Thursday, October 28, 2010

What the Economic Experts Expect in 2011

What will the U.S. economy look like a year from now?  Will the unemployment rate still hover close to 10%?  What will be the Dow Jones Industrial Average?  What about GDP?  When will things get better?


The famous economist John Kenneth Galbraith once said that “the only function of economic forecasting is to make astrology look respectable.”  There is no doubt that economic forecasting is a difficult endeavor.  But on October 21, 2010, the Missouri Council on Economic Education hosted an economic forecasting forum in Clayton, Missouri where we asked experts to predict the future. 


At this forum, economic experts provided their overview of the U.S. economy and made projections for the next year.  These experts included:


·         Emmett Wright, CFA, Chief Investment Officer, Northwestern Mutual Management Company

·         Alan Beaulieu, President, Institute for Trend Research

·         Alison Lynn Reaser, Ph.D., Chief Economist, Point Loma Nazarene University, Fermanian Business & Economic Institute (formerly the Chief Economist for Bank of America).

There was a consensus among these leading economic experts that:


·         The U.S. economy is in the midst of a slow recovery.

·         It will take several years before the economy returns to its pre-2008 level.

·         The future economic cycle will not be as manic as it has been recently.

·         The growing U.S. debt is unsustainable and will require significant policy changes very soon.

The following table summarizes their projections of key economic indicators, as of October 2011:


Expert Projections

Percent Change in Gross Domestic Product (GDP)

Percent Change Growth in Consumer Price Index (CPI)

Dow Jones Industrial Average

U.S. Unemployment Rate

Price of Crude Oil

Alan Beaulieu






Lynn Reaser






Emmett Wright







These projections paint a cautious picture of what the future holds for the U.S. economy.  To put these numbers in context, the average annual growth in real GDP was approximately 3.31 percent from 1947 to 2010, with great variation from year to year.  The Dow Jones Industrial Average is now hovering at around 11,000, and the U.S. unemployment rate was 9.5% as of September, 2010 (Bureau of Labor Statistics).  So over the next year, the experts expect the U.S. economy to grow, but slowly. 


All three experts expressed great concern about the growth of the U.S. budget deficit.  This concern is based on the growing structural budget deficit that the U.S. incurs each year—Alan Beaulieu projects that the U.S. will run a $1 Trillion deficit each year for the next twenty years (absent major policy changes). 


Tips for Using Economic Data in the Classroom

Numbers such as these, particularly figures that include the word “Trillion,” are hard to conceptualize.  It is therefore difficult to engage students in a discussion that focuses on macroeconomic statistics.  To help teachers do just that, the Council for Economic Education provides useful classroom lessons that incorporate macroeconomic data.  These lessons can be found at the EconEdLink website:


Each quarter, when economic data such as GDP, CPI, and Unemployment figures are released by the government, new lessons are available that challenge students to get to the bottom of what these numbers mean.  By using these GDP lessons, educators can teach students to:


  • Determine the current, recent and historical growth of U.S. real gross domestic product.
  • Assess the relationship of real GDP data, the indexes of economic indicators, and business cycles.
  • Speculate about the nature and impact of current economic conditions on consumers and producers, and implications for the future.

Teachers are encouraged to review economic data with students, showing them the source of this data and how it can be practically interpreted.  These lessons provide excellent opportunities for analytical thinking.  For example, students can be asked: “What recent data published by the Bureau of Economic Analysis supports the National Bureau of Economic Research decision that the U.S. recession ended in July, 2009?”

EconEdLink’s “Focus on Economic Data” series provides lessons for other economic indicators as well.  For more information, visit or email me at


**To view the presenter PowerPoint slides in their entirety, please visit MCEE’s website at


President & CEO

Missouri Council on Economic Education

Phone: 816-235-2654



Wednesday, October 20, 2010

Hope You Never Need These

Last week at our department’s student group meeting, our guest was Andrew Kaiser of The Kaiser Law Firm, PC.  He spoke about an important, yet rarely discussed topic, estate planning.  As a part of his talk he focused on estate planning tips for college students, young people that think they will never die or get sick.  Here are the key points of his talk[i].


Advanced Directive for Health Care Choices: This document allows you to express your written wishes for your health care, should you become physically or mentally unable to communicate them to others.  You may specifically state which medical procedures you do or do not want. This document is crucial for whomever you appoint as your durable power of attorney (below), for it will help them make better decisions.


Durable Power of Attorney: We should each designate someone to make health care choices for us, should we be unable to make those decisions. This is in addition to your advanced directive.  Find someone that shares your values for end-of-life care and who you can trust to fulfill your request.  Moreover, this document should allow the person to be able to request and review your medical and hospital records.  This document must be notarized.


