U.S. Consumer

• The State of Consumer Credit in America Valeo Financial Advisors
• Where Are Households in the Deleveraging Cycle? Richmond Fed

U.S. Economy

• How businesses in America have fared in the last few years The Economist
• Retail sales in U.S. rise, below forecasts | Bloomberg
• Consumer price index, compared with a year ago, is 2.9 percent higher Chart: St. Louis Fed

Federal Budget

• How $3.7 Trillion is Spent. Interactive look at the proposed U.S. Federal Budget The New York Times
• Congress sends payroll tax cut bill to Obama Yahoo! Finance

Europe

• So, what would your plan for Greece be? You decide via a “choose your own adventure” style path Crooked Timber

Miscellaneous

• 14 ways an economist says “I love you” Fosslien

During the Great Recession, total consumer credit outstanding declined dramatically for the first time since the early 1990s. Consumer credit, covers most short and intermediate-term credit extended to individuals, excluding loans secured by real estate. This type of credit includes both revolving credit, such as credit cards, and non-revolving credit, such as auto, boat, trailer, mobile home and student loans.

At the outset of recessions consumers typically scale back the amount of credit they carry either deliberately or by defaulting. As the economy recovers people collectively have tended to increase the total amount of credit they carry. In the first chart below, the growth in the amount of credit, from the level of credit observed at the end of the recession, is illustrated.

As of the end of 2011, the economy of the United States has been out of recession for 2.5 years (30 months as depicted in the first chart). Usually thirty months post-recession the total amount of consumer credit has expanded beyond the level at the end of the recession. In fact, total consumer credit expanded in 8 out of the previous 10 instances, prior to the Great Recession. The two exceptions were the economic recoveries of 1981 and 1991. During the early 1980s, the economy slipped back into recession, but in the early 1990s the economy was able to avoid a double dip recession and credit eventually expanded.

If the post recessionary period is extended from 30 months to 48  months total consumer credit has not failed to reach the level of the month immediately following the end of the recession. In order for this not to occur this time total consumer credit would have to reach June 2009 levels by June 2014.

The total amount of consumer credit outstanding at the beginning of the observation period (1948-2011) was dramatically lower than today. In order to determine the average amount of consumer credit per person only civilians that are not institutionalized and at least 20 years or older are assumed to have credit. All individuals that meet this criteria are included regardless of whether they have outstanding consumer loans or not.

After adjusting for inflation, at the beginning of 1948 the average person had $1,344 of consumer debt. (All dollar amounts in the per person calculations are in today’s dollars to account for inflation). The amount of consumer debt steadily increased until the recession of 1970 when the average amount of consumer credit outstanding was $6,303. After only marginally expanding for a decade, during July 1980, the average amount of consumer credit per person permanently increased beyond the previous, January 1970, peak.

During the period known as the Great Moderation (roughly the mid 1980s until the middle part of the 2000s) the amount of credit per person expanded almost without fail. The only time in which credit decreased was during and immediately after the early 1990s recession.

Since the depth of the most recent recession, September 2008, the amount of consumer credit outstanding per person decreased for 33 straight months. During June 2011 consumer credit finally expanded, but it was not until November that the expansion was significant.

The decrease in the total amount of consumer credit outstanding is likely a function of a multitude of factors. A few of which might be increased defaults, individuals choosing to carry less debt and demographics.  As many individuals in the baby boom generation have either retired or plan on retiring in the next decade many may be choosing to carry less debt than they did during the middle of their working careers during the 1980s and 1990s.

The total amount of consumer credit in the economy is important because personal private consumption accounts for well over 70% of American gross domestic product. Consumer credit allows people to leverage the amount of assets they have and spend additional amounts. The trend of consumer credit in the U.S. will be well worth watching as the decade progresses.

Personal Finance

• Organize your financial life: to keep, or to shred, that is the question. Valeo Financial Advisors
• Is the 4% Rule Still Viable? Wall Street Journal
• Building Your Financial Dream Team Wall Street Journal

U.S. Economy

• Feds, states, banks agree to $26 billion mortgage settlement USA Today
• America’s labor market: a churn for the better The Economist
• The 10 Fastest-Growing Jobs in the U.S. Yahoo! Finance

Saving

• Take America Saves Week to heart! Scoop San Diego
• Gen Y Invests More Than It Thinks Wall Street Journal

Mixed Media

• Trailer for the documentary film, Confidence Game, about the final week of Bear Stearns Market Folly

The beginning of the New Year is a great time to organize and purge many of your financial files.  We are often asked which documents clients should keep and which they should shred. Below you will find some guidance.

