DATE: Sept, 2005

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Recent Economic News

Greenspan Concern With Mortgages - Wall Street Journal 9/27/05
Federal Reserve Chairman Alan Greenspan, "drawing on new research he has personally supervised, said American consumers have become enormously dependent on borrowing against their homes to fuel their spending, and that a rise in mortgage rates could trigger a spending pullback," the Wall Street Journal reports. "Mr. Greenspan's new data show that borrowing against home values added a stunning $600 billion to consumers' spending power last year, equivalent to 7% of personal disposable income -- compared with 3% in 2000 and 1% in 1994."
Related Comments - NYTimes 9/27/05
With new evidence that the housing market remained red hot last month, Alan Greenspan said that the vast majority of homeowners are not yet stretched too thin. But Mr. Greenspan warned that the use of "exotic" mortgages could be pushing prices higher and inducing some homebuyers to take on too much risk.

New Home Sales, Consumer Confidence Dropped - NYTimes 9/27/05
New home sales fell sharply in August and consumer confidence dropped to its lowest level in more than two years this month, according to two reports released today, raising some concerns about the economy's health or at least consumers' perceptions of it in the wake of Hurricane Katrina . The latest data do not necessarily signal a worsening trend because both home sales and consumer confidence are volatile indicators that can fluctuate widely from month to month, analysts said. The large decline in new home sales, for instance, comes a day after another report showed a surprising increase in existing home sales in August.

Unswayed by Storm, Fed Raises Key Rate - NYTimes 9/20/05
Saying that Hurricane Katrina was unlikely to pose a "persistent threat" to the economy, the Federal Reserve raised interest rates on Tuesday for the 11th time in a row and signaled that more increases were on the way. In an unusually long statement, the central bank acknowledged that the hurricane's devastation was likely to cause higher energy prices, higher joblessness and greater uncertainty in the months ahead. But it said the hurricane had not shaken its confidence about longer-term growth, and it left little doubt that its top priority was still to head off inflationary pressures.

Housing Boom Continues - CNN Money 9/20/05
The red-hot U.S. housing market, after a typical summer slowdown, has taken off again and Hurricane Katrina contributed to up-ticks in several localities. According to the National Association of Realtors, with inventory of homes available for sale across the country so tight anyway, rebuilding the Gulf Coast will place additional pressure on all home prices. "New home prices will be immediately impacted because of increased construction costs," says NAR economist Lawrence Yun, "and that will filter down to existing home prices as well." That's because as new house prices rise, more homebuyers will consider existing homes, increasing the demand (and prices) for them. Home sales have already spiked, as has rental demand, in regions surrounding the disaster zone in the Gulf Coast, according to NAR.

Retail Sales Drop - 9/14/05 Reuters
U.S. retail sales dropped by a larger-than-expected 2.1 percent in August (forecast was 1.2 percent drop), the sharpest drop in almost four years, after car purchases collapsed (a record 12.0 percent drop in motor vehicle and parts sales) from July's near-record level, government data showed on Wednesday.
Sales excluding autos were buoyed by high gasoline prices, however, climbing a stronger-than-expected 1.0 percent. The Commerce Department said it could not quantify the impact of Hurricane Katrina but said it would have been small because the storm-affected region accounted for little more than 1 percent of total national sales.

US Productivity Growth is Revised Down - 9/7/05 NYTimes
U.S. business productivity grew at a slower-than-expected 1.8 percent annual rate in the second quarter, a government report showed on Wednesday, while compensation gains caused unit labor costs to rise more quickly than first thought. Unit labor costs -- a key gauge of inflation and profit pressure -- grew at a 2.5 percent pace, up from the 1.3 percent rate initially reported. Economists had expected a 1.4 percent gain. The previous quarter was revised down, to a 2.2 percent rate from 3.6 percent. Compensation pushed up at a 4.4 percent annual rate versus the 3.5 percent initially reported, although the first quarter's gain was revised down, to 5.5 percent from 6.9 percent. Advances in unit labor costs focus attention on inflation as the economy expands and are normally weighed closely by the Federal Reserve.

Katrina's Economic Impact - 9/6/05 govexec
The U.S. economy's shock absorbers kicked in within days of one of the worst natural disasters in its history, offering hope that the massive jolt to the country's energy and transportation systems won't produce a long-lived, serious economic contraction," the Wall Street Journal reports. "Hurricane Katrina is the biggest test in years of the economy's resilience. But recent history offers encouraging, though by no means definitive evidence of the U.S. economy's ability to bounce back from shocks.
The Federal Reserve is likely to conclude that Hurricane Katrina poses more risk of inflation than of an economic slowdown, and probably will raise rates on Sept. 20 while signaling it may pause later if there are lingering effects on growth and hiring," Bloomberg News reports. "Current and former Fed officials also are stressing odds that any slowdown will be temporary, and emphasizing their reputations for keeping inflation at bay.

