Consumer Spending on the Rise
PUBLISHED ON: Aug 1, 2015
The Bottom Falls out of Crude
This week the markets saw the bottom fall out of the price of a barrel of crude. It had been trading at depressed levels for over a month, but that's nothing like the $47 and change that it's being bought and sold for right now. What will this mean at the pump for people gassing up in late summer and early fall? Falling prices, in all likelihood.
The reason that the bottom has fallen out of the crude oil market is simple supply and demand. Right now, with both the US and OPEC producing at record levels, there is a supply glut. Consumer spending had been weak until this quarter, and that included demand for gasoline.
All of this talk of supply and demand is old-school capitalism, and it's not hard to see how we got to $47 oil.
What's harder to see is just how we're going to get rid of it. OPEC, for one, has decided that the days of artificially reduced supply are here to stay, at least in the short term. Although the move is bad for our economy, it's devastating to Russia's. If you need further proof, look at where the ruble is trading on FOREX, and follow the trendline back to when oil prices started falling. In that light, cheap oil doesn't look so bad. Unless you're a worker in the oil fields, that is.
Consumer Spending is on the Rise
In what could be a major piece of good news this week, the Government has announced that consumer spending is back on the rise. The news came just in time, as companies were releasing some pretty lackluster Q2 earnings reports. Hopefully this will help things turn around for Q3 and beyond.
Consumer spending had been flat and even falling, despite the economy creating jobs. Analysts have argued over the reason why, but the bottom line was that people didn't feel comfortable spending their hard-earned dollars, and instead saved their money or put it toward debt. Not that paying down debt is a bad thing, but without consumer spending our economy grinds to a halt.
In fact, some of the largest problems in Europe have been caused by low consumer spending. That's one of the reasons why Greece's financial controls on banking were such a dangerous move. They had to strike a balance between letting people spend, and stopping them from running on the banks.
Puerto Rican Default Coming August 1st
Unless things change in a hurry, it looks like Puerto Rico is all set to default on its payments to its creditors. This is a big deal for Americans, and especially the US dollar, since Puerto Rico is a commonwealth of the United States and uses the dollar as currency. After seeing what a Greek default did to the Euro, it makes you wonder how the US dollar will look on the other side of this mess.
Of course, things in Puerto Rico aren't as bad as things in Greece are. The island commonwealth has severe problems with cash flow, it's true, but it also has a $104 billion GDP thanks mostly to tourism. The heart of the problem lies in the timing of the payments, not in Puerto Rico's financial solvency. And that's a huge difference from what's happening in Europe.
Still, the timing couldn't be worse for the United States. This mess is coming right when the dollar is strengthening to the point that the Fed is considering a rate hike
-- one which is sorely needed, since the prime is at 0% -- and it may impact their decision to move rates up in September. Bankers will tell you that that's not a bad thing, and a higher prime interest rate will impact mortgages, but it's time to start moving forward again in this economy, and that means higher interest rates, unfortunate or not.