THE U.S. ECONOMY’S REARVIEW mirror darkened last week. Real growth of gross domestic product in the second quarter, previously reported at an annual rate of 2.4%, will likely be halved to just 1.2% when the next estimate is released Aug. 27

The main reason: Imports soared in the second quarter by much more than originally anticipated, led by that well-known powerhouse, China.

To say this is not to imply, as some have, that imports are a drag on American prosperity. But since the “D” in GDP stands for “domestic,” we are tracking only what is produced in the U.S.

 Imports, by definition, are produced abroad. And there are no data that directly track domestic production. So one strategy used by the Bureau of Economic Analysis, the Commerce Department agency in charge of these numbers, is to subtract imports from figures on domestic sales in order to get at domestic production indirectly.

What in effect happened, then, is that a large portion of sold products that were thought to have been produced here were actually imported. Hence the hit to GDP growth (Source: Barrons Online).

Ten years ago, one of America’s leading economists delivered a stinging critique of the Bank of Japan, Japan’s equivalent of the Federal Reserve, titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” With only a few changes in wording, the critique applies to the Fed today.

At the time, the Bank of Japan faced a situation broadly similar to that facing the Fed now. The economy was deeply depressed and showed few signs of improvement, and one might have expected the bank to take forceful action. But short-term interest rates — the usual tool of monetary policy — were near zero and could go no lower. And the Bank of Japan used that fact as an excuse to do no more.

That was malfeasance, declared the eminent U.S. economist: “Far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism.” He rebuked officials hiding “behind minor institutional or technical difficulties in order to avoid taking action.”

Who was that tough-talking economist? Ben Bernanke …

(Source:  Paul Krugman)

Question:   

My wife and I have a newborn daughter.  We intend to save for her college education in a Section 529 plan because of its incredible benefits.  But, we do not wish to invest all her college savings in a Section 529 Plan because of its restrictions on the use of withdrawals.  Our family income is $140,000 and we can save about $10,000 more per year.  Is there some other place to invest college money in addition to 529 plans?

Answer: 

Sure, a Roth IRA.  The “R” in IRA stands for retirement, but because you can withdraw contributions at any time tax- and penalty-free from a Roth IRA, the account can serve as a terrific tax-deferred college-savings plan. Say you and your spouse each stash $5,000 in a Roth starting the year a child is born. After 18 years, the dual Roth IRA’s would hold about $375,000, assuming 8% annual growth. Up to $180,000 — the total of the contributions — can be withdrawn tax- and penalty-free and any part of the interest can be withdrawn penalty-free, too, to pay college bills.

Feel free to contact me if you or someone you know has this type of situation.  Financial Planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.

“Be led by your dreams, not pushed by your problems.”

Author Unknown

1. Autism Diagnosis by Brain Scan – Scientists from the Institute of Psychiatry (IoP) at King’s College London have developed a 15-minute MRI brain scan that can identify adults with autism with over 90 per cent accuracy. The method could lead to the screening for autism spectrum disorders in children in the future.
Source: KurzweilAI

2. A System for Connecting Brains to the Outside World – Dr. John Donoghue, a professor of engineering and neuroscience at Brown University, has studied how human brain signals could combine with modern electronics to help paralyzed people gain greater control over their environments. He’s designed a machine, the BrainGate, which uses thought to move objects.
Source:  NYTimes

FAREWELL INTERNS!

Aki Terasaki’s last day is August 19—he will be returning to Columbia University for his junior year! Thanks for all of your hard work Aki and good luck in all of your future endeavors!

Samanthia Hirsch in the Johnstown office starts classes for her sophomore year at St. Francis University (Loretta, PA) on Monday, 8/23/10.  Samanthia expects to return in December at college break. Good luck Samantha and thanks for all of your work during the transition of the Johnstown office!

 DEAR BEN (YES, YOU, MR. BERNANKE),

Thanks for that confusing message last week, which shaved nearly 4% off our stock portfolios. I know, I know, you were trying to calm a market worried the U.S. is sliding back into recession when you promised to buy more government debt.

