Consumers: The 21st Century Weeble

NEW YORK (CNNMoney.com) -- Surprise! It appears that the death of the American consumer, just like Steve Jobs, has been greatly exaggerated.

Although the Commerce Department reported Friday that personal income in July fell a greater than expected 0.7% as the effect of the tax rebate checks began to fade, consumer spending was still up a slight 0.2% during the month, in line with economists' forecasts.

Talkback: Have you cut back on spending? If so, on what?

The U.S. consumer has had to endure a ton of economic headwinds so far this year: declines in housing prices, tightened credit standards, rising energy and food costs, and finally a net loss of 463,000 jobs and a rising unemployment rate.

Nonetheless, consumer spending, which remains the biggest engine of growth in the economy, has yet to dip in the past few months. The consumer reminds me of those old Weeble toys from the 1970s: they wobble but they don't fall down.

Some retailers have had more upbeat guidance than expected in the past few days. Shares of luxury retailer Tiffany & Co. (TIF) and the lower-end jewelry chain store company Zale (ZLC) both surged yesterday after the companies boosted their profit forecasts for the coming quarters.

Womens' clothing company Talbots (TLB) and athletic equipment and apparel chain Dick's Sporting Goods (DKS) also have upped their earnings targets for this fiscal year in the past week. So clearly, some retailers are holding up in these uncertain times.

Still, it's hard to deny that the consumer is finally starting to show some signs of strain. And there were some troubling details in the July personal income and spending report as well.

For one, spending in July was down from the stimulus check-fueled 0.6% increase in June. And with the rebates now mostly spent, it may be tough for consumers to keep spending as much as they did earlier this summer.

Even more worrisome is that it appears inflation is a big reason behind the increased expenditures in the first place - real spending, when chained to 2000 dollars, fell 0.4% in the month. That follows a 0.1% decline in real spending in June.

And despite all the concerns about inflation, some consumer companies are being forced to cut prices in order to entice people to spend.

Personal computer maker Dell (DELL, Fortune 500), for example, reported better-than-expected quarterly sales on Thursday. But its profits surprisingly slipped as the company offered discounts to try and stimulate demand...not to mention fend off tough competition from top rival Hewlett-Packard (HPQ, Fortune 500).

Finally, one of the biggest problems buried in the personal income and spending report was this little nugget: Personal savings, as a percentage of disposable personal income, was just 1.2% in July, down from 2.5% in June.

In times like this, it's certainly a concern that consumers are unable, or unwilling, to put more money aside for the proverbial rainy day, retirement and what have you.

So even though the consumer has been - say it with me again - resilient, we could be facing a dip in spending down the road if pricing pressures don't continue to recede and the economy doesn't sputter back to life.

Anyway, I hope all my readers enjoy the Labor Day weekend! The Buzz is taking a slightly longer one and will be back on September 3. 

Retail Sales

NEW YORK (CNNMoney.com) -- Retail sales dropped slightly in July, meeting economists' expectations that spending would decline following the end of government stimulus payments.

Retail sales were $384.6 billion in July, matching the forecast of a 0.1% drop from economists surveyed by Briefing.com. Sales growth numbers for June were upwardly revised to 0.3%, for total sales of $385.1 million.

Sales excluding autos rose 0.4%, slightly below the 0.5% economists' consensus, and down from an upwardly revised 0.9% gain in June.

Of all the major retail categories, auto sales saw the biggest decline, dropping 2.4% in July. That comes after a 2.1% dip in June, and decreases of 10.5% over the past year.

Sales at gasoline stations were up 0.8% from June. Over the past year, that figure has increased 24.6% as the price of oil has simultaneously increased by nearly 60%.

Stimulus checks have been used to pay for more expensive gas and food, and now consumers are changing spending habits to cope with a weak job market and declining home values, according to Michael Strauss, chief economist of Commonfund Asset Management Company.

"You'll see more bargain shopping at the warehouse stores. You'll see shopping downstream from where people would have shopped otherwise," Strauss said.

General merchandise retailers - who consider the back-to-school shopping season second only to winter holidays - saw a 0.3% growth in sales. But that's half of the 0.6% increase in sales from June.

Furniture stores, electronics and appliance stores and nonstore retailers - such as e-retailers, vending machines and store catalogs - made gains in July. Nonstore retailers posted the fastest growth in sales at 1.1%

The growth in nonstore retailers may be due to higher gas prices, according to Strauss.

"We are seeing the effects of higher energy costs in retail data through more buying via the Internet," Strauss said.

Sporting goods stores saw purchases down by 0.2%, after June's 0.2% increase in sales. Food services also lagged 0.2% in July, after slight gains of 0.3% in June.

The survey has a plus or minus 0.5% margin of error.  

Gustav to test lessons of Katrina

NEW YORK (CNNMoney.com) -- As officials started evacuating New Orleans, the oil industry shut down rigs and pulled back personnel as Hurricane Gustav bore down on the Gulf coast on Sunday.

A lot is at stake as the industry faces potentially its worst storm since Hurricanes Katrina and Rita devastated crude and gas facilities in 2005.

The Gulf of Mexico is home to 4,000 drilling platforms and 33,000 miles of pipeline, which send 1.3 million barrels a day to the Gulf Coast's 56 refineries.

About 1.3 million barrels a day are produced in the Gulf - 25% of the oil produced in the United States, according to the U.S. Energy Information Administration. The region also accounts for more than 10% of the country's natural gas production.

Gustav, a Category 3 storm after raking through Cuba on Saturday, is expected to strengthen as it gets closer to the U.S. coast. Forecasters predict it will touch land as early Monday.

The hurricane's path may steer right through the heart of the region's biggest concentration of oil and gasoline producers. Its impact on crude oil prices, which settled on Friday at $115.46 a barrel, could be tested as soon as Sunday.

The New York Mercantile Exchange will hold a special trading session starting at 2:30 p.m. ET.

Much offshore oil production has already been shut down and experts say it could get worse. It could damage gasoline refineries, which could send the price of oil and gas back up near record highs.

"Production will be shut down in the path of the storm," said Cathy Landry, a spokeswoman for the American Petroleum Institute. "Not every rig will be in the storm's path, but the oil companies tend to be very cautious."

Production at risk

Gustav has already interrupted production. The average hurricane halts oil drilling production for more than a week, according to API. Rig workers, who generally need to flee two to three days before a storm hits, have already evacuated many facilities in the Gulf.

"Platforms have to withstand not just the winds, but also waves, rain and currents," Landry noted.

The U.S. Department of the Interior estimates that 76% of the Gulf of Mexico's platforms and 67% of Gulf pipelines were in the direct path of Hurricanes Katrina and Rita in 2005. The cyclones, both of which reached Category 5 strength, destroyed 113 offshore oil and natural gas platforms and damaged 457 pipelines.

Gustav appears to be heading in the same direction - right up the gut of the oil drilling and refining region.

"If the storm was heading West or East, then companies could just shut down one region of the Gulf," Landry said. "But it looks to be heading through the center, so a good portion of the Gulf will be shut down."

The big storms in 2004 and 2005 did considerable damage to oil drilling platforms in the Gulf of Mexico, severely cutting into supply to gasoline refineries on the shore.

Though slow-moving, weak tropical storms over the Gulf of Mexico can halt oil drilling, powerful hurricanes that hit land can knock out refineries. That's because about 40% of U.S. refining capacity is located on the Gulf Coast, namely in oft-hit states like Texas and Louisiana. After Katrina and Rita, 30% of Gulf Coast refineries were shut down or operating with reductions.

It's rare for a refinery to be totally knocked out by a hurricane, but many are susceptible to wind and water damage that can limit supply to and from the facilities. Similar to offshore drilling platforms, refineries are sometimes shut down for more than a week before they can return to full operability, according to API.

Part of the reason Katrina and Rita led to such a spike in gas prices was that there weren't enough functional facilities to make up for the lost output. Although capacity at many U.S. oil refineries has been expanded, there hasn't been a new refinery built in the United States in three decades.

Prices could jump

Some of those living on the Gulf Coast have already reported seeing gas prices jump nearly 10 cents over the past few days. If Gustav damages refineries, prices could go much higher.

"Depending on the timing and impact, the storm could really move this market," said Alaron Trading analyst Dan Flynn. "It's not a far stretch to see oil back over $125 and gas back above $4."

Flynn noted that Tropical Storm Hanna also threatens to enter the Gulf of Mexico, though its path is less certain.

In 2005, the Gulf Coast was battered by two hurricanes - Katrina and Rita - in the span of a few weeks, bringing many Americans their first glimpse at $3 a gallon for regular gas. The destruction from Hurricane Katrina alone led gasoline prices to jump 46 cents, or 17%, in just one week to a national average of $3.11, according to the U.S. Energy Information Administration.

A similar surge now would send gas prices to nearly $4.40 a gallon, well past the previous record of $4.11 a gallon set in July and erasing all the declines seen over the last few weeks.

"The bottom line is what the damage to the refineries will be, but the markets still tend to overreact," Flynn added. "We'll likely see a big spike in the price of gasoline prices."

Lessons learned?

