November 15, 2024

Bucks Blog: Holiday Spending Stress

Tony Cenicola/The New York Times

Holiday spending is a source of concern and stress for many Americans, even as they plan to spend less money, according to recent CBS News polls. A third say they feel more stress than usual about the amount they plan to spend on gifts, and half are concerned they will not be able to afford the gifts on their list this season. And with these anxieties, few anticipate spending any more this year than last year.

Not surprisingly, household income plays a role in how people consider their holiday budgets. Those who are less affluent are more likely to spend less money on gifts this year, are more concerned about not being able to afford what they want to buy, and express more anxiety about the spending money on gifts this year. The poll was taken Nov. 18-21 with 951 adults.

Half of all Americans and two-thirds of those with annual incomes under $50,000 are very or somewhat concerned that they will not manage to pay for the holiday presents they want to purchase. Twenty percent of those surveyed with incomes over $50,000 say they are feeling more stress about their holiday spending this year than usual, while more than twice as many less affluent Americans feel that way.

Another CBS News poll, taken Nov. 6-10 with 1,182 adults, suggests that few Americans are feeling generous this year. Just 9 percent of respondents said they would spend more on gifts this year than they did last year. About half said they would spend about the same amount on holiday presents. And four in 10 expect to spend less money shopping for gifts this year than last year.

Again, less affluent holiday shoppers will be making more economies this year than those who are better off.

Both surveys were conducted with landlines and cellphones nationwide and each has a margin of sampling error of plus or minus 3 percentage points for all adults. The margin of sampling error for subgroups is larger.

Article source: http://feeds.nytimes.com/click.phdo?i=f1abdb31c9c67e8bafe2cc1f35e9ee16

Economix Blog: Judith Scott-Clayton: Student Loan Debt: Who Are the 1%?

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Judith Scott-Clayton is an assistant professor at Teachers College, Columbia University.

A continuing refrain of Occupy Wall Street protesters has been “student debt is too damn high,” as James Surowiecki wrote in The New Yorker. In some cases — like for the college graduate profiled in a recent article in the Chronicle of Higher Education who has $100,000 in debt and uncertain job prospects — this is unarguably true. But such cases make for dramatic reading precisely because they are so rare.

Today’s Economist

Perspectives from expert contributors.

The first thing to note is that most of those with that much debt have graduate degrees; it is difficult to accumulate that much debt in an undergraduate program. The chart below shows the percentage of beginning undergraduate students who, six years later, had accumulated more than the indicated levels of debt.

Only one-tenth of 1 percent of college entrants, and only three-tenths of 1 percent of bachelor’s degree recipients, accumulate more than $100,000 in undergraduate student debt. If you have more than $75,000 in undergraduate debt, you are the 1 percent – just not the 1 percent you might have been hoping for.

U.S. Department of Education, Beginning Postsecondary Students Survey (2009)

Even among recipients of bachelor’s degrees, 90 percent manage to graduate with less than $40,000 of debt. What happened to the other 10 percent is no particular mystery: they are less likely to come from wealthy families, but they attended pricier schools and paid for more years of tuition (see chart below). Compared with other graduates, these students are 20 percentage points more likely to have attended schools costing $20,000 or more a year (including room and board), and 20 percentage points less likely to have attended a public institution. Ten percent attended a private for-profit institution, compared with only 1 percent of their lesser-borrowing peers. High-borrowing students also took significantly longer to finish their degrees.

U.S. Department of Education, Beginning Postsecondary Students Survey (2009)

With a bachelor’s degree, even $40,000 may be a manageable level of debt over the long term. But for those who are unemployed – including 9.1 percent of the 20- to 24-year-old college graduate labor force and 20.4 percent of their peers with no college degree, according to a recent report – even much smaller amounts may be unmanageable in the short term.

Those who are struggling with their payments may be able to take advantage of deferments and forbearance provisions on the federal portion of their loans to help get them through the economic downturn. They probably should not hold their breath waiting for Congress to pass legislation forgiving all student loan debt, an idea some Occupy Wall Street protesters have advocated but which economists have panned.

