Relief Coming to the Cash-Strapped?
FARAI CHIDEYA, host:
Crude oil prices are at a record high. Nationally customers are paying on average $3.16 per gallon for gas. Prices in many cities soared beyond that. Stock prices dropped this morning after a huge plunge on Friday and the U.S. dollar is near a record low against other major currencies. Economist Keith Reed is here to break down the money news. He's a reporter for the Cincinnati Enquirer and writes a finance blog for BET called "Dollar Out of Fifteen Cents". Hey Keith.
Mr. KEITH REED (Cincinnati Enquirer): Hi Farai, how is it going?
CHIDEYA: It's going good for me but not so good for the Dow, I guess. What happened? What's going on?
Mr. REED: Well, essentially you had a really significant report that came out today on the manufacturing sector. If you go back to last Friday, the Dow also took a beating. Actually we had the second worse day of trading this year for the Dow going all the way back to January. They were - investors were expecting a pretty weak manufacturing report and they got it. Manufacturing actually, the manufacturing index is actually now the lowest that it's been in the past five years. Essentially that index, any number that comes out above 50 is a positive number. That means the manufacturing sector is growing.
Anything below 50 is, means that it is contracting. Right now we stand at about somewhere in the high 40s. I think around 48 was the number that they gave today. So that was at - 48.3 was actually the number that they gave today. So that was a big negative. The other thing that's going on is crude oil. Crude oil futures are up to about $103 a barrel. That is very, very significant. It suggests that we are at the highest price that we've been at for crude oil since 1980. All of that bodes pretty negatively for the economy right now.
CHIDEYA: So some people are saying that we could reach up to, in some areas, $4.00 a gallon by this coming summer. But the price of oil at the pump is not the only thing we're talking about. What else will this affect?
Mr. REED: Well it really affects every sector of the economy. If you look out at - I mean even if you think about manufacturing. When you have a manufacturing operation you need fuel. The oil price is sort of a bell weather for commodities broadly. Commodity prices are going up in large part because investors are fleeing stocks and going into commodities trading, because when you - the dollar is so weak. What happens is you have foreign investors who think commodities are a good deal because they buy, they pay for those commodities in dollars.
Their currency if you're talking - if you look at the Euro or some other currencies around the world, are worth a lot more than the dollar is right now. So they can come in and pay for, for these crude oil contracts, for gold contracts, all of those things, driving up the price of oil. What that means for the manufacturer and ultimately the consumer, is that the transportation costs goes up. You know, filling up your gas tank for your car is expensive. Imagine what it does to you if you're a manufacturer. You've got to run a plant. You've got to put trucks on the road. That increases the cost of goods and thus that all gets passed on to the consumer.
So investors get very, very worried and it becomes a perpetuating cycle because then the price, the cost of stocks takes a beating. Once again, investors tend to flee more into these commodities that they think are safer bets and then the whole cycle starts over again.
CHIDEYA: Now what about construction. Today the Commerce Department reported that construction spending took its biggest nosedive in 14 years. How is that affecting the economy? I mean it's got to be tied into the whole, not just the mortgage crisis, but the future of the housing industry.
Mr. REED: It's the future of the housing industry if you look at what the most recent numbers are on new houses and housing starts. They are very, very low. The inventories of houses, of existing houses that are on the market I think is, probably higher than maybe you've seen in maybe the last decade, although I'm not sure exactly what that number is. But there are very high inventories of existing houses on the market. That's going to slow down, residential construction, the other things that you still have to worry about, the credit crunch. You've seen some movement on interest rates. You've seen the Fed chairman come out and - the Fed board come out and lower some key interest rates.
Credit is still very tight for big borrowers. I mean you talk about commercial builders, housing, you know, companies that build new houses. They are still having a hard time borrowing money. And that's going to also continue to work its way through the economy as well.
CHIDEYA: All right Keith, well I want you to stay with us. We're going to take a quick break and then come back for more on what you've got, our latest economic news. We're talking to Keith Reed, a reporter working in Cincinnati, Ohio and just ahead a lot of affordable housing is flat out ugly. But now a team of architects is bringing high style to low income homes. And coming up in our Bloggers Roundtable, the California State Assembly votes in its first black female speaker. And will Jacko have to beat it from Neverland?
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CHIDEYA: This is NEWS AND NOTES. I'm Farai Chideya. If you're just joining us, we've been talking economics with reporter Keith Reed. Keith welcome back and let's talk about basically how this all boils down for people on a individual level. You do a few different things, including blogging on BET finance page. You've got a blog called "Dollar Out of Fifteen Cents" and on Friday, you gave us your take on an article that compared how people are paying for their mortgages and their credit cards. What's the story?
Mr. REED: Well this was a story that was in Friday's USA Today that was written by Kathy Chu(ph). And essentially what the story says is that there's been a shift. The historical norm is that when you have people who are behind on bills, the first thing that they are going to pay for obviously is going to be what? If you - you're going to pay for your rent because you need a place to live. And what's happened is, and this is potentially a very, very bad sign for the economy and probably a sign of how desperate people are getting. A lot of people are now paying for their credit card bills faster than they are paying for their mortgage.