Experts say that the lessons learned from Katrina and Rita might mitigate the fallout of Gustav.

"Yes, there will be an impact on the market, but we're much better prepared now than we were before Katrina and Rita," said Landry.

Since 2005, the industry began making changes to the structures. The Interior Department in April 2008 imposed more stringent design and assessment criteria for both new and existing structures located within particular Gulf of Mexico areas.

For example, drilling rigs moored to sea floor in the Gulf had been attached with eight lines, and are now required to be moored with 12 to 16 lines. New rigs are built higher out of the water than ones that were built previously, and old rigs were strengthened, according API.

And pipelines, which carry most of the oil and gas from the production platforms to the shore, now are equipped with redundant electric generation stations to ensure the power to the pumps will not be interrupted.

"This storm will be a good test for the [new standards]," said Landry. 

Gulf oil braces for Gustav

NEW YORK (CNNMoney.com) -- With Tropical Storm Gustav setting its sights on the Gulf of Mexico, oil facilities in the region are facing their first major threat since 2005, when Hurricanes Rita and Katrina knocked out nearly every barrel of oil production and sent prices soaring to then-record levels.

But this time around, if Gustav intensifies and heads into the Gulf as expected, experts say reinforcements have made production far less vulnerable than it was three years ago.

Drilling rigs and production platforms moored to sea floor in the Gulf had been attached with eight lines, and are now required to be moored with 12 to 16 lines.

New rigs were built higher above the water, and old rigs were strengthened, according to Andy Radford, a policy advisor at the American Petroleum Institute.

And pipelines, which carry most of the oil and gas from the production platforms to the shore, now have to be buried deeper beneath the sea floor, said Barbara Shook, a Houston-based analyst with the Energy Intelligence Group.

"The industry is probably in the best shape it's ever been in because of what they've learned over the last few years," said Shook.

Anyone who buys gasoline better hope so.

At 1.3 million barrels a day, the Gulf is home to over a quarter of the oil produced in the United States, according to the Energy Information Administration. Plus, it accounts for over 10% of the country's natural gas production.

When Hurricane Katrina roared through as a Category 5 storm in late August 2005, it ripped up pipelines and battered production platforms through out most of the Gulf.

But more than offshore oil platforms are at risk.

Upon making landfall, even as a Category 3, Katrina caused considerable damage to the many refineries in the region. It also disrupted crude imports - the Gulf of Mexico houses the country's only deep water port for imported oil.

As a result of all the disruptions, gasoline prices surged.

Gas went from a national average of $2.62 a gallon at the end of August to over $3.08 a gallon week later, a nearly 18% jump.

A similar surge now would send gas prices to nearly $4.40 a gallon, well past the previous record of $4.11 a gallon set in July and erasing all the declines seen over the last few weeks as traders talked of falling demand and a slowing economy.

Fortunately for motorists, traders don't think that will happen this time around.

"There's been a a lot of work on the rigs, and the outlook is that it won't be that bad, even if it is a terrible storm," Ray Carbone, a broker and trader at Paramount Options, told CNNMoney.com from the New York Mercantile Exchange.

As of midday Thursday, with Gustav still well south of the Gulf off the coast of Jamaica, oil prices were down sharply, trading around $115 a barrel. The storm isn't expected to make landfall in the United States until early next week.

Even if it is a worst-case scenario storm, Carbone said he thinks oil would have a hard time passing its previous record of $147.27 a barrel.

But as Shook points out, there's only so much companies can do to prepare for a Category 5 storm, and at some point all production is vulnerable no matter how many reinforcements have been made.

"It's a bit like preparing for a tornado," she said.

CNNMoney.com staff writer David Goldman contributed to this report. 

Stimulus cash still going out

NEW YORK (CNNMoney.com) -- The government sent out an additional 2.4 million stimulus payments, totaling $1.5 billion, since July 11, according to a statement from the Treasury department.

A total of $93.4 billion has been sent out to 114.8 million tax filers since the program was started in the spring, and the government is still working to distribute more checks.

By July 11, the government had mailed out 112 million stimulus payments totaling $92 billion. Those checks went to people whose 2007 tax returns were processed by April 15.

The government was still working to distribute stimulus checks to tax filers who obtained an extension on their 2007 tax return and to those Americans who qualify for a stimulus check, but may not normally file a tax return, according to Nancy Mathis, spokesperson for the IRS.

Roughly 10 million Americans requested an extension to file their tax return. The government is working to contact another 5.2 million - primarily retirees and veterans - to determine if they qualify, said Mathis.

The government said that tax filers who obtained an extension for the 2007 tax year must file by Oct. 15 in order to get a stimulus payment in 2008. If filers fail to get their tax return in by Oct. 15, there will still be an opportunity in 2009 to get the stimulus payment.

The stimulus program was enacted earlier this year in the wake of a slowdown tied to the credit crisis and the end of the housing boom.

The program did juice the economy. On Thursday, the Commerce Department said GDP, the broadest measure of the nation's economic activity, stood at an annual rate of 3.3% in the second quarter, adjusted for inflation. This reading was revised higher from an initial estimate of 1.9% growth.

To qualify for a stimulus payment, individuals and households must file a 2007 income tax return. Single taxpayers with adjusted gross income of less than $75,000 last year will get checks of as much as $600. Joint filers with adjusted gross income of less than $150,000 were eligible for a rebate of up to $1,200.

In addition, parents will also receive $300 per child under 17; there is no cap on the number of qualifying children eligible. 

Gustav: What's at stake

NEW YORK (CNNMoney.com) -- The Gulf of Mexico is home to 4,000 drilling platforms and 33,000 miles of pipeline, which send 1.3 million barrels a day to the Gulf Coast's 56 refineries. But a hurricane threatens to deal a powerful blow to the oil-rich region.

Hurricane Gustav, which just smacked Jamaica with heavy rain and winds, is heading towards the Gulf of Mexico, and forecasters predict its path will steer right through the heart of the region's biggest concentration of oil and gasoline producers.

Experts say the storm has the potential to significantly disrupt oil production in the region, potentially damaging gasoline refineries, which could send the price of oil and gas back up near record highs.

Production disruption: Though meteorologists stressed that storm prediction is an uncertain practice, by the time it is expected to hit Louisiana on Tuesday. Forecasters say the storm is a Category 4 hurricane with close to 145 mile per hour winds, according to the U.S. National Oceanic and Atmospheric Administration.

"Production will be shut down in the path of the storm," said Cathy Landry, a spokeswoman for the American Petroleum Institute. "Not every rig will be in the storm's path, but the oil companies tend to be very cautious."

The average hurricane halts oil drilling production for more than a week, according to API. Many companies have already begun the evacuation process, as rig workers are forced to evacuate two to three days before the storm hits. As soon as it's safe to return, they have to check for damage before they can restart production.

"Platforms have to withstand not just the winds, but also waves, rain and currents," Landry noted.

The U.S. Department of the Interior estimates that 76% of the Gulf of Mexico's platforms and 67% of Gulf pipelines were in the direct path of Hurricanes Katrina and Rita in 2005. The cyclones, both of which reached Category 5 strength, destroyed 113 offshore oil and natural gas platforms and damaged 457 pipelines.

Gustav appears to be heading in the same direction - right up the gut of the oil drilling and refining region.

"If the storm was heading West or East, then companies could just shut down one region of the Gulf," Landry said. "But it looks to be heading through the center, so a good portion of the Gulf will be shut down."

Refinery damage: The big storms in 2004 and 2005 did considerable damage to oil drilling platforms in the Gulf of Mexico, severely cutting into supply to gasoline refineries on the shore.

Though slow-moving, weak tropical storms over the Gulf of Mexico can halt oil drilling, powerful hurricanes that hit land can knock out refineries. That's because about 40% of U.S. refining capacity is located on the Gulf Coast, namely in oft-hit states like Texas and Louisiana. After Katrina and Rita, 30% of Gulf Coast refineries were shut down or operating with reductions.

It's rare for a refinery to be totally knocked out by a hurricane, but many are susceptible to wind and water damage that can limit supply to and from the facilities. Similar to offshore drilling platforms, refineries are sometimes shut down for more than a week before they can return to full operability, according to API.

Part of the reason Katrina and Rita led to such a spike in gas prices was that there weren't enough functional facilities to make up for the lost output. Although capacity at many U.S. oil refineries has been expanded, there hasn't been a new refinery built in the United States in three decades.

Prices could jump: Some of those living on the Gulf Coast have already reported seeing gas prices jump nearly 10 cents over the past few days. If Gustav damages refineries, prices could go much higher.

"Depending on the timing and impact, the storm could really move this market," said Alaron Trading analyst Dan Flynn. "It's not a far stretch to see oil back over $125 and gas back above $4."

Flynn noted that Tropical Storm Hanna also threatens to enter the Gulf of Mexico, though its path is less certain.

In 2005, the Gulf Coast was battered by two hurricanes - Katrina and Rita - in the span of a few weeks, bringing many Americans their first glimpse at $3 a gallon for regular gas. The destruction from Hurricane Katrina alone led gasoline prices to jump 46 cents, or 17%, in just one week to a national average of $3.11, according to the U.S. Energy Information Administration.