In an effort to respond to this proposal, the Obama administration recently took several executive actions that will lower repayment burdens for some borrowers; for those enrolled in the income-based repayment plan, the changes could reduce monthly payments by a third.

Surprisingly, though, neither the protest movement nor the administration is talking about the imminent doubling of student loan interest rates. Congress temporarily reduced interest rates to 3.4 percent for subsidized loans originating in 2011-12, but beginning next summer the rate for new loans will rise to 6.8 percent.

I asked Mark Kantrowitz, publisher of Fastweb.com and FinAid.org, why there hadn’t been more pressure to extend the interest rate reduction, especially given that the government turns a net profit on its student loan programs. He noted that these profits help pay for Pell grants and other student aid programs and said that many student aid advocates feared that any extension of loan interest reductions would necessitate larger cuts elsewhere.

Given a choice between allowing interest rates to rise or cutting Pell grants, he said in an e-mail, “cutting the interest benefit is the lesser of two evils.”

This is probably true. Unlike changes in Pell grants, changes to the interest rate affect loan repayments years in the future, not students’ ability to pay for college now. And because the change only applies to new loans, many people most likely to be affected are primarily occupying high school classrooms, not Zuccotti Park.

Article source: http://feeds.nytimes.com/click.phdo?i=12bf8fa853872a34d0436a4ecf6317fd

3rd-Quarter U.S. Growth Revised Down to 2 Percent

Gross domestic product grew at a 2 percent annual rate in the third quarter, the Commerce Department said on Tuesday, down from the previously estimated 2.5 percent.

The revision was below economists’ expectations for a rate of 2.5 percent. But data showing consumer spending still firm and business inventories dropping for the first time since the fourth quarter of 2009 appeared to set the stage for a stronger economic performance this quarter.

Data so far suggests the fourth-quarter growth rate could exceed 3 percent, which would be the fastest in 18 months.

Despite the downward revision, the growth last quarter was still a step up from the 1.3 percent rate recorded in the April-June period. Part of the pickup in output during the last quarter reflected a reversal of factors that held back the economy earlier in the year.

A jump in gasoline prices weighed on consumer spending earlier in the year, and supply disruptions from the devastating earthquake and tsunami in March in Japan curbed auto production.

The government revised third-quarter output to account for an $8.5 billion drop in business inventories, which lopped 1.55 percentage points from G.D.P. growth. Inventories were previously estimated to have increased $5.4 billion.

The drag from inventories was offset by strong export growth. Excluding inventories, the economy grew at an unrevised rate of 3.6 percent after expanding 1.6 percent in the second quarter.

Consumer spending was revised down slightly to 2.3 percent from 2.4 percent because of adjustments to motor vehicle fuels and lubricants. It was still the fastest rate since the fourth quarter of 2010.

However, weak income growth could curtail spending. The report showed real disposable income fell 2.1 percent in the third quarter after declining 0.5 percent in the previous three months. There were also small revisions to business investment, which rose at a 14.8 percent rate instead of 16.3 percent as estimates for investment in nonresidential structures and outlays on equipment and software were lowered.

The Commerce Department also said after-tax corporate profits increased at a 3 percent rate after rising 4.3 percent in the second quarter.

Export growth was stronger than previously estimated, rising at a 4.3 percent rate instead of 4 percent. Imports increased at a much slower 0.5 percent rate rather than 1.9 percent.

Trade contributed almost half a percentage point to overall growth. Elsewhere, residential construction grew at a 1.6 percent rate instead of 2.4 percent.

The report showed inflation pressures subsiding. A price index for personal spending rose at a 2.3 percent rate in the third quarter, instead of 2.4 percent.

