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Good news, bad news

Money | The Conference Board reported some good news last week that may turn out to be bad news for some Americans

Issue: "Muddy Gras," March 4, 2006

The Conference Board reported some good news last week that may turn out to be bad news for some Americans.

The private research group announced that its widely regarded Index of Leading Economic Indicators jumped 1.1 percent in January, after an increase of 0.3 percent in December. The index seeks to predict future economic conditions, and the January surge suggests that an already-growing U.S. economy may see even stronger growth in coming months. "The Leading Economic Index . . . rose sharply in three of the last four months," said labor economist Ken Goldstein. "That could be a signal of a faster pace [of growth] this spring."

Other signs point to an economy picking up steam:

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•An unusually warm January helped push housing starts up a surprising 14.5 percent, according to the Commerce Department, the biggest increase since March 1973.

•The Dow Jones Industrial Average shot up over 300 points in the first several weeks of 2006. This was on the heels of a stagnant 2005 stock market.

•Retail sales increased 2.3 percent in January. Several retailers are doing well: Wal-Mart reported a 13.4 percent increase in fourth-quarter profits. Rival discounter Target said strong sales pushed its profits up a similar 14 percent. Home Depot, meanwhile, saw quarterly earnings rise 23 percent and said it expected to see sales increase between 14 percent and 17 percent this year.

•The Labor Department reported that the nation's unemployment rate dropped to 4.7 percent in January from 4.9 percent in December. The January rate was a four-year low.

This is all good news, but it may be a curse in disguise for some Americans, namely the millions who used the low interest rates of recent years as an occasion to rack up high levels of credit-card debt (see "Spendthrift nation," Feb. 11) or buy expensive homes with adjustable-rate mortgages (see "ARMs have legs," Nov. 26, 2005).

These Americans have put themselves in a precarious position: If their interest rates increase, those once-affordable debt payments may suddenly stretch them to the limit. And several economists say the positive economic news of recent weeks may very well send interest rates higher. "This week's Valentine's Day," wrote Irwin M. Stelzer of the Hudson Institute on Feb. 20, "may be the last on which lovers of low interest rates will find their love requited."

The problem for indebted consumers is that Federal Reserve chairman Ben Bernanke may see strong growth as a sign that a jump in inflation is on the way. That would prompt him and the other Fed governors to continue increasing short-term interest rates beyond a long-expected increase at the Fed's March 27-28 meeting. A Feb. 22 report that consumer prices rose a strong 0.7 percent in January probably did nothing to ease the nerves of inflation watchers at the Fed.

"The consensus had been that the economy was going to slow and the Fed was going to be out of the game sooner rather than later," investment strategist Brian Rauscher told the Bloomberg news service. "Now people are realizing the Fed will go higher for longer."

Interest rates on both mortgages and credit cards have been on the rise lately anyway, and any Fed tightening would probably send them even higher. So rejoice at the news that the economy is growing strongly, but don't forget to pay off those variable-rate loans as soon as possible.

Going to the junk yard

In a financial version of beating a dead-or at least dying-horse, Moody's Investors Service last week lowered its debt rating for General Motors to five levels below investment grade.

GM's debt had already descended into junk territory before the move, which Moody's said was prompted by concerns that high wage and benefit costs would send the automaker into bankruptcy. Standard & Poor's and Fitch Ratings have also been lowering their debt ratings for GM in recent weeks.

The company is still reeling from a very bad year in 2005. GM lost $8.6 billion, even as it faced $64 billion in unfunded health and pension liabilities for its retirees. GM also became potentially responsible for about $12 billion more in employee costs when Delphi, a parts supplier that spun off from GM in 1999, filed for bankruptcy protection in October. "Delphi alone will put them in an extremely vulnerable position," Sean Egan of Egan-Jones Ratings Co. told the Reuters news service.

GM announced in January that it would cut 30,000 jobs and close 12 facilities by 2008. The first factory on the list, an Oklahoma City plant that made SUVs, closed down last week. CEO Rick Wagoner has also taken a 50 percent pay cut.

Timothy Lamer
Timothy Lamer

Tim is managing editor of WORLD magazine.

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