Tax Returns

• While there are exceptions, we recommend clients keep tax returns for at least 7 years, preferably in both paper and electronic form.
• The IRS minimum is three years, but they can go back seven years if you claimed a loss from worthless securities.  Of course, if you did not file a return or if you filed a fraudulent return, there is no limit to how far back the IRS will expect you to produce records.
• More details on tax recordkeeping requirements for individuals are available in IRS Publication 552.

IRA Contributions 

• Any year that you make a nondeductible contribution to a traditional IRA, you must file Form 8606 to document those contributions.
• Then hold on to all of those 8606 forms until you withdraw all the money from your IRA, so you have proof of these “after-tax” contributions when you start to take out the money in retirement. 

Investment Records

• Keep your monthly statements until you receive and reconcile your year-end statement.  If your year-end statement is accurate, then you can toss the monthly statements.  Keep the year-end statements in your tax files.
• You should keep records of your stock and fund purchases, for as long as you hold those investments.  When you ultimately sell the shares, you will need evidence of the price paid (your tax basis) and the date of purchase to settle up with the IRS.
• Since 2011, brokerage firms are required to track the tax basis of new stock purchases for you, and beginning this year, mutual fund companies must do the same.  You are required to maintain record of all cost basis records before then.

Home Improvement

• Keep receipts for major home improvements for at least three years after you sell your home.
• You may want to show potential buyers how much you have spent to upgrade the property, and you may be able to use certain home-improvement expenses to lower any tax bill you might have on your home-sale profits.
• It is unlikely you will have to pay taxes on the sale of your principal residence unless you have lived in it for less than two years, you rented out part of it, or your profit exceeded $250,000 (single), or $500,000 (married).

ATM Receipts and Bank-Deposit slips 

• Shred your ATM receipts and bank-deposit slips as soon as you reconcile with your monthly statement.

Paystubs 

• Shred as soon as you receive and reconcile with your W-2 for the year.

Bills

• Shred paper copies of your credit-card, utility, phone and cable bills as soon as the next month’s bill, acknowledging your last payment, arrives (unless you need to keep the bills for tax purposes – e.g. if you deduct home-office expenses).

Global Economy

• Unemployment around the globe. Chart: Valeo Financial Advisors
• A mere 3.4% of Europe’s products and services are sold via the web, compared with 4.6% in the U.S. The Economist
• Europe’s economies before and after the recession. Chart: The Economist

U.S. Economy

• How this recovery compares to the previous five. The missing GDP. Financial Times Alphaville
• Americans spent $2.6 trillion on healthcare in 2010, a staggering 18% of GDP The Economist
• The unemployment rate declined by 0.2% in January to 8.3%; the rate has fallen by 0.8% since August. Chart: St. Louis Fed
• The CBO outlook for America’s budget deficit. Chart: The Economist

Housing

• Another new record low in 30-year mortgage rates Yahoo! Finance
• Mortgage standards remain very tight. Graphic: San Francisco Fed
• For Third Straight Month, Home Prices Dropped In November NPR

Financial Planning

• Become your kid’s mortgage lender CNN Money
• 401(k) Changes Could Save You Money The Wall Street Journal

Today the U.S. Bureau of Labor Statistics (BLS) announced that, “total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent” in the United States. Since August the unemployment rate has dropped by 0.8%. While 8.3% is still high, the rate is headed in the right direction as it has steadily declined over the past year.

The last recession was experienced globally and increased the ranks of the unemployed in numerous countries. To put the United States jobless rate into perspective, the chart below depicts the unemployment rate for 12 other nations. As the global business cycle peaked in the middle of 2007 the rate was below 9% in all 13 countries.

Since October 2009 when the U.S. rate topped out at 10.0%, the economic recovery has been uneven around the globe. The labor market has improved in Canada at close to the same pace as it has in the U.S. In Germany the unemployment rate has been coming down rapidly since 2009. In South Korea, Japan and Australia, the unemployment rate did not increase too much to begin with and has remained subdued. The notable outliers include Portugal, Ireland, Greece and Spain. The labor markets in all four nations continue to suffer and the ranks of the unemployed continues to swell.