Article source: http://feeds.nytimes.com/click.phdo?i=5ce7b778d5c9a0677c9c9a157868da56

Northern Allies Feel Pinch of Germany’s Policy on the Euro

As long as the patients were South European countries like Greece and Italy, seen as victims of an unhealthy lifestyle, northern-tier nations like France, Austria and the Netherlands have been willing to go along with Germany’s prescriptions for reducing debt in the name of economic health. And they were willing to support Germany’s insistence that the European Central Bank should not be a lender of last resort to indebted governments, by actively buying their bonds.

But suddenly, as investors’ fears mount that many euro area nations are about to tip into recession, even countries like credit-worthy France are finding it much more expensive to borrow money in the open market, compared with Germany. And with that development comes a dawning realization: that austerity, rather than making it easier for them to pay down their higher debts, could make it harder — and more expensive.

As France’s borrowing costs become increasingly divergent from Germany’s, so might its attitude toward E.C.B. lending.

On Wednesday, Chancellor Angela Merkel of Germany continued to speak out against E.C.B. bond buying, while the French finance minister, François Baroin, was arguing just the opposite.

Mr. Baroin called for the support of all European institutions, including the E.C.B., to respond to the crisis. “But Germany, for historic reasons, has closed the door to the direct involvement of the E.C.B.,” Mr. Baroin said in an interview with the French business newspaper Les Échos.

On Wednesday, the so-called yield gap — the premium that investors demand for holding French 10-year government bonds, rather than German ones — rose to a new euro-era high of nearly two percentage points. It later eased back somewhat, to 1.9 percentage points.

That is still not close to the yield gap of nearly 5.2 percentage points that beleagured Italy has with Germany, but it is a disturbing new trend for France. Austria and Netherlands are also experiencing widening yield gaps with Germany.

Mr. Baroin’s remark was a reference to Germany’s deep-seated fears over the inflation that could result from the E.C.B.’s pumping more money into the region’s economies.

Italy continues to be a major source of bond-market jitters, despite the announcement Wednesday by its new prime minister, Mario Monti, of a new cabinet in which he named himself finance minister and brought in a number of academics and people from the banking industry and the upper reaches of the civil service.

Italian 10-year yields were back to nearly 7 percent Wednesday, the level at which analysts say financing the country’s €1.8 trillion, or $2.4 trillion, debt mountain becomes unsustainable.

But the market anxiety has moved well beyond Italy, as the specter of a regionwide recession is making investors realize that if every country is tightening its belt at the same time, few will be able to grow their way out of the problems any time soon.

So far, France, the Netherlands and Austria have been among Germany’s allies in the crisis. France, eager to show that the French-German axis is thriving, has even backed Germany’s stance on E.C.B. lending. The question now, though, is whether other countries will start to resist Germany’s policy prescriptions.

“The Germans have been able to rely on the French, the Dutch and the Austrians,” said Simon Tilford, the chief economist at the Center for European Reform in London. “But if they get dragged into this and their borrowing costs continue to rise, that could influence whether they continue to back Germany and the line taken on the euro zone crisis.”

On Wednesday, the French government showed a clear sign of divergence. It called on the E.C.B. to help calm the crisis by buying the bonds of Italy, Greece and other governments whose borrowing costs are surging. The E.C.B., in fact, has already been doing that, but at modest levels that seem to be having little impact.

“The E.C.B.’s role is to ensure the stability of the euro, but also the financial stability of Europe,” Valérie Pécresse, the French budget minister, said Wednesday. “We trust that the E.C.B. will take the necessary measures to ensure financial stability in Europe.”

Article source: http://www.nytimes.com/2011/11/17/business/global/germanys-bitter-recipe-tests-euro-zones-solidarity.html?partner=rss&emc=rss

Retailers Attracted More Shoppers in September

September is considered a key month for retailers because back-to-school shopping, as well as bringing in sales, can indicate how the consumer is feeling about the future.

Some of the sales increases, though, seemed due to heavy promotions.

“One of the questions as we go into holidays, frankly, is where margins end up,” said Chris Donnelly, an executive in Accenture’s retail practice. “I think you’re going to see more aggressive discounting to make sure they capture as much of the holiday sales as they can. And you’ve seen it in some of the folks that reported today, where they said sales have gone up but margin and average selling prices have gone down a little bit.”

