Unemployment and Retail Sales
This week, The Street was buzzing about the unemployment numbers for June. Unemployment claims dropped, causing the markets to rise. The markets also received good news in retail sales with existing stores open a year or longer reporting about a 5.9% increase in sales. Overall, retail sales were up 3.1% for June, which while not red-hot, are good in a market that is not moving. This increase shows that consumers are starting to spend. Discount stores are still reaping the benefits of budget conscious consumers. Both Lowe’s and Home Depot have announced they are beginning to open new stores again.
Retirement Pensions
Greece announced that they were increasing the retirement age and cutting some retirement benefits. We suspect that we may see similar actions domestically as many states are still struggling with underfunded pension plans. Illinois state auditors estimate that their state pension system is $62 billion in deficit. We feel our increased life expectancies are part of what is causing the underfunding in many pensions. So we suspect public sector workers may no longer be able to retire at 55 with full pensions.
We are beginning to see the change in municipalities, where a municipality will threaten to declare insolvency if unions do not cut pension benefits or reduce salaries. Of course teachers, fire departments and police are fed up with taking pay cuts. For example, New Jersey Governor Chris Christie did not cut teachers jobs. However, he trimmed public sector employee benefits and pay for current teachers, but let long-serving teachers who were eligible for retirement keep their benefits if they retired by August.
Overall, we feel that overly lucrative benefits cannot last forever.
Deflation
Recently, the Atlanta Federal Reserve President, Dennis Lockhart, warned the recovery remains so weak that deflation—a generalized drop in price levels often caused by a reduction in the supply of money or credit —is still a current risk. We do not see deflation as a problem since our gross domestic product is still growing. While we have unemployment near 10%, we feel we have a shortage of skilled workers and an oversupply of unskilled labor. Many of those who were laid off during the recession did not take steps to improve their skills.
Additionally, we are seeing many workers not willing to work for a reasonable salary. We are seeing news stories of unemployed individuals with degrees from top-notch schools unwilling to take a “dead-end” job paying $45,000 a year. In our opinion, the “dead-end” job would be not having a job for the last two years. We feel the labor pool is being picky when it comes to employment, but it is not surprising when unemployment benefits were extended to 109 weeks.