A similar surge now would send gas prices to nearly $4.40 a gallon, well past the previous record of $4.11 a gallon set in July and erasing all the declines seen over the last few weeks.

"The bottom line is what the damage to the refineries will be, but the markets still tend to overreact," Flynn added. "We'll likely see a big spike in the price of gasoline prices."

May not be so bad: Experts say, however, the fallout from Katrina and Rita is unlikely to be repeated.

"Yes, there will be an impact on the market, but we're much better prepared now than we were before Katrina and Rita," said Landry.

Since 2005, the industry began making changes to the structures. The Interior Department in April 2008 imposed more stringent design and assessment criteria for both new and existing structures located within particular Gulf of Mexico areas.

For example, drilling rigs moored to sea floor in the Gulf had been attached with eight lines, and are now required to be moored with 12 to 16 lines. New rigs are built higher out of the water than ones that were built previously, and old rigs were strengthened, according API.

And pipelines, which carry most of the oil and gas from the production platforms to the shore, now are equipped with redundant electric generation stations to ensure the power to the pumps will not be interrupted.

"This storm will be a good test for the [new standards]," said Landry. 

Income and poverty: Size up your state

NEW YORK (CNNMoney.com) -- It's a title Michigan likely doesn't want.

The Great Lake State was the only one in the union to see a drop in median household income and a jump in its poverty rate in 2007, according to Census Bureau figures released Tuesday. Much of the decline stems from the turmoil in the auto sector, which has shed tens of thousands of jobs in recent years.

"Michigan is really hurting," said Donald Grimes, senior research associate, Institute for Labor & Industrial Relations at the University of Michigan. "The Census report confirms the depth of employment loss. It's really driven by what's going on in the auto industry."

America, are you better off?

Michigan's poor showing bucks the trend of small economic gains for the typical American family last year. The national median income rose 1.3% to $50,233, while the country's poverty rate remained about the same at 12.5%, with 37.3 million people living in poverty - compared with 36.5 million in 2006.

(These national statistics differ slightly from the national figures listed in the map to the right because they are derived from different surveys.)

Meanwhile, the number of people without health insurance fell to 45.7 million people, or 15.3%, down from 47 million, or 15.8%.

While Michigan residents were the only ones to lose ground, there was still a wide disparity among state fortunes. For instance, median income rose in 33 states, but stagnated in 16.

Among the more prosperous locales were Alaska, where the median income increased 5.2%, and Wyoming, which saw a 5.4% jump. Residents there can thank natural resources for the gains.

(See where your state ranks.)

Poverty and health insurance

A dozen states and the District of Columbia chipped away at their poverty rates, while the vast majority saw no significant change.

This year, it will prove tougher for states to keep their residents out of poverty as the weakening economy puts increased strain on their budgets. Many state programs, particularly Medicaid and employment assistance initiatives, will feel the pinch.

"You are less able to do anything at the state level that helps people get back to work," said Tim Smeeding, director of the Institute for Research on Poverty at University of Wisconsin.

Only six states saw declines in the number of those without health insurance in recent years, while 10 saw increases. Rates remained the same in the rest, including Michigan. The Census Bureau compared the average uninsured rates in 2004-05 with those of 2005-06.

States along the nation's southern border - including Louisiana, Mississippi and New Mexico - saw the largest increase in the uninsured, in part because they have high rates of undocumented immigrants who account for many of those without coverage, said Grace-Marie Turner, president of the Galen Institute, a think tank that promotes free market ideas for health care reform.

States that have made increasing healthcare coverage a priority - both through public and private initiatives - saw declines in their uninsured populations. These include Massachusetts, which saw a 2.4% decline, and Indiana, which had a 2.7% drop.

What's driving Michigan?

Michigan, however, has had no such luck. The state has never recovered from the 2001 recession and has lost jobs annually ever since, said Rebecca Blank, a senior fellow at the Brookings Institution and former dean of the University of Michigan's School of Public Policy.

The housing bust has hit the state hard. Detroit and Ann Arbor are the only two areas in the country where home values have fallen back to pre-2002 levels, according to Zillow, a real estate Web site. Nationwide, home prices are where they were in late 2004.

In 2007, the state shed about 80,000 jobs, according to the state's Department of Labor and Economic Growth. The state's troubles lie in the fact that it's so heavily invested in the auto industry. While the state is attempting to build up new sectors, such as alternative energy and health care, any meaningful change is years away, experts said.

"Michigan has been talking about the need to diversify its economy for a long time, but it has not happened," Blank said. 

Gulf Coast gas prices spike

NEW YORK (CNNMoney.com) -- Gas prices jumped overnight - and are expected to keep rising - in states along the Gulf of Mexico as offshore oil rigs prepare to abandon ship ahead of Hurricane Gustav on Friday.

The price increase was most dramatic in Mississippi, where the statewide average for unleaded gasoline rose nearly 7 cents a gallon on Friday, according to the motorist group AAA. Gas rose by more than 9 cents a gallon in the coastal cities of Biloxi, Gulfport and Pascagoula, said AAA.

Gas also rose by about 3 cents a gallon in Louisiana and Alabama, by nearly 2 cents in Texas, and by about 1 cent in Florida, according to AAA.In New Orleans, gas prices rose nearly 5 cents a gallon. All of these areas are dependent upon oil rigs in the Gulf of Mexico as a major part of their oil supply.

In comparison, gas prices declined overnight in New York, New Jersey, California and Alaska, states that are not directly dependent on the Gulf.

"Prices are more affected down South, while New York is supplied through [New York] Harbor," said Fred Rozell, oil analyst with the Oil Price Information Service.

Rozell said these increases are particularly painful to Mississippi, not just because the price increases are the most dramatic there, but because it's a state where people tend to have less discretionary income.

"I think some of those areas are going to get hit hard again and it's really going to squeeze people," said Rozell.

Get ready for high gas prices: The price increases are likely to continue, said Rozell, partly because of the storm, and partly because of recent increases in wholesale gasoline prices, which tend to lead retail prices. Rozell expects prices nationwide to increase by 10 cents a gallon over the next five to seven days, or by 15 to 25 cents in the Gulf Coast states.

Hurricane Gustav smashed into the Dominican Republic and Haiti on Thursday, killing more than 50 people and causing extensive flooding. The storm headed west and whipped into Jamaica at midday on Friday. The storm is expected to crash through the Caymans and Cuba as it heads for the Gulf of Mexico, where it could possibly build to hurricane strength and smash into New Orleans and the surrounding region early next week.

If the storm continues along its projected course and builds strength, it could threaten the 4,000 drilling platforms and 33,000 miles of pipeline in the Gulf Coast, which sends 1.3 million barrels a day to the Gulf Coast's 56 refineries.

"We are seeing [gas price] increases here that are based on the possibility that there may be some supply dislocation," said Peter Beutel, oil analyst with the firm Cameron Hanover. "That would affect supply close to the affected area, as opposed to anywhere else." 

Gas prices rise - first time since July

NEW YORK (CNNMoney.com) -- Gasoline prices rose for the first time in more than a month, according to a nationwide survey of gas station credit card swipes Friday.

The average price of regular unleaded gasoline rose nine-tenths of a cent to $3.669 a gallon from $3.66 a day earlier, according to motorist group AAA and the Oil Price Information Service.

The price increase is the first in more than 40 days since falling from a record high of $4.114 a gallon set July 17.

Gas prices had been following an 18% decline in the price of crude oil - the main ingredient of gas.

Overall, gas prices have fallen off their highs in recent weeks. But prices at the pump are still 33% above the same time last year, when a gallon of gas cost $2.769. 

Problem banks multiply

NEW YORK (CNNMoney.com) -- The number of troubled banks on the government's watch list grew dramatically last quarter.

The Federal Deposit Insurance Corp. reported Tuesday that the number of firms on its so-called problem bank list grew to 117 during the second quarter - its highest level since the middle of 2003. There were 90 banks on the problem list in the first quarter.

FDIC Chairman Sheila Bair expressed little surprise at the increase and warned that the number would grow.

"More banks will come on the list as credit problems worsen and assets of problem institutions will continue to rise," said Bair in a press conference.

The number of troubled institutions has moved steadily higher this year - nearly doubling from 61 at the same time a year ago - as banks across the country struggle to cope with the fallout in the housing market and rising loan losses.

Problem banks typically face difficulties with their finances, or are suffering through operations or management issues that pose a threat to their existence.

Banks included on the problem list are considered the most likely institutions to fail, although few institutions actually reach that point - just 13% of banks on the FDIC's problem list have failed on average.

The FDIC, one of the top regulators of the nation's banking system, doesn't reveal the names of the banks on the list, but it does give the total assets of these institutions.

That number was $78.3 billion during the quarter, up sharply from $26.3 billion the previous quarter. The lion's share of that figure included the Pasadena, Calif.-based mortgage lender IndyMac, which boasted assets of $32 billion before it collapsed in mid-July. (Since IndyMac (IDMC) failed in the third quarter, it was on the problem list for the second quarter.)

