. 

The quoted unemployment rate excludes people who have stopped looking for work because they believe no jobs are available (discouraged workers) and others outside the labor force.  They are counted separately.  Their number has nearly doubled in the previous 12 months.

 Stimulus (Recovery Act):

The president’s $787 billion stimulus bill signed into law hopes to create about 3.5 million jobs.  Lower estimates put that figure at 2 to 2.5 million jobs by the end of 2010, reducing the unemployment rate to 7+%. 

The White House Council of Economic Advisers released a report showing the plan would save or create 1.5 million jobs by the end of 2009 and 3.5 million by the end of 2010. 

A senior White House official stated that the Obama administration’s fiscal stimulus plan will meet their previous estimates to save 3.5 million U.S. jobs by the end of 2010, but the unemployment rate at that time may be higher due to further deterioration in the economy.  White House officials have been careful to point out that estimated jobs created and saved have merely slowed continued job losses.

 Stimulus spending by state: 

As of September 30, 2009, of the
$241,105,531,529 announced
$214,964,917,646 (89%) has been made available
$90,402,704,572 (37.5%) has been paid out to the states

http://www.recovery.gov/?q=content/funding-notification

 Recession histories:

With Nov 1982 unemployment at 10.2%, and the government taking aggressive action, it was still more than five years (April 1988) from the peak before unemployment receded to 5.4%. 

The approach that time, however, was to fix the economy at the expense of the worker.

Some compare the the fall in employment to 1974-1975 and 1981-1982. If the comparison is accurate, the peak in unemployment may be reached within the next five to six months (past performance is no guarantee of the future).

Economist William Polley made a chart  that includes every recession since World War II.  It makes the chart pretty hard to read, so he simplified it with selected post-WWII recessions.

William Polley’s chart shows how the recovery from the 2001 recession took four years for employment to return to its February 2001 peak. 

Using the Department of Labor unemployment tables of unemployment rates and 5.5% as the “normal” rate of unemployment, I have analyzed things a little differently.  Of course, along the way, the Civilian labor force increases, so the percentages represent ever more workers.

The following table shows unemployment start dates, peaks and returns to the normal rate of 5.5%, Civilian labor force in millions of workers for that year, and the lengths of times from the start date in months:

 Recession peaks 1974-2009 

 Note that the unemployment peak period that started in 1974 and ended in 1979 (lasting nearly five years) was followed immediately by another peak period ending nearly nine years later.  By the end of that period, the work force had increased by more than 32%, meaning overall, almost 30 million new jobs had to be created.

 The aggressive increase in the Civilian labor force in that period can likely be attributed to post-World War II babies reaching adulthood, with some entering the labor force after secondary school and the rest entering the workforce after further education.

The periods from 1988 to 1990 and 1995 to 2008 were periods of prosperity, with low unemployment (but a building bubble). Here is the same data in graphic form:

Unemployment rates:

It is interesting to recognize that in most cases, unemployment peaks roughly one-third of the timeline for unemployment to return to its “normal” rate, so we can double the number of months from the Start to the Peak to expect to arrive at an approximate return to “normal.”

We live in hope (again, past performance is no guarantee of the future).

The next Economic Jobs report will be found at:
Economic Picture: October 2009

The last Economic Jobs report will be found at:
Economic Picture: August 2009

The not-so bad news:

• Nonfarm payroll employment continued to deteriorate this month (down 345,000), but slowed for the second month in a row (539,000 in April and 633,000 in March). This is about half of the average decline in the last six months. The number of unemployed persons increased by 787,000 (more than April with 563,000 but less than March with 851,000).
• Total unemployment has risen from 11.6 million (7.6%) in January to 12.5 million (8.1%) in February, to 13.2 million (8.5%) in March, 13.7 million (8.9%) in April, to 14.5 million in May, putting unemployment at 9.4%.
• Since the recession began in December 2007, 9.5 million jobs have been lost across nearly all major private-sector industries. In the last 12 months, the number of unemployed has risen by 7 million persons.
• Long-term unemployed (jobless for 27 weeks and more) has tripled since the start of the recession to 3.9 million since December 2007, an increase of 268,000 when measured last month (better than the 500,000 measured for April).
• Employment rose in April in the federal government due mostly to hiring of Census 2010 temporary workers. Education and Health care employment grew by 44,000 last month, evenly divided between the two. Other than that, job losses in May continued in most major private-sector industries.
• Manufacturing again led the month in losses (down 156,000 consistent with March and April’s 149,000 and March’s 161,000) with widespread job losses in the component industries and transportation accounting for more than half the decline.
• Since the peak in February 2000, employment in motor vehicles and parts has fallen about 50%.
• Construction job losses edged into second place (down 59,000 but less than April’s 110,000 and March’s 161,000). Professional and business services were third (down 51,000 but less than April’s 122,0000 and March’s 133,000). Finally, retail trade jobs dropped by 18,000 (less than April’s 47,000).
• The good news from this data, is that the job losses are getting less. It is perhaps due to fewer jobs available to lose, but the lower figures are an encouraging sign.
• With approximately 1.9 million college graduates expected to enter the work force in May 2009 as graduates of four-year colleges, unemployment will get a huge increase, since many businesses are laying off employees rather than hiring.