So I'm 30 days late on both, which one do I pay? Well the credit card bill is cheaper and I need that credit card to be able to go out and buy food because I don't have the cash. I'm going to pay the credit card bill as opposed to the mortgage.
CHIDEYA: Now what are the implications of that? Because I mean, people, we all make good and bad choices in this world. Is this a good or a bad choice for people who are doing that?
Mr. REED: I think anyway you look at it, it's a bad choice. I mean for somebody who is in that desperate situation, we all know desperate times lead to desperate measures. But if you step back and think about it, I mean, what happens is, if someone puts off paying for, paying for their mortgage, puts themselves at greater jeopardy for going into foreclosure, well what is it that brought us to this point that we're at in the economy? It is foreclosures, it's housing. To have the risk of even more people being out there in foreclosure, in default on heir mortgages because they've chosen to pay another, smaller bill, because they don't have the cash to be able to stay in that house, that potentially keeps the housing downturn and the overall economic downturn going on longer than it needs to. So it's a very, very bad sign.
CHIDEYA: When people start using what should be their backup plan as their first line of defense, what happens once they run out of that credit? I mean what happens when you reach the end of the road, particularly from the standpoint that bankruptcy law has changed over the past few years. If you're someone who has kind of played things out as long as you can and you've maxed out all your cards, you can't get any additional credit, what's the next step?
Mr. REED: You know, I think you just hit on what the real problem is here, is that eventually that credit does run out. And so many people have been using credit. I think this is really emblematic of some of the things that we saw - the housing market, again, being the thing that started this big problem. But if you step back from it, it wasn't just the housing market, it was credit. People were getting mortgages that were actually bigger than the actual value of the house.
If you went out and bought a house that was $130,000. You took out $170,000 loan. So you got a little bit cash on top of that. And people were spending that cash and that kept the economy going. Well, now it's all coming through. You can't borrow any more on the house. You can't refinance the house any more. So what do you do? You turn to your credit card and rates on cards have been coming down because of some of the action that the Fed has been taking. So the credit is still plentiful and so what do you do? You don't have the cash. You go out and max out the card.
Now you are in a very tough situation because A, you can't borrow anymore, because you're maxed out on your credit card and your mortgage is in default. Well what happens? Then you start to see that cold(ph) that the housing market had moving to other sectors of the economy. And if you looked at what happened - we talked earlier about what's going on, on Wall Street, look at what's happened. It's moved from housing stocks, from manufacturing stocks, into the financial services sector. That really, really scares investors because these companies that issue credit cards are now having the same problems collecting on those bills that the mortgage lenders were having.
CHIDEYA: So, there are a lot of different things that you hear over time about how to carry yourself in the world financially. One of them is have an emergency pot of money that can get you through you know, I've heard three months, three months of expenses, some people say six months. Other is, pay off all your credit card bills. So if you're in a position where you're really, you've spun out the rope in terms of overextending yourself with credit and you get a little extra money. Should you save it for an emergency fund or should you pay off your bills if you can only do one?
Mr. REED: If you can only do one, I think the way you have to go is, you've got to start to put a little bit away for that rainy day because you still have to, you still have to be able to live. The unfortunate thing again is that that puts your credit at risk. But at the end of the day, I mean you still got to get to work everyday. You still got to feed your kids. You still have to have a place to live. So if you're in that absolute, positive, dire situation, then I think you err on the side of taking care of yourself so that you're in a position to go out and get another job, to work another, to have the lights on for another day and be able to bring in some more income to start to take care of those bills.
But the big thing is, live within your means. If you're not in a position where you've over extended yourself, don't get in that position. If you don't have the cash, don't pay for it with credit. I mean, you know, some of these things that are very, very commonsense that people have lost sight of. If you can't afford it, just don't buy it, don't pay for it.
CHIDEYA: What about the upside? At times of trouble, there are always people who make money because they either find a service for the people who are in trouble or a way to buy things at a cut rate like homes that have gone through foreclosure. Who is in a position to make money during this very difficult time?
Mr. REED: Anybody who is already flush with cash. If you're talking about investor, again foreign investors can do very well in the United States because many commodities here are trading at lower levels because of the weak dollar. You've also got you know, real estate assets that are down. If you're coming in with, from the U.K. with Euros and you want to pick up real estate or assets in the United States, it's a good time to do it. The same thing for people coming from China and even from Japan.
Domestically, it's a very good time if you are a renter. If you are renting a place and you've got some money saved up and you've got enough to make a down payment, interest rates are lower than they've been in probably the last three or four years. Right now if you can go out - and there are houses, I went to look at a home here in Cincinnati, that unfortunately it's a short sale, meaning that the person is selling the place for less than it's worth. But it would be a great deal for me or anybody who decide they want to buy the place, because it's you know, that asset is sitting out there and they have to take some money for it, otherwise they are going to end up in foreclosure.
The bank wants out and the borrower wants out. So if you're renting and you've got some cash to put down a down payment, your credit's good, it's a really good time for you.
CHIDEYA: All right Keith, thanks again.
Mr. REED: Thanks Farai.
CHIDEYA: Keith Reed is a reporter for the Cincinnati Enquirer and he blogs for BET's finance page. His bloc's called "Dollar Out of Fifteen Cents" and he joins me from member station WGUC in Cincinnati, Ohio.