"What is evident is that the size of the new banks added to the list are extraordinarily small," said Gary Townsend, a former bank analyst at Friedman, Billings, Ramsey, who now serves as the president of the Chevy Chase, Md.-based Hill-Townsend Capital.

Failing firms

Including IndyMac, nine banks have failed so far this year.

The most recent failure came last Friday with the Topeka, Kansas-based Columbian Bank and Trust. As is typically the case, the FDIC orchestrated the sale of the company's branches and deposits to another institution, in this case selling them to the Chillicothe, Mo.-based Citizens Bank & Trust.

In the event of a failure, the FDIC fully insures individual accounts up to $100,000 per deposit and $250,000 for most retirement accounts.

Indeed, bank failures are widely expected to continue - particularly among those institutions who tend to generate most of their business from commercial real estate, especially construction and development loans, said John Corston, an associate director at the FDIC.

"That area is fairly stressed and we're seeing more institutions now becoming problems by virtue of their exposure there," Corston said.

Analysts, as well as the FDIC, are quick to point out that the number of failures so far isn't close to the numbers seen during the savings & loan crisis of the late 1980s and early 1990s. During that tumultuous period, more than 1,000 institutions failed.

But as an increasing number of banks have gone bust, Bair warned Tuesday that the industry may soon face higher premiums to help replenish the FDIC fund used to insure depositors of failed institutions.

Another tough quarter

Overall, the second quarter proved to be yet another difficult period for the nation's banks as industry profits fell 87% to $5 billion from $36.8 billion a year ago.

Driving that decline, in part, was a surge in loan-loss provisions. Facing additional deterioration in the housing market and further weakness in the broader economy, FDIC-insured banks set aside $50.2 billion during the quarter, more than four times the quarterly total of $11.4 billion from a year ago.

At the same time, net charge-offs, or loans banks don't think are collectable, continued to rise, totaling $26.4 billion in the second quarter - its highest level since 1991.

Banks also saw their first decline in assets since 2002. Total assets fell $68.6 billion during the quarter, the largest drop since early 1991.

As the housing market continues to sink, bankers have been reining in their lending. Real estate construction and development loans, for instance, registered their first quarterly decline since early 1997, falling by $5.4 billion, or 0.9%.

But FDIC officials said this tightening is crucial to helping the banks and the economy heal.

"The ongoing adjustments to credit standards are absolutely necessary to put the industry on a sounder footing to extend credit and finance economic activity down the road," said Rich Brown, the FDIC's chief economist.

Banks also took steps to preserve capital during the quarter. Just over half of the more than 4,000 banks that paid a quarterly dividend last year reported paying out a smaller amount, or no dividend whatsoever, during this year's second quarter, the FDIC said. 

Economy gets big stimulus boost

NEW YORK (CNNMoney.com) -- A revised reading on gross domestic product announced Thursday showed much better U.S. economic growth than previously reported for the second quarter.

GDP, the broadest measure of the nation's economic activity, stood at an annual rate of 3.3% in the quarter, adjusted for inflation, the Commerce Department said.

Economic growth between 2.5% and 3.5% is typically viewed as the norm for a healthy economy.

The revised result surpassed last month's initial estimate of 1.9%. It also surprised economists surveyed by Briefing.com who expected a revision to 2.7%.

Stimulus works: The $90 billion in economic stimulus payments that reached taxpayers during the quarter helped boost GDP up from just 0.9% growth in the previous quarter.

Personal spending helped add 1.2% to the second-quarter preliminary GDP reading released Thursday, up from the advanced reading of 1% for the quarter and just 0.6% in the first quarter.

But many economists say the boost in consumer spending is a temporary factor attributed to the tax rebate checks, making the jump in the second quarter an anomaly.

"We got a decent boost from the stimulus, which hit the economy at a time when we really needed it," said Wachovia senior economist Mark Vitner. "It will have less of an impact going forward, though and we may even have a payback in the fourth quarter."

Trade helps too: The increase from the initial estimate was also partially due to June's U.S. trade gap reading, which was not available until after the advanced GDP numbers were reported. Much improved demand for U.S. exports added 3.1% to GDP, compared to just 0.8% in the advanced reading.

"We would have had growth even without the stimulus, as much of the rise in GDP had to do with the trade deficit," Vitner added.

A pickup in government spending, particularly a 0.4% rise in defense spending by the federal government, also boosted GDP.

But imports declined over the period, meaning lower inventory levels for retailers, which account for more than half of all GDP. Changes in non-farm inventories subtracted nearly 1.3% from overall growth.

Inflation: The government report also showed mixed readings for inflation in the previous quarter.

The GDP price index, the so-called "price deflator," which measures prices overall, rose at a 4.2% annual rate.

But the core PCE deflator - a more closely watched inflation reading that measures prices that individuals pay excluding volatile food and energy prices - rose 2.1%, the same as was reported in the first GDP report.

Inflation is still just barely above the perceived comfort zone of central bankers. The Federal Reserve is generally believed to want to see the 12-month change in core inflation readings remain between 1% and 2%.

"Without a price spiral, the Fed won't have to squeeze the life out the economy, which should help sustain modest economic growth," Vitner said. 

Manufacturing (ISM)

NEW YORK (AP) -- U.S. manufacturers' business was flat in July, as higher prices and tight credit kept them from expanding, but exports propped them up.

The Institute for Supply Management said its reading of activity from the country's producers of cars, airplanes, appliances and other manufactured goods hit 50, down from 50.2 in June.

Still, it beat economists' prediction of a reading of 49.2, according to the consensus estimate of Wall Street economists surveyed by Thomson Financial/IFR. A reading above 50 signals growth.

The report has been hovering near 50, which economists call "the boom-bust line," for the last 12 months.

The index of prices manufacturers pay for raw materials grew, but at a slower rate than June, when it hit its highest level since 1979. About 88.5% of manufacturers said prices in July were higher than June. No commodities prices fell, according to the report.

At Columbia Gear Corp., a 385-person gear maker based in Avon, Minn., steel suppliers that used to change their fuel surcharges every quarter are now changing them every month, said Lyle Nuhring, vice president of sales and marketing.

The company's customers are growing increasingly resistant to Columbia's resulting price increases, asking to see invoices Columbia gets from its suppliers as proof of price increases the company is paying, Nuhring said.

"It's increasing every month and you can't keep going back to them every month," he said.

Exports continue to fuel the index, however. The rate of growth for exports slowed, but it was the 68th straight month that exports grew, thanks to the weak dollar. 

Manufacturing saves the day for now

NEW YORK (CNNMoney.com) -- For the second straight month, a key measure of manufacturing activity rose at a much higher than expected rate.

The surprise jump in so-called durable goods orders is an encouraging sign. Demand for big-ticket items rose 1.3% while economists were predicting just a 0.1% increase. That follows a 1.3% gain in June.

It is an indication that manufacturing strength is helping to offset some of the weakness brought about by the housing mess and credit crunch.

Talkback: What's next for the economy and manufacturing?

Economists say the big reason for this increase is healthy demand from foreign nations looking to take advantage of a relatively weak dollar.

"If there has been any bright spots in the economy, it's exports. That is providing some support to the manufacturing side of the equation," said Michael Strauss, chief economist with Commonfund, a money-management firm based in Wilton, Conn.

However, some economists worry that the boost from manufacturing could be short-lived. After all, the dollar has rallied lately. And that's mainly because other economies around the globe - most notably in Europe - have begun to slow.

"The competitiveness of the dollar has been giving exports a kick," said Chris Probyn, chief economist with State Street Global Advisors in Boston. "But there are clear signs that the global economy is slowing down. And for America's economy to heal, it will be helpful to have a robust global economy. That doesn't look likely," Probyn added.

In addition, it's tough to imagine that demand for autos, which rose 1.2% in July, is sustainable. GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler have all reported dismal sales figures for the past few months due to record-high gas prices and the shift away from SUVs to smaller and less profitable cars.

So Detroit's pain should weigh on future durable goods reports.

Nonetheless, there is a hope that durable orders won't completely fall off a cliff.

Strauss said that many U.S. companies are very well-positioned to benefit from what should remain strong demand for infrastructure in emerging markets such as China and India. So that can help offset weakness in Europe.

"By September, we may be dealing with the reality that demand is softening domestically and internationally. But the good news is that demand for capital goods probably won't decline in the third quarter.

In addition, some think that the U.S. economy could start to rebound by early-to-mid 2009, which could also lessen the sting of a potential pullback in demand for exports.

"Europe's economy, as well as Japan's, is coming down dramatically and flirting with recession. But the U.S. has already been in a slowdown so it may be the first one in and first one out," said Bill Stone, chief investment strategist with PNC Wealth Management.

Strauss said that the recent strength of the dollar and pullback in the price of many commodities could help set the stage for an eventual U.S. economic recovery.

That's because pricing pressures should subside, which would be a big shot in the arm for many consumers that have been faced with soaring energy and food costs.

"One of the cures of inflation sometimes is higher inflation. Higher prices slows down demand and that leads to lower prices," Strauss said.

However, while a recovery may be in the cards soon, Strauss cautioned that an economic rebound is not going to happen overnight.