Source: BLS

U.S. Economy

• Some surprising figures about where income in America comes from Valeo Financial Advisors
• Foreclosures made up 20% of U.S. home sales in 3Q CNN Money

Global

• Globalization – Which Countries Make Money Off the iPad? Yahoo! Finance
• World economic growth is originating almost exclusively from the emerging world. Chart: The Economist
• Spain, Italy among 5 euro nations cut by Fitch Bloomberg
• A short history of low rates, chart from Nomura

Personal Finance

• 5 Personality Traits That Lose You Money Forbes
• Why Brokers Still Needn’t Put Clients First Smart Money
• How long should you keep tax records? IRS
• Which states have a state inheritance and/or state estate tax? Interactive Map: Forbes

Markets

• Why aren’t companies paying out more in dividends? Barron’s
• Fed says it doesn’t plan to raise its benchmark interest rate until late 2014 Yahoo! Finance

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Over the past 65 years the amount of income received by Americans, as a whole, has generally increased over time. The source of this income, however, has varied a great deal. The variation speaks volumes about the underlying opportunities available to earn or receive different types of income in America. The sources of income might also play a large part in determining the pace of economic growth.

Today, the Bureau of Economic Analysis released the Q4 2011 Personal Income and its Disposition report. In the data lie clues as to the economic health of individuals in the U.S. and the potential of the U.S. consumer to drive future economic growth. With the onset of the Great Recession in 2007, income per capita plunged. While it has began to recover after the recession ended, it has yet to reach the previous peak.

While the total amount of income received certainly merits attention, the source of this income provides a deeper understanding of income in America. Over time the statistics read like a narrative and reflect how Americans historically have received income and what it has meant for the U.S. economy.

The first two income charts below reflect the source of American income as a whole. These charts illustrate that, since 1970 when income received via compensation for employment peaked around 74%, the income stream for Americans has broadened. The source of income for American citizens can be broken down into three distinct periods. Each era is defined by what the second largest stream of income is for individuals. (i.e. the highest point of any given year in the Income 2 of 2 chart.)

1. 1947 – 1967 - Proprietor income. During the post World War II period, the U.S. economy went through a great boom and business owner income accounted for a great amount of overall American income. During this period small businesses still reigned supreme.
2. 1968 – 2008 – Personal income on assets. During the first half of this period, income on assets was roughly in line with proprietor income and transfer receipts as the  U.S. left the gold standard, went through a series of recessions (1969-1970, 1973-1975 and 1980-1982), and battled high inflation. Over the second half of the period, beginning in 1981, income on assets began to increase rapidly as a source of income. A reduction in income and capital gains taxes in the mid 1980s and booming capital markets were both responsible for the change in the degree to which Americans relied on income on assets.
3. 2008-? -Current transfer receipts. Once the Great Recession hit at the tail end of 2007, transfer receipts became the second largest source of income for Americans. This occurred for multiple reasons. First, income on assets as a source decreased as interest rates plunged. Second, the front end of the baby boom generation began to draw on social programs such as Medicare and Social Security for the first time. Third, unemployment and other social programs that act as shock stabilizers during economic downturns kicked in.

Personal current transfer receipts, from above, broken apart into the six major sub components.

Markets

• 2011 Equity Returns: A Global Perspective Valeo Financial Advisors
• Historical S&P 500 sector weighting charts and tables Bespoke
• A chart of long term interest rates back to the founding of the U.S. shows that rates have rarely been lower than today Big Picture

Financial Planning

• Secrets of the 401(k) Millionaires Wall Street Journal
• Don’t Let Grown Kids Ruin Your Retirement Wall Street Journal

Economy

• Sales of existing single-family homes rose from November to December Cleveland Fed
• Industrial production index rose 0.4 percent in December following 0.3 percent decline in Nov. St. Louis Fed
• Unemployment claims at 352,000, fewest since 2008 Yahoo! Finance

Stocks in the United States, as measured by the S&P 500 index, ended 2011 in positive territory. The 2.1% return for the year was roughly equivalent to the dividend yield from the index. This means, that without the dividends from the companies in the S&P 500, the index would have been flat for the year.

The low single digit return on the S&P 500 meant that the index was one of the best performing country indexes in 2011. One of the only other major country equity indexes to eek out a gain in 2011 was Malaysia. Below is a chart of a majority of the larger equity markets from around the globe.

A handful of nations with very small equity markets managed to end the year in positive territory, including but not limited to, Venezuela, Pakistan, Jamaica and Botswana. These indexes are all dominated by only a few companies and therefore were not included.