Generally, stores that go after a higher-end shopper fared better than those focusing on middle- and low-end customers.

The top performers among department stores was Nordstrom, where same-store sales rose 10.7 percent, beating estimates by more than five percentage points. There, shoppers seemed drawn to luxury purchases — Nordstrom said its top categories for the month were designer clothing, dresses and handbags.

Saks Fifth Avenue’s sales increased 9.3 percent, and there, too, people were drawn to non-essential items. Shoes, purses, jewelry and cosmetics were among its top sellers.

Macy’s, Kohl’s and Dillard’s came in a bit lower than the more plush department stores, at 4.9 percent, 4.1 percent and 3 percent respectively.

J.C. Penney had one of the few negative September results, with same-store sales down 0.6 percent. Analysts had expected growth of 0.6 percent. The company said Internet sales also dropped for the month because people were buying fewer expensive home-furnishing items.

J.C. Penney revised its profit outlook for the third quarter on Wednesday, saying that because of lower-than-expected sales, it was now expecting profit to be 10 to 15 cents a share, excluding one-time charges, versus the 15 to 20 cents a share it had previously projected.

The best performance over all was turned in by Costco, which, despite being a club store, caters to a well-off shopper. Costco’s same-store sales rose 12 percent, and its American sales, excluding gas, rose 7 percent.

Other than Costco and Nordstrom, the rest of the top five performers included Limited Brands, up 11 percent, and the teen stores The Buckle and Zumiez, up 10.3 and 10.1 percent, respectively.

On the bottom, Gap Inc.’s brands — Banana Republic, Gap and Old Navy — had a combined 4 percent drop in same-store sales, though analysts had expected about that. Smaller retailers Bon-Ton, Cato, Stein Mart and Stage Stores were also among the worst results.

Over all, according to MasterCard Advisors SpendingPulse, which tracks all forms of consumer spending, , 2011 was the best back-to-school spending season since 2006. SpendingPulse compared spending in July, August and September in school-related categories like children’s apparel and office-supply stores to earlier years,

“It’s a positive surprise that the American consumer is maintaining some degree of resilience here,” said Michael McNamara, vice president of research and analysis for SpendingPulse.

But Mr. Donnelly of Accenture warned that could soon change.

“There is a limit to how much consumers are going to be able to spend, because folks aren’t making any more — we just saw a couple of weeks ago wages are very low, real wages aren’t growing, employment’s not moving anywhere, the stock market’s got a lot of volatility — so it’s unclear how sustained this uptick in spending will last,” Mr. Donnelly said.

“As much as the consumer can surprise you on the positive side, like they did the last couple of months, they can also catch you on the negative side,” Mr. Donnelly said.

Article source: http://feeds.nytimes.com/click.phdo?i=5c086b7bb68964e26d58c8b57d14a2af

Wall Street Follows European Markets Higher

The Standard Poor’s 500-stock rose 1.8 percent, while the Dow Jones industrial average rose to 10,939.95 points, a gain of 131.24, or 1.2 percent. The Nasdaq composite index rose 2.3 percent, driven partially by a 13 percent rise in shares of Research in Motion, which has been the subject of rumors about a possible takeover.

Stocks continued to surge in Europe. The Euro Stoxx 50 index, a gauge of blue-chip shares in the euro zone, closed up 4.22 percent. In London, the FTSE 100 closed up 3.19 percent.

Economic data released Wednesday painted a mixed view of the American economy.

A report by the Institute for Supply Management showed that growth among non-manufacturing businesses slowed in September, as compared to August. The index registered 53.0 percent, in line with analysts’ expectations. A figure above 50 percent indicates growth. New orders increased 3.7 percentage points, however, a possible sign of strengthening performance.

However, the report also registered a contraction in employment after 12 consecutive months of growth. The index’s level for employment registered 48.7 percent, down 2.9 percentage points. Prices also increased as a slower rate in September.

