US Employment. In the past the Fed has predicted that the natural rate of unemployment is around 4.5-5%. This natural rate of unemployment is a combination of frictional and structure unemployment which is present in an efficient economy, which is in expansion, created by labor and resource meeting an equilibrium point. The last unemployment numbers came in today, beating previously conceived notions and analyst forecasts, posting unemployment of 3.5%. More importantly, we saw leisure and hospitality post an increase in 45,000 jobs this last month, which instills confidence that consumers have started to spend more. It seems that the generally perceived climate of the economy, being that we are nearing a recession, is quickly turning suit. The numbers don’t lie, and they seem to show that this trade war is affecting the global economy, much more than it is our domestic economy. although PMI is posting under 50, with a steep decline in business confidence over the last year, we are seeing a booming service industry, with newly instilled confidence in consumers. November posted 266,000 jobs, beating analyst forecasts of 180,000 jobs, by over 47%.
Financial Obligations Ratio. In recent years consumer debt has been increasing at an alarming rate. As of 2018, total consumer debt reached $13.3 trillion which is mostly comprised of $291 billion in personal loan debt, $834 billion in credit card debt, $ 1.27 trillion in auto loan debt, $1.37 trillion in student loan debt, topped off with $9.4 trillion in mortgage debt. These new extreme debt levels are worrisome when you consider that U.S median household income has barely grown over the last ten years. So, how does all of this look for the average consumer? Each quarter the Federal Reserve publishes the Financial Obligations Ratio (FOR). This ratio tracks how much disposable income a family has compared to the amount of debt they owe. The Fed accounts for what percentage of household income is being spent on repaying debts, for example; rent, auto loan payments, property tax, mortgage payments, credit card payments, and personal loan payments. The FOR can be used by the Fed and by firms to gauge how financially secure the average consumer is as well as the stability of the overall economy. Unfortunately, there are several issues with the FOR. The Fed publishes the FOR irregularly, sometimes months after the end of the quarter, revises the data without notice or any clear criteria, and doesn’t publish regional or demographic data so the ratio is extremely broad. While researching the Financial Obligations Ratio we also found that it is not entirely reflective of the average American family and that the data may be skewed by the ultra-rich. As of Q2 2019 the FOR stood at 15.03%, which shows that many consumers are in a fairly strong financial position, but unfortunately, we know that is not that case for many Americans. Experian found that the average consumer debt per adult is $61,554 and that 74% of consumers die before they can pay off their debt. This is reflective of a society that is heavily burdened with debt, but there are measures you can take to help manage this. The debt to income ratio is a tool you can use to assess your financial security. Simply add up all of your monthly debt like mortgage/rent, car payment, student loans, credit card minimum payments and divide the total by your gross income, you can find you approximate annual income on you most recent w-2 or by looking at your gross YTD earnings found a paystub from December. You should aim to have a debt to income ratio below 30% to be in a strong position financially. If you are above this figure, then you should consider increasing your monthly payment amounts to pay off debts sooner or consolidating your debt.
CFA. You've probably heard the term CFA. It stands for Chartered Financial Analyst. It's widely known as arguably the most prestigious and most respected qualification/designation in the world of finance. Not just anyone can hold the title. At the completion, you must have a bachelor's degree, four years of work experience, or some combination of education and work experience that equals four years. It’s a three-exam qualification, and the CFA Institute recommends 250 hours of study time for each exam. Candidates report a figure closer to 300 hours, however. Due to the way it works, you sign up for the exam in December and take it in Jun (or vice versa), and only have six months to study. In addition to this, its widely known as being incredibly difficult to pass. Below are the pass rates from the June 2018 exams.
Level 1: 43%
Level 2: 45%
Level 3: 56%
These are sequential, meaning that 43% of people go on to take #2, and of those people only 45% pass. Out of that 45% that go onto level 3, only 56% finish. Of all the people that enroll to take the exam, less than 12% finish. This is exactly why people decide to do this. Because it is so hard, it carries a lot of weight, and signifies to anyone that sees your resume that you work hard, you're disciplined, you understand a multitude of financial topics, and you would be a valuable asset. It will help immensely in job searches, and puts you over the other candidates. Topics include money management, financial ethics, asset classes, investment tools, portfolio management, economics, corporate finance, and more.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.