and Timothy Lamer
Borrowing less, working better
The great American spending juggernaut may have hit a speed bump this summer. Consumer credit declined by $1.6 billion in June, according to a Federal Reserve report released last week. It was the first time credit use fell in almost four years. "I think consumers are now finally adjusting to the slower economic climate and the fragile state of the labor market and are acting in a more tight-fisted manner," said economist Richard Yamarone. "Consumers are borrowing less and paying off some debt." Still, the United States hasn't suddenly become a nation of savers. The June drop followed a $6.9 billion rise in consumer credit in May. Meanwhile, the Labor Department reported that worker productivity in the second quarter grew at an annual rate of 2.5 percent, the largest increase in a year. The agency also revised the productivity numbers from 1996 through 2000, reporting that worker output grew at an average of 2.5 percent instead of the 2.8 percent originally reported. Many economists had argued that productivity gains during the late 1990s were the result of a "new era" spawned by the high-tech revolution. "The revisions put a dent in the new era thesis," said David Orr, chief economist at First Union. But new era economists remained undeterred. "Those who argue that the revised data deny the productivity miracle are just being silly," said Bruce Steinberg, chief economist at Merrill Lynch. From 1973 through 1995, productivity growth averaged just over 1 percent per year. Plunging profits
Profits at the nation's biggest firms dove during the second quarter to their lowest ebb in more than a decade, according to a Wall Street Journal report. Total net income for more than 1,100 firms tracked by Dow Jones fell 67 percent from second-quarter earnings last year. Seventeen companies, mostly technology firms, each posted losses of more than $500 million. Corporate operating income-another carefully watched measure that closely reflects true corporate health-also dropped sharply in the second quarter. Standard & Poor's 500 firms reported a 17 percent decline in per-share operating income in the second quarter, bringing total losses to more than 23 percent for 2001. Analysts say the net profit and operating income figures raise again the specter of recession, as firms look now not to economic recovery, but to survival. "Legitimate" scams
Many investment scams carry the twin red flags of little risk and high return. But while fake securities and pyramid schemes won't fool most consumers, some legitimate investments can, in the hands of unscrupulous brokers, morph into swindles that take in even savvy investors. The North American Securities Administrators Association (NASAA) publishes a "top 10 scams" list that includes the following "legitimate" investments:
- Affinity group fraud: Many gifting programs and mutual funds benefit specific religious or ethnic groups. Swindlers sometimes create bogus investment vehicles tied to actual affinity groups, then convince investors to pour in their savings. Such schemes include church-gifting programs, in which the church never receives the money.
- "Callable" CDs: These legitimate, high-yield certificates of deposit lock up investors' money for terms as long as 10 or 20 years, but may mature earlier if the bank "calls" or redeems them. The problem? Shady sellers of such instruments often fail to disclose risks and restrictions-such as early withdrawal penalties of as much as 25 percent of the original investment.
- Viatical settlements: A viatical settlement is the sale of an existing life insurance policy through a broker to a third party. In the transaction, the insured person or seller-sometimes terminally ill-receives a percentage of the value of the policy immediately. After the seller's death, the broker receives a fee, and the investor receives the remaining value of the policy. Viaticals theoretically improve the quality of a seller's remaining days by providing death-benefit money for immediate use during life. Viaticals are legal, state-regulated transactions, but are one of the riskiest investments, according to NASAA. In some cases, scam artists have advertised viatical settlements as "100 percent secure" (death being, as it is, inevitable) with "guaranteed" rates of return as high as 40 percent or more. But in one Palm Springs, Calif., case, viatical brokers allegedly accepted $95 million from more than 1,100 investors but never bought the viaticals.