 May 2009

The total Civilian labor force stands at 155.1 million (up 350,ooo from April), slightly increased from the number at the end of 2008.  Again, there was a net decrease in jobs found to jobs lost of 437,000.

There are now 14.5 million people unemployed putting the rate at 9.4% of the available work force.  In modern times, this unemployment rate was last reached in September 1983. 

Comparing now with the final month of the last major downturn in November 1982, the total Civilian labor force then stood at 111.1 million.  In that month, there were 11.9 million people unemployed accounting for 10.8% of the available work force (average for the year was 10.6 million unemployed with the rate at 9.7%).

Unemployment: Spreads stayed relatively the same with the highest among teenagers, rising to 22.7% from 21.5% last month, followed down by African-Americans, then Hispanics.  The lowest unemployment started with Asians at 6.7% followed up by Adult women at 7.5%, Whites, then Adult men.  

Note: The Census Bureau surveys 60,000 households across the country to insure an accurate demographic survey.  The unemployment rates are extrapolated from the survey results. 

The quoted unemployment rate excludes people who have stopped looking for work because they believe no jobs are available (discouraged workers) and others outside the labor force.  They are counted separately.

Looking at jobs needed to reduce unemployment
with the total Civilian labor force at 155.1 million:

.
To restore employment to the 5.5% level of 2008, more than 7 million people will have to regain their job or new jobs.  It is a tall mountain to climb.  Add that the 1.9 million graduates from four-year colleges expecting to enter the work force.  Those going on to higher education will reduce that number.

With Nov 1982 unemployment at 10.2%, and the government taking aggressive action, it was still more than five years (April 1988) from the peak before unemployment receded to 5.4%. 

The approach that time, however, was to fix the economy at the expense of the worker.

The president’s $787 billion stimulus bill signed into law hopes to create about 3.5 million jobs.  Lower estimates put that figure at 2 to 2.5 million jobs by the end of 2010, reducing the unemployment rate to 7+%. 

 Some compare the the fall in employment to 1974-1975 and 1981-1982. If the comparison is accurate, the peak in unemployment may be reached within the next five to six months (past performance is no guarantee of the future).

Economist William Polley made a chart  that includes every recession since World War II.  It makes the chart pretty hard to read, so he simplified it with selected post-WWII recessions.

William Polley’s chart shows how the recovery from the 2001 recession took four years for employment to return to its February 2001 peak. 

I have analyzed things a little differently, using the Department of Labor unemployment tables of unemployment rates and 5.5% as the “normal” rate of unemployment.  Of course, along the way, the Civilian labor force increases, so the percentages represent ever more workers.

The following table shows unemployment start dates, peaks and returns to the normal rate of 5.5%, Civilian labor force in millions of workers for that year, and the lengths of times from the start date in months: 

Recession peaks 1974-2008

Note that the unemployment peak period that started in 1974 and ended in 1979 (lasting nearly five years) was followed immediately by another peak period ending nearly nine years later.  By the end of that period, the work force had increased by more than 32%, meaning overall, almost 30 million new jobs had to be created.

 The aggressive increase in the Civilian labor force in that period can likely be attributed to post-World War II babies reaching adulthood, with some entering the labor force after secondary school and the rest entering the workforce after further education.

 The periods from 1988 to 1990 and 1995 to 2008 were periods of prosperity, with low unemployment (but a building bubble).  Here is the same data in graphic form:

It is interesting to recognize that in most cases, unemployment peaks roughly one-third of the timeline for unemployment to return to its “normal” rate, so we can double the number of months from the Start to the Peak to expect to arrive at an approximate return to “normal.”

We live in hope (again, past performance is no guarantee of the future).

Ed.Note:  According to a recent New York Times/CBS News poll (April 6) of 998 adults showed that Americans have grown more optimistic about the economy, since Barack Obama took office as president.  The number of people that think the country is headed in the right direction jumped to 39 percent from 15 percent during the final days of President George W. Bush’s administration.  The number of people who still think the country is headed in the wrong direction dropped to 53 percent from 79 percent.

A senior White House official stated that the Obama administration’s fiscal stimulus plan will meet their previous estimates to save 3.5 million U.S. jobs by the end of 2010, but the unemployment rate at that time may be higher due to further deterioration in the economy.  White House officials have been careful to point out that estimated jobs created and saved have merely slowed continued job losses.

The White House Council of Economic Advisers released a report showing the plan would save or create 1.5 million jobs by the end of 2009 and 3.5 million by the end of 2010.  All recipients of stimulus funding are required to report jobs retained and created by the funds.