HIPAA Privacy Authorization Form: As a father of three college students, I consider this form to be mandatory.  The medical information of any person over the age of 18 is private information and no one, not even parents, are allowed to be told this information without this form being signed by the patient.  Think for a minute about a mother receiving a phone call that her child was injured and in the emergency room at the hospital.  Without this form, legally, the hospital cannot tell that mother if her child has a broken arm or is near death.  Moreover, if a parent needs to, say, take medical records from one hospital to another to expedite care, they cannot be given the documents without having this permission granted by their child.


So, this Thanksgiving, after you’ve had your pumpkin pie and everyone is napping in the living room watching the Detroit Lions get beat again, bring this up to your parents.  Parents, bring it up to your child.  Better yet, many of the parents out there need to get motivated to get their own affairs in order and get this done!


Importantly, we have not broached the broader topic of estate planning, including wills.  In many cases, your financial success is dependent on solid counsel so you may wish to contact your lawyer or a legal service office on your college campus to help you make these decisions and to assure that you “do it right”. At the University of Missouri, our office is called Student Legal Services.


If you wish to see example forms or you want to “do it yourself”, forms for Missouri are here: .



[i] We published a Tip on this topic in June of 2008.  Yet, because the readership of this newsletter changes overtime and the fact that none of the students present at our meeting had ever acted on these matters, a refresher is due. If you’d like more detail go to .   Any mistakes in this article are mine and not Mr. Kaiser’s.

Thursday, October 14, 2010

Is Auto Leasing a Good Idea?

To lease or to buy? When you buy a car, you own it. When you lease, you pay to drive someone else’s vehicle. However, leasing can involve lower monthly payments than a loan. At the end of the lease, though, you have no ownership or equity in the car.   Many dealers and other lessors offer vehicle leases. Before you decide whether to lease or buy, remember — don’t be dazzled by so-called deals. Ask questions, nail down the details, read the fine print and shop around.


If you’re thinking of leasing, the Federal Trade Commission offers these shopping tips:


• Shop as if you’re buying a car. Negotiate all the lease terms, including the price of the vehicle.  Lowering the lease price will help reduce your monthly payments.  Get all the terms in writing.


• Learn the language of leasing.


o   In a closed-end lease, you return the car at the end of the lease and walk away, but you’re still usually responsible for certain end-of-lease charges, such as excess mileage, wear and tear, and disposition. In an open-end lease, you pay the difference between the value stated in your contract and the lessor’s appraised value at the end of the lease.


o   Lease inception fees are payments you make before the lease starts. They may include a down payment, security deposit, acquisition fee, first month’s payment, taxes and title fees. Ask for a list of all charges due at lease inception. You may be able to negotiate on the terms.


o   The capitalized cost is the price of the car for leasing purposes plus taxes and extra charges like service contracts and registration fees.


o   The capitalized cost reduction is similar to a down payment. If you’re trading in a car, make sure the dealer applies the trade-in value to the price your lease is based on. The trade-in credit may reduce your down payment or monthly payments.


• Ask whether extra charges will be assessed for excessive mileage, wear and tear, disposition and early termination, and find out the amount of these charges. Most leases allow you to drive 12,000 to 15,000 miles a year. If you put on more miles, expect a charge of 10 to 25 cents for each additional mile. You may think the ding in the door or coffee stains on the upholstery are normal wear and tear — to the lessor, it may be significant damage. Check out penalties for an early return and expect to pay a substantial charge if you give the car up before the end of your lease.


• Make sure the manufacturer’s warranty covers the entire lease term and the number of miles you’re likely to drive.


• Consider gap insurance to cover the difference — sometimes thousands of dollars — between what you owe on the lease and what the car is worth if it’s stolen or totaled in an accident.


• Before you sign the deal, take a copy of the contract home and review it carefully away from any dealer pressure. Be alert for any charges that were not disclosed at the dealership, like conveyance disposition and preparation fees.


• Federal law requires lessors to provide lease cost information before you sign the lease. Take a copy of the attached form to the dealer and ask them to complete it. Some dealers may be willing to provide the information during your shopping process. If the dealer declines, consider shopping elsewhere.


For more information about buying or leasing a car, visit the FTC’s Web site at   To file a complaint or to get free information on consumer issues, visit or call toll-free, 877-FTC-HELP (877-382-4357); TTY: 866-653-4261.


Adapted from “Look Before You Lease,” (Federal Trade Commission, May 2003),

(accessed October 6, 2010).


Brenda Procter, M.S.