"The pain in discretionary spending for the consumer should get tempered a little bit and that may help improve economic conditions. But it will take months, if not quarters, for that to unfold," he said.  

Gas prices down 10%

NEW YORK (CNNMoney.com) -- Gasoline prices fell yet again, bringing the total decline to 44.7 cents a gallon since July, according to a national survey of gas station credit card swipes.

Gas was selling at $3.667 a gallon on average, down from $3.672 a day earlier, according to motorist group AAA and the Oil Price Information Service.

Prices have fallen more than 10% since hitting a record high of $4.114 on July 17, AAA reported.

The decline in prices at the pump followed a more than 20% decline in the price of crude oil -- the main ingredient in gasoline.

Oil prices have declined as commodities investors worry that the high price of fuel is causing drivers and businesses to cut back on the use of gasoline and diesel fuel.

Those concerns have driven gas prices below $4 a gallon in all but two states: Alaska, where gas was selling at $4.546 a gallon, and Hawaii, where gas was $4.393 on average.

The lowest average gas prices were found in Missouri at $3.424.

Gas prices can vary from state to state due to differences in state and local gasoline taxes, and proximity to oil and gas facilities around the Gulf of Mexico.

Despite the drop in price, gasoline remains more than 33% more expensive than it was last year, according to AAA.

Diesel: The average price of diesel fuel, which is used by most trucks and commercial vehicles, held steady at $4.283 a gallon compared to the day before, the survey said.

Because of its use in shipping and transportation, high diesel prices can boost the prices of goods and services as businesses pass along extra costs to their customers.

The average price of diesel was most expensive in Hawaii and Alaska at $5.288 and $5.112 a gallon, respectively. Diesel was cheapest, on average, in Missouri at $4.036.

Diesel prices have also fallen with crude oil prices since July, shedding more than 56 cents. But they remain more than $1.36, or 46% higher than they were a year ago, according to the AAA survey.

Ethanol: The price of E85, which can substitute for gas in specially configured "flex-fuel" vehicles, fell to $3.03 a gallon on average, AAA reported.

The high price of petroleum-based fuels has raised the profile of alternatives such as E85, an 85% ethanol blend.

Ethanol is made primarily from corn, not volatile crude oil, and is cheaper per-gallon than gasoline. However it's difficult to find outside the corn-producing Midewst, and it's not sold in some states.

E85 also has a lower energy content than gas. Drivers would have to pay the equivalent of $3.987 a gallon for E85 to get the same mileage as gasoline, AAA estimated. 

Job Growth

NEW YORK (CNNMoney.com) -- Employers cut jobs in July for the seventh straight month, while the unemployment rate hit a four-year high, according to a government report released Friday.

The Labor Department reported a net loss of 51,000 jobs in the month. Economists surveyed by Briefing.com had been forecasting a loss of 75,000 jobs in the latest report.

The latest report brought job losses this year to 463,000. The June job loss number was revised to 51,000.

The unemployment rate rose to 5.7% from a 5.5% reading in June. It was the worst reading since March 2004, and slightly worse than economists' forecast of a 5.6% rate.

The rate has now jumped a full percentage point from a year ago.

But the 5.7% unemployment rate tells only part of the problem facing job seekers. It doesn't include those who have become discouraged from looking for work, or those who have accepted part-time jobs when they want to be working full time.

Counting the unemployed or underemployed, the rate rises to 10.3%, the first time that measure has hit double figures since November 2003.

Those who are out of work are also taking longer to find new jobs. There are now 1.7 million people out of work for six months or more, which is up 6% from a month early and is 28% above year-ago levels. Nearly one in five people counted as unemployed have now been out of work for six months or more.

"It is becoming increasingly hard for Americans to find work in this economy," Sen. Charles Schumer, D-N.Y., said in a statement. "As the construction, manufacturing, and now retail sectors are reeling from job losses, too many workers are being forced to reduce their hours and take part-time jobs just to make ends meet."

Tig Gilliam, chief executive of Adecco Group North America, a unit of the world's largest employment firm, said there's few signs of a turnaround in the labor market on the horizon.

"I think we're going to see more of the same for at least another quarter, and it could be the rest of the year," he said.

The job losses also show spreading weakness in the labor market.

Construction lost 22,000 jobs as housing continued to suffer, while manufacturing employment plunged 35,000 jobs, as automakers cut production in the face of weak sales.

But the job losses were spread far beyond the battered construction and auto industries. Retailers cut 17,000 jobs, while business and professional services lost 24,000 positions.

Problems in housing and credit markets continued to hit the job base as commercial banks, Wall Street firms and real estate firms cut more than 4,000 between them.

But there were a number of service sector employers outside of finance and real estate that saw problems as well. Publishing lost 3,400 jobs, due to continued problems at newspapers and magazine. Airlines also cut 900 jobs.

Even with gains in health care and a narrow increase in leisure and hospitality employers, service sector companies cut a total of 30,000 jobs. And the service sector is the broad area of the economy that provides more than 80% of the non-government jobs.

Government employers added 25,000 jobs to mitigate the losses in the private sector. But Gilliam said that's not necessarily a positive for the economy.

"It's good to have the government adding jobs in the short term, but that's not an long-term solution either," he said.

In another sign of weakness, the average hourly work week fell 0.1 hour to 33.6 hours. The average hourly wage edged up 6 cents to $18.06, bringing salaries up 3.4% over the year-ago levels. That's well below the 5% rise in overall prices paid by consumers over the 12 months ending in June, meaning that paychecks are not keeping up with costs.

Both presidential candidates cited the weak jobs report as an argument for their economic proposals.

Democratic presidential candidate Barack Obama called for another economic stimulus package, on top of the one passed earlier this year that sent $600 checks to single taxpayers and $1,200 to married taxpayers in order to help support spending.

Obama called for $1,000 "energy rebates" that would go out this fall, as well as a $50 billion in public works projects and help to state governments. He criticized his the proposal of his opponent, John McCain, to eliminate the gasoline tax.

"If we want to create jobs, we should do more to make work pay for ordinary Americans, not boost the profits of oil companies," he said. "It's time to restore fairness and balance to our economy and we can start by passing the emergency economic plan that I'm proposing today."

McCain issued a statement saying a jobs plan must help small businesses.

"Unlike Senator Obama, I do not believe that raising taxes is the answer to our economic problems," he said. "There is no surer way to force jobs overseas than to raise taxes on businesses. The American people cannot afford economic policies that will take us backward." 

Industrial Output

WASHINGTON (AP) -- Industrial output rose in July at a slightly better pace than expected as a further rebound in the auto industry offset a big plunge in output at the nation's utilities.

The Federal Reserve reported Friday that industrial production edged up 0.2% last month. That was half the pace of the 0.4% gain in June, but it did surpass analysts' expectations for flat production in July.

The increase reflected a 0.4% gain in output at manufacturing plants. Motor vehicles and parts showed the biggest increase in manufacturing, advancing for a third straight month.

These gains were not seen as signaling a sustained rebound, however, given the problems facing the auto industry this year. Instead, the rebound in auto activity was viewed as a temporary improvement because a strike ended at parts supplier American Axle.

Even with the recent gains, production at auto plants remained 10.4% below where it was a year ago.

The increase in manufacturing helped to offset a big 1.9% drop in output at utilities, a decline which followed a 2.3% surge the previous month. Both changes were seen as weather-related.

The big June jump came from hotter-than-normal weather requiring increased electricity production. The decline in July reflected a return to more normal weather which meant a drop in utility output compared to the previous month.

Output in the mining sector rose a strong 0.9%, matching the increase of the previous month. The gains in this sector have been paced by strong activity in oil and natural gas production.

With all the changes, the nation's factories, mines and utilities operated at 79.9% of capacity in July, up slightly from June when the operating rate was 79.8% of capacity. That level remained below the average operating rate of 81% seen over the last 25 years.

Industry is having to struggle this year with a steep slump in housing, which has hurt producers of building supplies and furniture, and the continuing problems in the auto industry, which saw sales drop to the lowest level in 16 years in July.

A boom in U.S. export sales because of the weak dollar has helped offset this slump There is concern that the export boom may not last given spreading weakness in major overseas markets in Europe and Japan. 

Are you better off? Many say, 'Yes.'

NEW YORK (CNNMoney.com) -- Are you better off than you were at the end of the last recession? That's the question we've posed today on CNNMoney.com.

Now this is an admittedly unscientific poll. Nonetheless, the results so far are a bit surprising.

As of early afternoon Monday, a little more than 36,000 people had responded and 42% indicated they were better off now than in 2001, while 47% said they were worse off and 11% said they were about the same.

Talkback: Are you better off than in 2001? If so, tell us how you've done it.

I would have expected that more than two-thirds of our readers would have indicated they were worse off.

According to the latest CNN/Opinion Research Corp. poll, 43% of Americans dubbed the economy as "very poor" while another 32% characterized it as "somewhat poor."

That's not too surprising. Housing prices have plummeted in many areas of the country. Inflation is now a major worry for most Americans as the price of gas and food is much higher than it was a year ago.