Ed.Note:  Government and economists foretell that the “normal” unemployment rate will move up to 8% from its current 5.5% level.  With the current civilian workforce, that means that on a permanent basis there will be roughly 12.5 million people unemployed — more than 4 million more than at the “normal” level today.

The next Economic Jobs report will be found at:
Economic Picture: June 2009

The last Economic Jobs report will be found at:
Economic Picture: April 2009

The best customers have received paybacks for being good customers – benefits like cash-back rewards and frequent flier miles.

The not-so-best customers have received penalizing fees and penalties for being late with their payments, or over-limit on their cards.  Some of those fees drive the cards over the customer’s limit again, to have more fees applied.

What’s the size of the problem?  Americans owed more than $945 billion in March for credit card debt alone.  Even though that reflects a hefty pullback due to the recession, credit card debt has risen about 25 percent in the last ten years.  Nearly 80 percent of American families owe more than $7,000 on their plastic. 

Money generated by credit card penalty fees like late and over-limit charges have increased in recent years by about $1 billion annually, and should top $20 billion this year.

Fifty million people are in the best customer camp, while double that number are struggling with their payments.
 

The House of Representatives just voted 361-64 to approve the “credit cardholder bill of rights.”  In this bill, Congress is limiting the penalties to struggling borrowers, restricting the ability to raise interest rates on existing balances and impose unfair penalties. 

This credit card reform has broad appeal with many consumers stalled in credit card debt and angry with card issuers for gouging them through excessive fees.  President Obama and Congress have seized the opportunity to pass banking reforms that industry lobbyists helped defeat when the economy was booming.

Not to be left out, Republicans bartered their votes for an amendment that will allow citizens to carry loaded firearms inside National parks.  (?)  The combined bill is scheduled to be signed by the President on Friday, and will take full effect in February 2010, although some provisions will activate earlier.

This bill, representing a major victory for President Obama and Democrats, is a counterattack against credit card companies after years of abuse that angered consumers and lawmakers alike, including rate and fee increases, and aggressive marketing tactics to consumers including children.
 

Banks initially only issued credit cards to their best consumers and charged them a flat interest rate of about 20 percent plus an annual fee.

With the standardization and accessibility of credit scores in the late 1980s, the banks began to offer a variety of fees and interest rates, tied to the credit score of the customer.  Aligning risk with interest reduced rates for the best customers, but increased rates for the not-so-best.

When two-thirds of the cardholders were classified as “risky,” they became a significant source of untapped revenue.  Similar in concept to the events leading up to the housing crisis, banks have sought to increase earnings by marketing to everyone who breathes, including children and imprisoned felons.

The impending crisis is what Congress is trying to head off.  The new bill represents only the first of several banking reforms tightening regulatory oversight.

As the recession deepened and cardholders defaulted through bankruptcies or labored at reducing their balances and fees, banks saw a real decrease in easy revenue.  In addition to adding fees and increasing interest rates, banks acted to decrease their risk by decreasing credit limits, both for risky customers and for good customers who were not using their cards.

With the reduced risk came loss of income.  Banks on the verge of failing the government “stress test” cannot afford to lose income, so to make it up, they are now going after their customers with sterling credit. 

The government “stress test” showed that the 19 biggest banks will incur $82 billion in credit card losses in the next two years.  The Federal Reserve passed regulations last December to control unanticipated interest increases that will cost the credit card issuers about $12 billion per year in lost income and associated fees. 

Six institutions are responsible for 80 percent of the credit cards issued: American Express, Bank of America, Capital One, Citigroup, JPMorgan Chase, and A.B.A. Discover.

The credit card bill will impact more consumers than any other of Obama’s economic initiatives.  It has been projected that a major pullback in unsecured credit might extend the recession, but the government is willing to take that chance rather than deal with a new crisis. 

This bill will impact credit card banks who all have their shareholders to report to.  Profits will be hurt, and in the financial maneuvering, banks will become ever more reliant on marginal customer fees in addition to other modifications. 

A Government Accountability Office (GAO) report issued in 2005 estimated that 70 percent of credit card revenue came from interest charges.  The new bill does not place a cap on interest rates, but forces fuller disclosure.

There are millions of families living close to the edge of financial collapse, who rely on their credit cards for cash flow and cannot seem to reduce their balances.
 

Three modifications that will surface immediately from credit card companies will be to:
1.      pull back on good-customer rewards
2.      assess annual fees to all, and
3.      charge interest from the day of purchase with no grace period.

Notices have already gone out to consumers making them aware of these changes.  And if you decide not to pay the annual fee?  Your credit account will be closed, and you’ll still owe the balance with interest accruing.  Your credit score will also likely be reduced with the closing of a credit account.

Credit card companies also receive income from retailers accepting payment with credit cards, and these fees will also be increased.  Angry retailers will be forced to pass the increases on to consumers as they acquire them.

It will certainly change the rules of the game.