Associate State Extension Specialist & Instructor

Personal Financial Planning Department

College of Human Environmental Sciences

University of Missouri-Columbia

162 Stanley Hall

Columbia MO 65211-7700

Phone: 573-882-3820

Fax: 573-884-5768



Wednesday, October 6, 2010

Seeking Shelter

Many of you are aware of the nervous US investor and how their flight to safety during the past two years has driven them increasingly toward bonds and away from stocks.  This is true regardless of the long-run track record of stocks and the trend toward lower yields for bonds caused by the increasing demand for bonds by both the government and investors.  As market yields fall, the value of outstanding bonds will increase.  Why?  Take the following example.  A $1,000 face value bond with 30 years to maturity which pays the investor $40 per year (usually paid as $20 every six months) will be worth $1,000 if market yields are 4%.  If market yields fall to 2.5%, however, that same bond would be worth $1,314.  This has been the picture we’ve seen over the past few years and is essentially what has occurred in markets from April 2010 (when the Treasury Rate were close to 4%) to today, when Treasury rates are 2.45%, the lowest they have been since December of 2008. 


We need to ask ourselves, what would happen if interest rates increase?  We can answer that by taking the above example and turning it around.  The 4% coupon rate bond that is worth $1,314 today will be worth $1,000 if rates return to 4%, resulting in a 24% loss in value. So, what should an investor do to protect their portfolio from rising rates of interest?  Here are a few options…


Treasury inflation-protected securities (TIPS) – An alternative to Treasury bonds that pay a fixed coupon rate of interest are bonds that pay a lower fixed rate of interest, set at initial auction, and whose principal value is adjusted according to changes in the consumer price index.  Thus, a part of the gain is interest – fixed – and a part is variable depending on the rate of inflation.  Since inflation is the most likely driver of higher interest rates, TIPS can provide protection from rising rates – though the rate set at auction will not change.  For more information, see: .


Dividend paying stocks – Near the end of August, AT&T had a preferred stock that paid a dividend yield of 5.94%, a bond maturing in 2029 that paid 5.49%, and AT&T’s common stock had a dividend yield of 6.24%!  Moreover, there is a promise to pay the interest on the bonds, before paying the preferred stock dividend, and a promise to pay the fixed preferred stock dividend, before paying anything to the common stock holder, yet a move toward dividend paying stocks might have benefits.  ( AT&T has the greatest dividend yield in the Dow Jones Industrial Average and may point to the risk that investors might be factoring into AT&T’s future, but it is instructive.   Yesterday, the dividend yield on AT&T was 5.80%, but the price of the stock has risen from $26.94 to $28.94 over the past few weeks.) 


In the early part of this decade, when interest rates increased, we saw equity-income stocks (or, mutual funds that focus on these stocks) increase significantly, when Treasury yields rose.   Currently, the average dividend yield for the stocks that pay a dividend in the DJIA is 2.82%, while 10-year Treasuries are yielding below 2.4%. At the same time, the value of the ownership interest, represented by the stock, could increase.  If you decide to buy stocks for income, you must remember that the dividends may cease at any time.  Thus, you need to be mindful of the quality of the company and the likelihood the dividends will continue.  You may want to simply look for an equity income index fund or ETF to provide the management expertise, while trying to minimize the costs associated with this tip.  (This site is interesting: )


Convertible BondsConvertible bonds are bonds that pay a fixed semi-annual rate of interest, lower than the rate paid on bonds that are non-convertible.  In exchange for the lower rate, they grant the holder of the bond the right to convert the bond into the common stock of the company.  The result is that convertible bonds tend to move in a positive direction to changes in the economy, while providing income, though less than non-convertible debt, until the owner is forced to convert the debt into common stock.  (I say “forced” because the holder of convertible debt should not voluntarily convert.  To do so, removes the “floor price” of the convertible debt when valued as debt, while the value of the convertible as stock will always be worth the conversion value, if the stock price continues to increase.  If you need the money from an appreciated convertible bond, just sell the bond.)  There are mutual funds that specialize in convertible bonds.


I know this is a lot of information for a “Financial Tip of the Week”.  Thus, I’m going to stop writing.  Other options might be high-yield bonds, floating-rate debt, cash, commodities, or real-estate income producing properties.  Each comes with unique risks.  Yet, as we see, the retail investor (you and I) are buying, buying, buying bonds and bond funds and selling, selling, selling equities and common stock funds.  The crowd is usually wrong and they often arrive late to the shelter, after the storm has hit.  I do not know the future for our economy and our world.  All I know is that disciplined diversification, with low-cost investments, allows anyone to find financial success in the “loser’s game”.  Diversification essentially means that you need to learn to embrace the systematic risks of investing (those that cannot be removed through diversification), rather than cower from them.  Charles Ellis wrote his book Winning the Loser’s Game in the early 1990s[i].  His thesis about low-cost diversified investing remains true today.  While past performance does not predict the future, we can still learn from it. 


[i] Charles Ellis’s original article, published in 1975, appears here:'s_Game1975.pdf .  His book continues to be sold.