And many of this column's loyal readers love to call me out as Pollyanish, because I don't think the economy is inexorably headed towards a second Great Depression.

So what gives? How, in the midst of all this troubling economic news, could it be that this high a percentage of our readers say that they are better off now than they were seven years ago?

I have a few theories.

For one, the unemployment rate, while on the rise lately, is still not at a level that you'd typically find in a serious recession.

Yes, the exodus of many jobs overseas via outsourcing and the poor health of many manufacturing-related industries in the United States is undeniably a problem.

But other sectors have helped to offset some of the job losses in autos and other industrial sectors. The technology industry, for example, has enjoyed a healthy comeback since the dot-com bubble burst in 2000. And as much as we all like to complain about high oil and gas prices, the commodities boom has also created many jobs in the energy sector.

Then there's the mortgage crisis. It's no doubt scary, but the simple fact remains that just a small fraction of homes are in foreclosure.

For people who didn't rely on their house as an ATM and treated it more as a place to live than as a short-term investment, the housing price drop is just a bump in the road, not an economic catastrophe.

Finally -- and this may not be a popular view with some of my colleagues -- I do think that one reason the economy is perceived as being in such dire straits is that there is a natural tendency among the media to focus more on the bad news than the good.

Simply put, it is more compelling to write stories about people who are struggling to get by than those that are getting by. So there are probably a lot of average middle class people out there who are paying their mortgage, credit card and car bills on time. You're not going to see profiles about them though.

Now don't get me wrong: The results of our poll still show that many people have been hit hard in this downturn. Plus, the economy could very well get worse before it turns around since it appears that the problems in the housing market and the resulting credit crunch are not over yet.

But the results of our poll seem to me to be yet another example of what I've been preaching in this column for the past few months: the economy is in rough shape but this is not the beginning of an epic collapse.

There are people out there that apparently have been able to save, invest and live within their means, which at the end of the day helps lead to financial security.

So instead of proselytizing that the end is nigh and complaining that things aren't as good as they used to be, they have just been hunkering down to make it through this downturn.  

Economists: Inflation threat growing

NEW YORK (CNNMoney.com) -- A survey of top economists shows that many are growing more concerned about inflation and slightly less worried about mortgage and credit market problems.

According to the National Association of Business Economists, 16% of the 278 members responding believe energy prices are the most serious short-term risk to the economy, up from only 5% who picked that in the March survey.

In addition, another 15% cited overall inflation as the greatest threat, up from 10% in March.

Nonetheless, the financial crisis remains the biggest worry -- 46% of the economists surveyed cited subprime loan defaults, excessive household and corporate debt or the credit crunch as the biggest problem. That's down from the 52% who cited defaults and debt as the most serious threat in the March survey.

Although oil prices have retreated since the July 25 to Aug. 11 survey period, one economist said she doubts that concerns about energy and inflation has abated much since then.

"My guess is it may even be higher," said Brandeis University Business School professor Catherine Mann, a member of the NABE committee that conducted the survey.

Questions about housing bill

Economists also were fairly critical of the recently passed housing bill, signed by President Bush on July 30. Of those surveyed, only about a third said it would stabilize home prices or hasten a housing recovery, even though 59% thought it would reduce mortgage foreclosures.

Nearly eight in 10 of the economists surveyed said the bill constituted a bailout of home borrowers, while 65% said it represented a bailout of lenders. In addition, 71% said it was unfair to those who were not mortgage borrowers.

The bill also allowed troubled mortgage lenders Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) to borrow unlimited amounts of money from the Treasury Department and opened the door for Treasury buying equity in the firms if they needed such assistance.

Three-quarters of the economists agreed that the two firms, the primary source of funding for banks and other home lenders making mortgages, were "too important to fail." Only 20% said the assistance authorized in the bill would amount to nationalization.

The economists also were mostly supportive of the Federal Reserve's response to the crisis in the financial markets: 83% thought the Fed's program to make more money available to banks and Wall Street firms if necessary had been either moderately or highly effective.

However, 88% of the economists said they were at least somewhat concerned this would encourage future risk taking by financial firms. In addition, 55% said the Fed's monetary policy was "about right," up from only 48% who believed that in March. The Fed's key interest rate now stands at 2%

The Fed cut this rate seven times between last September and April, and left rates unchanged in June and August. Most investors and economists expect the Fed to keep rates at 2% following its September and October meetings. 

Buffett: We're still in a recession

OMAHA, Neb. (AP) -- Billionaire investor Warren Buffett said Friday the economy continues to be in a recession, by his definition, and will continue to be for at least several more months.

During a live appearance on CNBC, Buffett said ripples of the credit crunch are continuing to cause problems in financial businesses and the economy.

Earlier this year he said a financial crisis reveals which players have been "swimming naked," because the tide goes out. That picture has worsened along with the crisis.

"We found out that Wall Street has been king of a nudist beach," said Buffett, who is chairman and chief executive of Berkshire Hathaway Inc (BRK.A)., which is based in Omaha.

Buffett said activity at businesses Berkshire owns, especially ones related to housing construction such as Shaw carpet and Acme Brick, continued to slow during the summer.

He's confident the nation will be doing better five years from now, Buffett said, but the economy could be worse five months from now.

Buffett said the economy is in a recession because most Americans aren't doing as well today as they used to be. The technical definition of a recession most economists use is two consecutive quarters of negative growth in the nation's gross domestic product.

Regarding the nation's credit crunch, Buffett said he believes mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) are too big to fail, but that doesn't mean that all the shareholder equity in those companies can't be wiped out.

"They're looking for help, obviously. And the scale of help is such that I don't think it can come from the private sector," Buffett said.

So the Oracle of Omaha predicted that the federal government eventually will have to step in to help because the troubles of Fannie Mae and Freddie Mac seem to be growing and feeding on themselves.

Together the companies hold about half of U.S. mortgage debt and are the largest source of funding for home mortgages. But they are seeing too many defaults. Losses between April and June for the two companies totaled $3.1 billion, and investors fear they will continue to grow.

Buffett and another billionaire investor, Pete Peterson, appeared at a special screening of a new documentary on the nation's debts Thursday in Omaha. The two Nebraska natives were part of a panel discussion after the premiere of "I.O.U.S.A." The film was shown in 358 theaters nationwide.

The film's message is that an economic disaster will befall the nation if the federal government's $53 trillion in debt continues to grow.

Buffett said he doesn't think the situation is as dire as the film portrays.

"I admire the fact they tackled the subject," Buffett said. "I don't agree with many of the conclusions in the movie."

Berkshire subsidiaries include insurance, clothing, furniture, candy companies, restaurants, natural gas and corporate jet firms. Berkshire also has major investments in such companies as Coca-Cola Co. (KO, Fortune 500) and Wells Fargo & Co. (WFC, Fortune 500)

Buffett said Friday he sold nearly two-thirds of Berkshire's 35.6 million shares of Anheuser-Busch Cos (BUD, Fortune 500). stock because he hadn't been sure Belgian brewer InBev SA's takeover bid of $65 a share would succeed.

"In retrospect, I was wrong to partially sell the holdings," Buffett said.

Anheuser agreed in July to a $52 billion takeover bid from InBev.

Berkshire sold Anheuser stock for about $61 or $62 a share, he said. But at the end of June Berkshire still held 13.8 million shares of Anheuser. 

Existing home sales rise, but prices still sinking

NEW YORK (CNNMoney.com) -- Sales of existing homes rose more than expected in July, but prices continued to fall and inventory increased. That's according to the latest reading on the battered housing market by an industry trade group released Monday.

The National Association of Realtors reported that sales by homeowners in July increased to an annual pace of 5 million, up from the revised June reading of 4.85 million.

That's better than the annual pace of 4.9 million that economists surveyed by Briefing.com expected, and it's the highest pace since February. Still, July sales were down 13.2% from a year earlier.

"Sales volume is starting to increase because prices are collapsing," said Michael Larson, an analyst with Weiss Research. "When lenders are aggressive enough on pricing, especially in certain markets, it's enough to attract buying interest."

Falling prices

The median price of all homes sold during the month - including single-family homes, townhomes, condominiums and co-ops - fell 7.1% to $212,400 from $228,600 a year ago. Before the start of the current housing slump, it had been 11 years since prices fell compared to a year earlier.

At the same time, the single-family home median price fell 7.7% from a year ago to $210,900. The trade group has tracked those sales prices going back to 1989.

The rate of existing home sales rose in every region of the country except the South, where sales slipped by a seasonally adjusted 0.5%. Sales in the Northeast rose 5.9%, while the Midwest saw an increase of 0.9%. The West saw the largest jump in sales, up 9.7%, as prices fell a whopping 22.2% in that region.

Prices in the Northeast declined 4.9%, while the South saw a dip of 3.5%. Prices actually rose 1% in the Midwest.

"Home prices generally follow sales trends after a few months of lag time," said Lawrence Yun, NAR chief economist. "Still, inventory remains high in many parts of the country and will require time to fully absorb."

Expanding inventory

Even as sales picked, up, the excess supply of homes on the market still rose 3.9% in July to a record high of 4.67 million. Realtors estimated that represents an 11.2 month supply.

