Category: How the Economy Works

The Dow Jones Industrial Average is on its way to posting another triple-digit gain Monday, as more encouraging data on the housing market boost hopes that happy days are here again for the U.S. economy.

Tell that to state governments.

State tax revenues have been in a freefall over the last year -- the steepest drop in tax collections seen in more than 50 years. Overall state tax revenues dropped 10.7% in the third quarter, compared to the same period a year earlier, in the 44 states providing tax data to the Nelson A. Rockefeller Institute of Government at the State University of New York. (Find the complete report here.)

Seems like every day there's new data out that suggest the U.S. economy is sputtering back to life, but one important driver of economic growth -- new home construction -- continues to hamper the recovery.

Housing starts tumbled 10.6% in October to a seasonally adjusted annual rate of 529,000 from a month earlier, the Commerce Department reported. The number startled economists, who'd forecast a 1.7% increase in new home groundbreakings. The disappointing October report followed September's 0.5% increase, which also came in well below economists expectations.

Why is new home construction so important to the economy? Historically, housing starts are among the first indicators to show strength in the early stages of an economic recovery. (Housing starts are the total number of new housing units -- single-family homes and multi-family apartment buildings -- that have begun to be built in any given period.)

Apparently consumers are still willing to open their wallets, despite the fact so many are out of work. Retail sales in October rose 1.4%, outstripping the 0.9% increase economists had expected.

The retail-sales report reflects federal-government estimates of all receipts from retailers that sell durable goods (think cars, furniture, washer and dryers) and nondurable goods (your food, gasoline, party supplies, gardening materials). Today's U.S. Census Bureau report showed a surprising jump in auto sales last month, despite the expiration of the federal government's "Cash for Clunkers" stimulus program. Even more encouraging, if you exclude cars, retail sales were up 0.2% in October, rising for the third consecutive month.

Why do retails sales matter? Well, investors keep close tabs on retail sales because they have an immediate impact on stock prices. As I've noted in other blog posts, consumer spending makes up about 70% of the U.S. gross domestic product (GDP) -- the broadest measure of America's economy. Since consumer spending plays such a large role in GDP, retail-sales data help investors determine whether the economy is slowing down or picking up.

The value of U.S. dollar sank to a 15-month low against other major foreign currencies this week, depressed by strong economic reports out of Asia, and worries about high unemployment and persistently low interest rates in the U.S.

Most people don't bother to think about how strong or weak the U.S. dollar is until they start planning a trip overseas. But a weak dollar can affect prices right here at home, on everything from how much you pay at the pump to all those foreign-made gifts you'll be buying this holiday season.

When the dollar is strong, U.S. consumers benefit because it lowers the price of products made in other countries. (It takes fewer dollars to buy the same products, driving down the total cost.)

The health-care reform bill squeaked through the House this weekend and now all eyes turn to the Senate, where the legislation faces an even tougher battle.

The uninsured would be the clear winners under the proposed health-care bill, by offering subsidies to pay for private insurance and making it easier for them to shop for affordable coverage. Those who already have insurance would benefit as well, with the potential for lower out-of-pocket costs and government efforts to stop to insurance companies from denying or dropping coverage when people get sick.

What's unclear is what role the health-care reforms would play in helping to reduce "job lock," where workers stay in their jobs -- even if their bosses make them miserable or their wages stink -- because they can't afford to lose their health-care benefits. Workers with families, and particularly those who have a member of the household with a chronic illness, are under even more pressure to keep their current jobs. A change in employer could result in months of lost coverage before a worker becomes eligible for the new company's health-care plan, even if the plan agreed to cover an individual with a pre-existing condition.

It's not just workers with families or chronic illness who feel trapped by their need for employer-provided health insurance. Fear of losing health benefits is one of the key reasons workers put off retirement, according to this study by AARP.

The number of workers receiving pink slips each month is finally beginning to tail off, but companies plan to keep laying off workers despite signs of a pick up in the U.S. economy.

Private-sector employers cut 203,000 jobs in October, after eliminating 227,000 jobs the previous month, according to a report out today by payroll giant Automatic Data Processing Inc. and Macroeconomic Advisers LLC, a consulting firm that specializes in economic forecasting.

On a more encouraging note, U.S. companies said they were planning fewer layoffs going forward. Planned layoffs at U.S. firms fell to 55,679 in October, down from 66,404 a month earlier, according to outplacement-consulting firm Challenger, Gray & Christmas Inc. The bulk of the layoffs are expected to come from the auto industry, non-profit firms, and state and local governments.

Law makers are closing in on approving an extension of federal unemployment-insurance benefits. The bill would provide an extra 14 weeks of benefits for people who've exhausted their benefits. Those who live in states where the unemployment rate is more than 8.5 percent would get up to 20 weeks of extended benefits.

It's tough to argue that extending unemployment benefits is a bad idea at a time when more than 15 million people are out of work. The extension would come at a time when as many as 7,000 people a day are exhausting their unemployment benefits.

But that doesn't stop some people from trying.

Sales of newly built homes fell in September for the first time in five months. New single-family home sales dropped 3.6 percent from the previous month, according to the U.S. Commerce Department. It was brow-popping news to market watchers, who'd been expecting sales to increase by 2.6 percent in the month.

Now, wait a minute. Weren't consumers and investors (oh, and yes, real-estate agents) just cheering reports of a surprising leap in existing-home sales? The National Association of Realtors announced Friday that sales of single-family town homes, condominiums and co-ops jumped 9.4 percent in September. The rise in home sales, almost double the increase expected, had people speculating that the long-awaited housing-market rebound had finally arrived.

Then boom ... new-home sales tank. What happened?

The U.S. government is close to maxing out its credit limit. Again.

This week the U.S. Treasury Department will hold a slew of bill and bond sales, pushing the amount of debt the government owes precariously close to the federal debt ceiling of $12.1 trillion. The debt ceiling is a self-imposed limit on the amount of money the country is permitted to borrow. As of today, the national debt stood at a $11.9 trillion . Trillion. With a "T." That's $110,135 for every U.S. taxpayer. And you thought your credit-card bills were bad.

It won't be the first time the government has maxed out its credit limit. Congress has boosted the ceiling 76 times since 1960, twice in the last two years alone. Lawmakers last raised the ceiling in February of this year.

Another closely watched measure of the health of the U.S. economy --the Conference Board's index of leading economic indicators -- is out this morning and the news looks good. The leading indicators, designed to forecast the direction of the economy (that's where the "leading" part comes in), rose in September for the sixth straight month. The index jumped 1% in the month, after climbing 0.4% in August.

September's increase was a bit higher than expected by economists, who had anticipated the index would rise just 0.8%. The Conference Board's index of leading indicators is one of its most influential reports among investors, who look to the data for guidance on whether the economy will get better or worse in the months ahead. The higher-than-expected rise in September's reading, and the consecutive string of increases in the index, have got to be a sure sign the economy is headed in the right direction, right?

Hold the phone.