Kathy Jones, a fixed-income strategist at Charles Schwab, said this probably reflected persistent reluctance among businesses to be too aggressive.

“Maybe we got some good orders right now, but we’re not confident with that trend continuing,” she said.

A separate report on employment from ADP Employer Services showed that private employers added 91,000 jobs in September at a seasonally-adjusted level, slightly better than analysts’ expectations.

Some economists see the report as a hint of what to expect on Friday when the Labor Department publishes its September jobs data. The government’s job report is considered one of the most important indicators of the health of the national economy. A consensus of analysts expects it to show 65,000 new jobs for the month.

The situation in Europe continued to weigh on the minds of investors. In addition to confusion over the latest rescue plan for Greece and signs that a double-dip recession is imminent, problems in the banking system threatened to further undermine government finances.

“All but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings,” Moody’s Investors Service said on Wednesday, a day after it followed Standard Poor’s in cutting Italy’s credit rating, citing the country’s debt burden and paltry economic growth.

“Moody’s expects fewer countries below Aaa to retain high ratings,” the agency said, adding that “there are no immediate pressures that could cause downgrades for Aaa-rated countries.”

Tuesday’s momentum on Street did not carry over into Asian markets. The Nikkei 225 stock average in Japan fell 0.9 percent on Wednesday, and South Korea’s Kospi index was down 2.3 percent, but the S.P./ASX 200 index in Australia gained 1.4 percent. Stock markets in Hong Kong and mainland China were closed for a holiday.

The dollar was relatively stable, with the euro trading at $1.3342.

Benchmark crude oil futures for November delivery rose 4.7 percent to $79.26 a barrel. Comex gold futures rose 2.6 percent to $1,640.00.

This article has been revised to reflect the following correction:

Correction: October 5, 2011

An earlier version of this article had an incorrect surname for Kathy Jones, a fixed-income strategist at Charles Schwab. 

Article source: http://www.nytimes.com/2011/10/06/business/daily-stock-market-activity.html?partner=rss&emc=rss

Economix Blog: Losing Faith in Government

Washington’s dysfunctional political climate not only makes it harder for Congress to pass sound economic policy. It also means that whatever policies Congress manages to pass may be ineffective anyway, since Americans have lost so much confidence in their government’s ability to help.

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

Americans’ confidence in their government is at historic lows, according to Gallup’s annual governance survey.

The poll of 1,017 adults, conducted in early September, found that 81 percent of Americans are dissatisfied with the way the country is being governed, the highest share since the question was first asked in 1972.

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Additionally, 69 percent of Americans say they have little or no confidence in the legislative branch of government, also a record high, and nearly three times the share of people who said this in 1972.

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Americans estimate that the federal government wastes 51 cents of every dollar it spends, the highest number on record since that question was first asked in 1979. (Because the margin of sampling error was plus or minus four percentage points, however, that is not a statistically significant difference from last year’s poll, when Americans said 50 cents of every dollar the government spent was wasted.)

Almost half of Americans (49 percent) believe the federal government “poses an immediate threat to the rights and freedoms of ordinary citizens.” In 2003, less than a third of Americans said they believed this.

Perhaps most worrisome, Americans’ trust and confidence in the government’s ability to handle policy problems has plummeted.

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The light green line above shows that just 43 percent of Americans say they have “a great deal or fair amount” of trust in the federal government to handle domestic problems. That is lower than it was at any time in the past four decades.

If we have another federal government shutdown in the next few days, which is entirely possible, these sentiments will only get worse.

My concern about these survey responses isn’t that they might hurt politician’s feelings. It’s that, in order for government policy to be effective, people must believe it will be effective. This is as true for economic policy as it is for anything else.

In particular, part of the reason that economic stimulus works is that it gives consumers and businesses confidence that the economy will improve. That belief becomes self-fulfilling as they feel more comfortable increasing their purchases and investments.