That is up from the 11.1-month supply in June, though NAR said the rise in inventories was due to a sharp jump in the number of condominiums on the market. Inventory of single family homes declined slightly, falling to a 10.6 month supply from 11 months in June.

"The troubling thing about this report is that the supply issue is not going away," said Larson. "It would be okay as long as the inventory went down, but there were enough new listings that overall supply rose more than sales."

In response to the struggling market, President Bush signed the Housing and Economic Recovery Act late last month. The bill includes a temporary tax credit of up to $7,500 for first-time home buyers who haven't purchased a home in three years.

Qualified buyers must earn less than $75,000 - or $150,000 for a couple - after which point the tax credit begins to phase out. The Senate Finance Committee estimates that about 1.6 million people will use the credit.

But if inventory continues to rise, it may be a while before the the market can recover.

"This report illustrates a housing market that's going to continue to struggle," said Larson. "Pricing pressure will remain for a while." 

Inflation (CPI)

NEW YORK (CNNMoney.com) -- The annual inflation rate surged to 5.6% in July - the highest point in 17 years, the government announced Thursday.

The previous month's reading on annual inflation was 5%.

The July increase matched the 5.6% level in January 1991, when the Persian Gulf War was raging.

"It's obviously disturbing - it's a bad number," said David Wyss, chief economist for Standard & Poor's.

The report from the Bureau of Labor Statistics is the latest sign of economic misery for Americans, on top of mounting job losses and the imploding home market.

On a monthly basis, the Consumer Price Index jumped by 0.8% in July. That is twice the increase that economists had expected.

The biggest culprit in driving up inflation was the cost of energy, which increased by 4% on a monthly basis and 29.3% annually.

The big hits on energy include a 61.1% annual surge in household fuel oil and a 37.9% jump in the price of gasoline.

Monthly food prices increased 0.9% and 8.4% annually. This is one of the largest monthly increases of the year, matching the 0.9% increase in April.

Among the annual food price increases were a 12% jump in the price of cereal and bakery products and a 10.1% increase in fruits and vegetables.

The so-called core CPI, which excludes the volatile food and energy prices, increased to 2.5% annually and 0.3% on a monthly basis in July. Analysts had expected a monthly increase of 0.2%.

Wyss said that while energy prices have dropped dramatically in recent weeks, "this is a number that is going to make the Fed very concerned."

He also said that the weak U.S. dollar was "part of the problem" in driving up the CPI.

Wyss said he does not expect the Federal Open Market Committee, which next meets on Sept. 16, to change the federal funds rate from its current target of 2%.

The price of crude oil slipped 56 cents on Thursday morning to $115.44 a barrel, down from the July 11 record of $147.27.

But Lakshman Achuthan, managing director of the Economic Cycle Research Institute, believes the worst of inflation's sting is over.

Inflation is being driven by food and energy prices, and consumers are pulling back on purchases, Achuthan said. He said this is partly why the price of new vehicles has fallen 0.8% over the last year, while the price of computers and computer equipment has plunged 11.8%.

"Inflation is not going to run away; it's going to be reduced," he said. "The bad news is that this is because we're in a recession. Recession kills inflation." 

Auto industry seeks $50B in loans from Congress

WASHINGTON (AP) -- -- Automakers plan to urge Congress to support funding up to $50 billion in low-interest loans over three years to help them modernize their assembly plants and develop next-generation fuel-efficient vehicles.

Industry officials said the loans, which are twice the amount authorized in last year's energy bill, are a top priority when Congress returns next month because of the declining fortunes of Detroit's automakers and tightening credit markets.

"The amount of concern and urgency from the Detroit companies has increased in the last month and significantly ratcheted up what they're communicating what their funding needs are," said Alan Reuther, legislative director for the United Auto Workers union.

Congress authorized $25 billion in low-interest loans in last year's energy bill, but the auto industry's allies in Congress have been unable to get funding for the plan.

The loans would provide low-interest credit for up to 30 percent of the cost of retooling facilities to build hybrids, plug-in hybrids, electric cars and other alternatives.

Massive losses

Detroit's automakers have struggled this year amid a sluggish economy and consumers shunning large sport utility vehicles and trucks because of high fuel prices. General Motors (GM, Fortune 500) reported a second-quarter loss of $15.5 billion and Ford Motor (F, Fortune 500) reported an $8.7 billion loss.

The auto industry's future has been a top issue in Midwest battleground states key to the presidential race. Sen. John McCain had opposed the retooling efforts, arguing that his $5,000 tax credits for consumers who buy fuel-efficient vehicles and a $300 million battery prize would accomplish the same goal.

But in a statement released Friday, the Arizona Republican said Congress should fund the loan program in the energy bill: "I believe we should fund it and take action that will assist Detroit and its suppliers in making it through this difficult time of transition."

Douglas Holtz-Eakin, McCain's top economic adviser, said the conditions had declined for auto companies seeking access to capital. "It's a common sense response to the realities on the ground," he said.

Democrat Barack Obama previously outlined support for the loans, and a 10-year, $150 billion program for green manufacturing. Obama's campaign said Friday they would support the $50 billion loan program.

No bailout

Auto industry officials have argued that the loan program would not represent a bailout, but would be similar to aid lawmakers have given to Wall Street investment banks and struggling mortgage firms. They also note that auto companies face tens of billions of dollars in costs from new fuel economy regulations.

"We don't see it as a bailout. We see it as government assistance to help retooling tied to the production of these advanced technology vehicles," Reuther said.

Congress would need to appropriate $3.75 billion to provide up to $25 billion in low-interest loans to car companies and their suppliers, according to a July 25 letter to House Democratic leaders.

The plan, which is still being discussed, calls for $25 billion in loans to be available in the first year, followed by an additional $15 billion in the second year and $10 billion in the third year, industry officials said. To activate the full $50 billion in loans, Congress would need to set aside about $7.5 billion to guard against a loan default.

GM and Ford spokesmen declined to comment on whether their companies would be pushing Congress to raise the loan limit, but expressed support for the program.

The loans in the energy bill showed how "government policy can be aligned with consumer demand and the efforts of the industry," said GM spokesman Greg Martin.

Mike Moran, a Ford spokesman, agreed: "Congress created a program for direct loans and we're hopeful that they can fund those this year." 

Leading economic indicators tumble

NEW YORK (AP) -- A private business group's measure of the economy's health showed the largest drop in one year as stocks fell, new building permits declined, and unemployment rose.

The monthly forecast for future economic activity fell 0.7% in July, according to a Thursday report from the Conference Board, a New York-based research firm, plummeting far beyond the 0.2% decline estimated by a consensus of Wall Street economists surveyed by Thomson/IFR.

The last time the index showed a drop this great was last August, when it fell by 1%.

Revised June data showed no change to the index, which has slipped 0.9% for the six months ending in July.

The decline was the steepest in the index this year. The largest drag on the index was the decline in building permits, followed, in order, by: stock prices, rising unemployment claims, a tightened money supply and falling manufacturers' orders for consumer goods.

Interest rate spreads, consumer expectations and manufacturers' orders for capital goods all contributed to the index.

Stocks, which were down before the index's release, cut some of their losses. The Dow Jones industrial average was down 52.35 at 11,365.08. The Standard & Poor's 500 was down 4.45 at 1,270.09, and the Nasdaq Composite was down 18.64 at 2,370.44. 

The next credit crunch

(Fortune Magazine) -- We made it through the bursting of the Internet bubble and now the bursting of the real estate bubble. Next we may be approaching the end of the most worrisome bubble of all: the standard-of-living bubble.

That conclusion comes from the latest data on credit card debt. It's growing fast, but the problem is bigger than that - and to understand what it means, we have to take a few steps back.

For the past several years, the average inflation-adjusted total pay of American workers hasn't been increasing. That means we haven't been building a foundation for increases in our living standard. You might be tempted to say that by definition our living standard couldn't have increased, but that's not quite right. Even with stagnant real incomes, we can always live a little better every year through borrowing and pretending that our living standard is still rising, just as it was for decades.

So the Great Bull Market made us feel rich, and we felt justified in saving less and borrowing - and spending - more.

After stocks collapsed, home prices took off, making us feel rich all over again. So we continued saving less and spending more, creating the illusion that our living standard was still rising. In 2005 our personal savings rate went negative, but even that didn't slow us down, because our homes were still appreciating - and rising home values meant that household net worths weren't declining. (Don't be fooled by that saving-rate spike in this year's second quarter; it was probably a one-time event resulting from the federal stimulus payments.)

Of course, we don't hear those assurances anymore. Stocks are back where they were eight years ago, and home prices are where they were five years ago. But personal debt is much higher than ever before, and average pay is still going nowhere in real terms. So now how do we live as if our living standard is still rising?

End of easy money

That's where the credit card reports come in. Last year, just as the subprime crisis happened, credit card debt took off. The home-equity ATM had been shut down, so people turned to the last source of easy money they had left, the most expensive debt on the menu, credit card borrowing.