But, dude, you’re scaring people.

For a start, your plan won’t help our slowing economy much. The money you’re reinvesting in Treasuries is coming from mortgage securities in the government’s portfolio that have been paid down, which is roughly $20 billion a month. You aren’t injecting new money into the markets, just stalling the ebb in previously provided funds.

Interest rates already are low, and as Morgan Stanley argued, the sum is trivial.

What mattered was the symbolism, and by vowing to prop up the economy, you are confirming investors’ nascent fears that our recovery has weakened enough to require propping. Maybe this was your way of reassuring us you’re on the case. But “a half-measure meant to instill confidence actually undermined it,” says BTIG chief market strategist Mike O’Rourke. By the time you and Anna settled down to watch “So You Think You Can Dance,” risky assets from crude oil to copper were selling off, and the dollar was rebounding in a flight to safety.

On top of that, you set off a Treasuries rally that drove the yield on 10-year notes to a 16-month low below 2.7%, while that on 2-year Treasuries dipped to 0.513%, the lowest ever. Investors have been sniffing anxiously for signs the U.S. is entering a Japan-like era of puny yields and stagnant growth, and slumping Treasury yields reek of deflation.

On the brighter side, I suppose your bias has shifted from monetary tightening toward neutral, so we can all quit worrying, at least for now, about when the Federal Reserve must raise interest rates. But we’ve been far more distressed lately about staid growth than rising rates. Just last week, Cisco Systems (ticker: CSCO) exacerbated those fears when it told investors to expect slower revenue growth this quarter, and JPMorgan cited deteriorating computer orders in downgrading Intel (INTC).

Already, this has been the summer of indifference and indecision, with the Standard & Poor’s 500 index flip-flopping desultorily between 1020 and 1120. Now, the crowd of fence-sitters is swelled by the suspense over what you might pull next. You won’t speak publicly until the Fed’s late-summer annual retreat at Jackson Hole—and even then you might not clarify things much, given your fondness for indirect sentences and shaded subterfuge. So what are we to do until then?

THE DOW JONES INDUSTRIAL Average ended its three-week winning streak and fell 350, or 3.3%, to 10,303. The Standard & Poor’s 500 ceded 42 points and has retreated six of the last seven sessions. The Nasdaq Composite Index gave up 115, or 5%, to 2173, while the Russell 2000 fell 41, or 6.3%, to 609.

Clearly, the economy is slowing anew after its government-sponsored rebound. Volatile weekly unemployment claims increased last week, and retail sales improved a ho-hum 0.4% in July from June. The global- growth glow dimmed as the Chinese imported goods at a less giddy pace.

A lousy economy doesn’t always mean lousy corporate profits. Per-share earnings of S&P 500 companies are up 84% from a year ago, or 22% excluding financials. Revenues are up 6%, or 16% at more global companies.

Stellar profits are made possible by severe cost-cutting and buttressed margins. That’s why data last week showing U.S. productivity wilting 0.9% from April to June, its first droop in nearly 18 months, was worrisome.

“Productivity is slowing, and corporations have little fat left to trim on the cost side,” writes Morgan Stanley strategist Gerard Minack. If margins stop growing, will projections for 2011 earnings have to come down?

Uncertainty about jobs, consumer zeal, corporate margins, monetary policy and tax changes will cap any stock rallies in the short term. But downside damage could be limited too, not least because stocks look reasonable compared to bonds.

Goldman Sachs, for one, thinks there is a “meaningful probability” of another recession, but pegs the odds at 25% to 30%.

Still, “several components of economic activity that usually help drag the economy down during recessions have already suffered large hits and are unlikely to fall much further, if at all,” argues economist Ed McKelvey (Source: Barrons Online).

U.S. Stocks and Foreign Stocks and both decreased this week while Bonds increased.  During the last 12 months, BONDS have substantially outperformed stocks (which is a change from previous weeks). 

Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized.  Assumes dividends are not reinvested.