Likewise, if Americans believe that Congress cannot be counted upon to do anything that will help the economy, nothing that Congress does — no matter how well designed and well executed — will succeed in helping the economy. Perception matters.

Article source: http://feeds.nytimes.com/click.phdo?i=314b98067e29827a80fda299a621699c

Old Tax Relief Seen as Anchor in Obama Plan

Mr. Obama has signaled that he will propose to extend for another year a reduction of two percentage points in the 6.2 percent Social Security payroll tax that employees pay, which means about $1,000 more for the average household. And he is considering a proposal to expand the tax relief to employers’ share.

In his prime-time address to a joint session of Congress, Mr. Obama is expected to call for a package totaling several hundred billion dollars that would also extend other business tax cuts, put federal dollars into building and repairing roads, rails, airports, schools and other infrastructure projects, and provide aid to states to avert more layoffs of teachers.

But the single biggest stimulus measure he will propose is likely to be temporary payroll tax relief. If the current tax cut, due to expire at the end of the year, is expanded next year to employers as well as employees, it would pump roughly $200 billion into the economy, with the aim of stimulating much-needed demand for goods and services from consumers and businesses and, additionally, of giving companies an incentive to hire.

For the White House, its appeal is that it may be the only large stimulus measure that can pass Congress this year given Republicans’ preference for tax cuts.

And if Republicans oppose him, the White House figures Mr. Obama has the better of the political argument because he will be trying to block a tax increase that otherwise would apply to virtually all households on Jan. 1.

Republican leaders have said they might support the payroll tax cut’s extension if its cost is offset by equal spending cuts, a condition they did not apply for extending the Bush-era tax cuts on high incomes. Mr. Obama has said he will propose long-term deficit savings to offset the short-term costs of his stimulus proposals, though that is not likely to satisfy Republicans.

Mr. Obama previewed his argument on Labor Day in Detroit, at one point addressing a raucous rally of union supporters as if he were speaking to Republicans.

“You say you’re the party of tax cuts? Well then, prove you’ll fight just as hard for tax cuts for middle-class families as you do for oil companies and the most affluent Americans,” Mr. Obama said. Interrupted by applause and hoots, he continued: “Show us what you got.  The time for Washington games is over.” 

A payroll tax break was not the tax cut that Mr. Obama preferred in December when he and Congress’s Republican leaders first agreed to a stimulus package of tax cuts. He wanted to extend the “Making Work Pay” tax credit for low- and middle-income households, part of his original two-year stimulus package for 2009 and 2010. But Republicans, newly empowered by their big gains in the 2010 midterm elections, blocked him. Mr. Obama countered with the broad-based and more costly payroll tax cut.

Both the administration and many economists, including those at the nonpartisan Congressional Budget Office, agree that some spending measures, in particular unemployment compensation and aid to states to avert layoffs, have more “bang for the buck” than many tax cuts — that is, for each dollar of cost to the federal government, more than a dollar is added to the economy’s output. Generally, such programs keep money in people’s pockets that they quickly spend, whereas high-income taxpayers tend to save.

But Republicans oppose spending measures. In a letter to Mr. Obama on Tuesday, the House Republican leaders — Speaker John A. Boehner and Majority Leader Eric Cantor — said that continued high unemployment had vindicated their opposition to his 2009 stimulus package.

“As you know,” they wrote, “we argued at the time that a large, deficit-financed government spending bill was not the best way to improve our economic situation or create sustainable growth in employment.”

Nonpartisan analyses have found that the first stimulus package, which was roughly one-third tax cuts, did prevent unemployment from rising higher, and economic growth from being lower. Now many economists and analysts say the recovery needs further assistance, especially given the fallout from global economic problems; some have reduced their projections of economic growth because the earlier stimulus measures have ended or are about to, while Congress and the White House have been cutting spending to reduce deficits.