Since credit card debt has been growing much faster than the economy - more than 8% in last year's third and fourth quarters and over 7% in May (the most recent month reported)- people are apparently using it as a substitute for income. Thus, for the past year or so we have still maintained the standard-of-living illusion.

But a big crunch is coming - and here's why. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup (C, Fortune 500), one of America's largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought. More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it's getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can't offload as much of the debt as before, they'll have less money to lend to cardholders.

The squeeze has already started, which is why Congress is in the process of passing the Credit Cardholders' Bill of Rights, which would prevent issuers from changing rates and terms without warning, among many other provisions. But bottom line, the credit card money window is going to start closing - and soon.

So now what? It's hard to see where consumers can turn next. Home prices seem highly unlikely to start rising again soon. Stocks? You never know, but the Great Bull Market looks like a once-in-a-lifetime event. Homes and stocks are households' biggest asset classes by far. There isn't much else to borrow against.

It may be that the standard-of-living bubble finally has to deflate. Sustainable increases in living standards have to be earned, not borrowed, and that means performing ever higher value work that can't be outsourced. We haven't been meeting that challenge very well; doing so will probably require much more and better education for millions of Americans, which takes time and money.

The result may feel like deprivation, but I don't see it that way. Who knows - we might even find that living within our means and saving a little money actually isn't so bad.  

Leading Indicators

NEW YORK (CNNMoney.com) -- The economy slowed in June as higher prices for food, fuel and other goods translated into a dip in growth, according to a private group's measurement released Monday.

The New York-based Conference Board's forecast of future economic activity fell by 0.1%, matching the consensus estimate of Wall Street economists. The group revised May's number down to a 0.2% decrease from a 0.1% increase.

The report indicated that the economy may not improve over the next six months.

"The report is saying there's no pickup, there's no recovery from where we are six months ahead," said Allen Sinai, chief economist at Decision Economics.

He said the report showed a fragmented economy, with housing and finance in "a depression" alongside healthy sectors like health care and exports.

The situation is complicated by the fact that while real GDP has not declined, many important monthly indicators - such as job creation - have shown weakness.

"So, how do I characterize it? More of the economy is doing poorly than well, so I'm calling it a mild recession," Sinai said.

The leading indicators index is an aggregate of data such as stock prices, unemployment claims, weekly manufacturing hours and the difference between short-term and long-term interest rates.

Four of the 10 key factors contributed positively to the index. Most important were building permits, an increase of 0.3%, and interest rate spread, an increase of 0.2%.

Of the six factors that weighed down the index, money supply fell by 0.3% and stock prices decreased by 0.2%. 

Bernanke and Buffett battle the bears

NEW YORK (CNNMoney.com) -- The market's up one day and down the next. Oil rises and oil falls. The dollar strengthens and then it weakens.

This has been a topsy-turvy market for the past few weeks. And it seems that the only thing traders can agree is that the sluggish economy is to blame.

Regardless of what direction stocks, commodities or the dollar move on any given day, the sad state of the economy is invariably cited as the reason.

Talkback: How much longer will the economic slump last?

Oil's down and stocks are up? It's demand destruction! Crude's spiking again and stocks are falling? It's because the credit crunch is worse than feared and the commodity bulls are back!

Sure, some of the wacky market moves this month can be attributed to light trading volume as many Wall Streeters appear to be hitting the beach. But these are confusing times for investors. It's difficult to figure out when the economy will finally start to emerge from this funk.

Federal Reserve chairman Ben Bernanke, speaking at a conference in Jackson Hole, Wyo. this morning, admitted that "the financial storm...has not yet subsided."

And because the credit crunch is coupled with a global boom in commodity prices, Bernanke said this is "one of the most challenging economic and policy environments in memory."

Bernanke added that the Fed has kept interest rates relatively low despite the increase in inflationary pressures because the Fed believed that slowing global growth would eventually lead to a pullback in commodity prices.

That has begun to happen in the past month. Bernanke said in his speech that the drop in oil prices and the strengthening of the dollar is "encouraging" and that inflation "should moderate later this year and next year."

However, Bernanke also pointed out that a key reason why inflation will moderate is that the pace of economic growth "is likely to fall short of potential for a time."

My takeaway from this speech is that barring a major shock to the economy, such as a huge bank failure or another big spike in oil prices, the Fed is going to keep interest rates where they are for a while...perhaps well into next year.

In other words, consumers and investors will have to get used to this economic uncertainty. It's likely to linger.

The Fed has no quick and easy fixes to the dual problems of the credit crunch and inflation. It's going to take time for the Fed's seven rate cuts from last year and earlier this year, to work their usual stimulative magic.

This doesn't mean that the economy, as some pundits and many of this column's most vocal readers seem to think, is heading for another Great Depression.

But it does probably mean that the markets will remain fairly volatile for the next few months.

To that end, legendary investor Warren Buffett said in an appearance on CNBC this morning that he thought the economy may be worse five months from now but it would be stronger five years from now. He also said that stocks are more attractive now than a year ago.

Yes, this may turn out to be a longer recession, slowdown, or whatever term you want to use to describe the current state of the economy, than usual. As I pointed out in a column a few weeks ago, the typical post WWII recession lasts about 10 months. But some have lasted as long as 16 months.

Still, now more than ever, is a time to resist the temptation to fret about day-to-day market moves and doom and gloom economic headlines. For those that are able to put some money aside to invest in quality U.S. companies, now is an opportune time to do so.

The short-term outlook may be bleak but this is not the beginning of the end for the U.S. economy. It's a cyclical downturn, plain and simple. And as long as oil prices keep falling and the dollar keeps rebounding, there's good reason to think that we're closer to the end of the slump than the beginning.  

Consumer Confidence

NEW YORK (CNNMoney.com) -- A key measure of consumer confidence rose modestly in July after declining for six months in a row, according to a report issued Tuesday.

Despite the small improvement in consumer sentiment from June, consumer outlook remains "very pessimistic," according to the report by the New York-based Conference Board, a business research organization.

The board said its Consumer Confidence Index rose to 51.9, up from a revised 51 in June. Economists had expected the index to decline to 50, according to a consensus compiled by Briefing.com.

While the July measure showed some improvement over the previous month, the board said that consumers' perception of the economy has not shifted dramatically.

"Consumers' assessment of current conditions was little changed, suggesting there has been no significant improvement, nor significant deterioration, in business or labor market conditions," said Lynn Franco, Director of The Conference Board Consumer Research Center, in a statement.

While the consumer confidence number increased in a month-over-month comparison, the reading was still much lower than it was even in May, when the reading stood at 58.1.

"In arithmetic terms, yes it is higher, but in economic terms this is still bad, severely depressed," said Robert Brusca, chief economist at Fact and Opinion Economics. "This is certainly not a rebound in economic terms," added Brusca.

"We are kind of focused on month-to-month changes," said Brusca. "That is a relative standard."

In order to really understand how the reading fits into a bigger picture, however, Brusca said that the Consumer Confidence measure for July needs to be considered "in absolute terms."

Consumer confidence in July 2007 stood at 111.9. "Up and down the line, these are extraordinarily weak numbers," said Brusca.

Present conditions. The Present Situation Index, which measures where the average consumer feels the economy is right now, was virtually unchanged at 65.3 versus 65.4 last month.

Consumers' read on the economy right now remained grim, according to the report.

Those who think business conditions are "bad" increased slightly to 32.8% from 31.9%, but those claiming business conditions are "good" also rose to 13.1% from 11.5% last month.

Those Americans saying jobs are "hard to get" increased to 30.3% from 29.7% in June, and those claiming jobs are "plentiful" declined to 13.5% from 14.1%.

On Friday, the U.S. Department of Labor will announce the unemployment rate for July. The unemployment rate is expected to tick up to 5.6% from 5.5% in June, according to a consensus estimate from Briefing.com.

The most recent reading on initial claims for unemployment benefits came in 406,000 for the week ended July 19, according to the Labor Department.

Future conditions. The Expectations Index, which measures what consumers think will happen to the economy in the coming months, increased moderately to 43 from 41.4 in June.

"Looking ahead, while consumers remain extremely grim about short-term prospects, the modest improvement in expectations, often a harbinger of economic times to come, bears careful watching over the next few months," said Franco.

While consumer sentiment remained mostly negative, "we have had some good news in the month in terms of energy prices breaking off," said Brusca.

The survey period for this reading was July 22, and while gas prices at the pump had not come off significantly at that time, Brusca said consumers understand that falling crude oil prices will eventually mean cheaper gas prices.

Consumers who think business conditions will get worse in the coming six months decreased slightly to 32.4% from 33.5%, and those expecting conditions to improve increased to 9.3% from 8.5% in June.

But consumers remained pessimistic about their job prospects.

Consumers expecting fewer jobs in the months ahead increased to 37.1% from 35.7%, and consumers expecting more jobs remained virtually unchanged at 8.2%.

However, Americans expecting their paycheck to increase rose to 14.2% from 13.1%.

The index - based on a survey of 5,000 U.S. households conducted for The Conference Board by TNS - had declined for six months in a row before reversing direction in July. The index uses 1985 as its benchmark, setting the index at 100.