“We are looking at a substantial fiscal drag on the economy next year as the spending cuts take hold and state and local governments continue to contract,” said Karen Dynan, an economist at the Brookings Institution, a policy research organization. “If this tax cut expires, that’s going to take a lot of money out of people’s pockets and that is going to slow consumption substantially in the first part of next year.”

Letting the payroll tax cut for employees expire would shave a half-percentage point from economic growth in 2012, Moody’s Analytics has reported.

“The payroll tax cut is better than nothing, and letting it lapse without putting anything else in its place would certainly worsen our economic problems,” said Leonard E. Burman, a former Treasury economist now teaching at Syracuse University.

“But it’s far from ideal,” Mr. Burman added. “A lot of the money goes to higher-income people whose consumption is likely to be unaffected by the additional after-tax income. Even for lower-income people, if they save the money or use it to pay down debt, it doesn’t boost the economy in the short run.”

Still, said Donald Marron, director of the Tax Policy Center and a former economics adviser in the George W. Bush administration, “Relative to other things you could do on the tax side, it’s a pretty attractive stimulus.”

Also, Mr. Marron said, broad tax changes generally can mean a much bigger package in dollar terms than a spending initiative.

“It’s very hard on the spending side to identify any single lever that gets to that kind of scale, particularly over the period of a year,” he said. “So if you want to do something big, you almost inevitably have to do something on the tax side.”

That is especially true, he added, “when you layer on the political constraints” of Republicans’ opposition to spending.

Article source: http://feeds.nytimes.com/click.phdo?i=bc188b9265b45fa53dd277e8c9b2022f

Case Study: Kopp’s Cycle Struggles to Get Financing

THE CHALLENGE Obtaining a $1 million loan to refinance the mortgage on the bike store, pay down credit card debt and obtain working capital.

THE BACKGROUND Kopp’s Cycle operates out of a small storefront on a quiet side street in downtown Princeton. Behind the counter is a repair studio that is lined with old wooden bins and is just big enough for three mechanics. Mr. Kuhn still sits at the workbench he used when he was a child working for his father, though the shop has moved several times in the intervening years. In the summer, there is room for two or three mechanics on the porch out back.

Kopp’s moved to its current location in 1989, when Mr. Kuhn and his sister bought the business from their mother. (Mr. Kuhn bought out his sibling’s interest in 1999.) In 2004, he bought the building for $801,000 with an adjustable-rate loan for $775,000, guaranteed by the Small Business Administration. By 2007, though, the rate had risen about three percentage points, to 10.75 percent. Moreover, Mr. Kuhn had grown tired of the paperwork that dogs an S.B.A. borrower. “I just didn’t want to dedicate hours of time putting together annual statements for them,” he said.

So Mr. Kuhn refinanced with Washington Mutual (“I sent them a copy of our tax return, and that’s all they wanted,” he said), signing on to a seven-year loan for $825,000, with interest fixed at 6.18 percent.

The loan is amortized on a 25-year schedule, however, so when it comes due in fall 2014, Mr. Kuhn will have to make a balloon payment of $775,000. (Balloon payments, typically refinanced at term’s end, are common in commercial real estate loans.) At the time of the loan, the store and its lot, the loan’s collateral, were appraised at $1.3 million.

In the intervening years, Kopp’s business has been battered. The effects of the recession have been intensified by online competition. Mr. Kuhn started noticing customers coming in with products bought elsewhere that they had browsed in his store.

“People come in with their smartphone and scan a bar code on a product that I have in my showroom, and what comes up on the phone is the three closest places and their price and then also what it is on Amazon,” he said. Revenue fell from a high of $485,000 in 2008 to $393,000 the next year. Mr. Kuhn kept himself afloat by borrowing on his credit card, mostly for personal expenses but also to buy inventory.

To rebuild sales, Mr. Kuhn cut prices on accessories, which — typical for a bike store — have provided most of his profits, Mr. Kuhn said. This lifted revenue to $473,000 in 2010, but profits fell sharply — Mr. Kuhn said his margin was just 1 percent last year, compared with 10 or 15 percent in 2008.

This has not greatly concerned him, he said: “When I get the books done at the end of the year, if I break even — if I don’t show any loss, and I show a little profit — as long as my guys are getting paid, all my bills are getting paid, and I’m getting paid, then I’m O.K.”

Mr. Kuhn adjusts his salary as necessary to keep the profit small. Also, he and his wife personally own the building and rent it to the store at a rate that exceeds their mortgage payment.

But the 12 percent interest rate on $100,000 of credit card debt has grated on him, as did the prospect of the balloon payment now three and a half years away. The solution, as he saw it, was a new 25-year loan that would consolidate the credit card debt with the $800,000 outstanding on the property and add $100,000 for working capital. He anticipated that the property’s value had risen to $1.5 million, enough to support a $1 million loan.

Article source: http://feeds.nytimes.com/click.phdo?i=c1ca37c2a41c9efaccef2eee3c2cbca6

On Economy, Raw Data Gets a Grain of Salt

Three months later, the government announced a small change. The economy, it said, actually had expanded at a pace of only 0.4 percent in the first quarter.

Instead of chugging along in reasonable health, the United States had been hovering on the brink of a double-dip recession.

How can such an important number change so drastically? The answer in this case is surprisingly simple: the Bureau of Economic Analysis, charged with crunching the numbers, concluded that it had underestimated the value of vehicles sitting at dealerships and the nation’s spending on imported oil.

More broadly, politicians and investors are placing a great deal of weight on a crude and rough estimate that has never been particularly reliable.

“People want the best information that we have right now. But people need to understand that the best information that we have right now isn’t necessarily very informative,” said Tara M. Sinclair, an assistant professor of economics and international affairs at George Washington University. “It’s just the best information that we have.”

The growth rate that the government announces roughly one month after the end of each quarter — news much anticipated in Washington and on Wall Street — has been off the mark over the period from 1983 to 2009 by an average of 1.3 percentage points, compared with more fully analyzed figures released years later, according to federal data.

The second and third estimates, announced at subsequent one-month intervals, are no more reliable. The first quarter this year offers a typical example. The government estimated the annual growth rate at 1.8 percent in May and 1.9 percent in June before issuing its most recent estimate of 0.4 percent.

Perhaps more important, the government underestimated the depth of the recession by a wide margin, initially calculating that the economy contracted by an annual rate of 3.8 percent in the last quarter of 2008. It now estimates the contraction rate at 8.9 percent. Instead of an annual growth rate of 0.2 percent from the fourth quarter of 2007 through the first quarter of 2011, the government now estimates that the economy contracted at an annual rate of 0.2 percent during that period.

The basic problem is easy to understand: More than half of the ingredients in the first estimate are based in whole or in part on projections from past months. The government doesn’t actually know how much people spend on their cellphone bills or how much companies spend on construction. It simply makes an educated guess based on past spending. Even in the third estimate, 22 percent of the data still comes from projections.

If basic assumptions start changing rapidly — business failures during a recession, start-ups during a recovery — the estimates can quickly lose touch with economic reality.

“When we most want timely information is when they’re least able to give it to us,” said Professor Sinclair. “That’s exactly when those historical patterns are breaking down.”

The Bureau of Economic Analysis, an arm of the Commerce Department, makes some efforts to warn users about these problems. It emphasizes transparency and is uncommonly open to public questions. It says it provides a valuable public service, but that the data reflects only the best available information. But policy makers, investors and the public continue to treat the data as highly significant.

“These are really not much more than educated guesses and yet the marketplace puts enormous weight on them because financial markets are high-frequency trading places based on immediate data,” said Madeline Schnapp, director of macroeconomic research at TrimTabs Investment Research.

A growing number of economists say that the government should shift its approach to measuring growth. The current system emphasizes data on spending, but the bureau also collects data on income. In theory the two should match perfectly — a penny spent is a penny earned by someone else. But estimates of the two measures can diverge widely, particularly in the short term, and a body of recent research suggests that the income estimates are more accurate.

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