Wall Street Sees Little Storm Impact - Washington Post 9/6/05
Wall Street economists and money managers spent the long holiday weekend keeping close watch on the effects of Hurricane Katrina, with many saying that, despite the devastation, the long-term impact on U.S. and global economic growth should be muted. But several analysts also warned that global stock, bond, currency and commodities markets may react sharply in the coming days and weeks to any signs of prolonged energy supply disruption, depressed consumer spending or rapidly rising unemployment. "The economic and market implications of Katrina, and her ugly aftermath, remain highly problematic," Robert J. Barbera, chief economist at ITG-Hoenig, wrote in a report to clients over the weekend. "Most obviously, a slower trajectory for global growth now seems unavoidable. . . . U.S. consumer spending will take a hit in the months ahead."

THE ECONOMY: SEVEN INDICATORS - From CNN Money (as of 9/27/05)

The Indicator
What It's Telling Us
Next Update
Consumer Confidence Near two year lowOct 25
Retail salesBigger than expected decline, driven by slowdown in auto salesOct 14
Leading Economic IndicatorsPoint to slowdown aheadOct 20
Manufacturing Activity (ISM)Expanding but losing momentumOct 3
Industrial ProductionUp less than expected due to Katrina slowdownOct 14
Jobs Growth169,000 jobs added; below forecastsOct 7
Inflation (CPI)Prices rising at steady clip - but still under controlOct 14

 

Major Gift Opportunity Through 12/31/05
As part of the Katrina Hurricane Relief Tax Package (H.R. 3768), Sec. 301 permits charitable gifts up to 100% of income. This provision effectively permits unlimited IRA withdrawals and gifts to charity. Many major donors may make IRA withdrawal-gifts during the rest of 2005. When a person over 59 1/2 withdraws funds from his or her IRA, the withdrawal will be included in the IRA owner's taxable income. Under the new 100% of income charitable gifts option, the withdrawn funds may be given in full to charity. The full gift will then be deductible.
This bill is pending compromise committee review and the President's signiture.
Qualifying cash gifts must be made between August 28, 2005 and December 31, 2005. Make sure the withdrawal request allows time for processing. You must have the cash available by December 31 to qualify.
Public charities generally will qualify, but there are several exceptions -- no private foundation gifts, no supporting organization gifts, no donor advised fund gifts and no gifts of property such as stock or land.
www.iragift.org 9/23/05

Vehicle Donation Update
The IRS has just issued a new form 1098-C, which charities must provide to donors who donate cars, boats or airplanes. This form helps to implement the new law that prohibits a charitable deduction greater than the charity's sale price. You can view this new form at the IRS website here: www.irs.gov/pub/irs-pdf/f1098c.pdf. The charity must issue the form to the donor within 30 days of the date of the gift, and a copy must be forwarded to the IRS by February 28th of the following year.
Commentary: As we see time and time again, the misdeeds of the few cause more paperwork for everyone else. If a few charities had not stretched the rules and encouraged donors to claim deductions far in excess of what the charity actually received, there would have been no need for the new law or the new form. This new procedure will pose a significant additional burden for the business office of each charity that regularly accepts donations of cars, boats and airplanes.
John Ebare - www.pgcoach.com 9/12/05

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Hurricane Relief Package Includes Temporary IRA Charitable Rollover Provision
Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Max Baucus (D-MT) have announced legislation to provide immediate tax relief to victims of Hurricane Katrina - including an IRA charitable rollover provision.
The provision would exclude from gross income otherwise taxable IRA withdrawals for qualified charitable distributions. Under the provision, taxpayers age 70-1/2 and older would be allowed to roll over amounts from their IRA accounts directly to a qualified charitable organization on a tax-free basis. In addition, the provision would allow taxpayers age 59-1/2 and older to transfer IRA funds to a charitable remainder trust and give a remainder interest in the trust to charity without tax consequences. The IRA provision would be effective only through December 31, 2005.
This legislation is moving very quickly and may be considered this week in the Senate with action in the House soon after. Should this tax package be passed, NCPG (National Committee on Planned Giving) believes this will add great momentum toward passage of a permanent IRA Charitable Rollover, such as H.R. 1607, the Public Good IRA Rollover Act.
NCPG Bulletin 9/13/05
NOTE - 9/21/05 The version passed by both House and Senate did not contain the rollover provision.

Delay In Estate Tax Vote
The U.S. Senate will delay voting on legislation to repeal the estate tax, Senate Majority Leader Bill Frist said after Democrats urged Republicans to make helping Gulf Coast hurricane victims the priority when Congress returns. "We want to address the urgent needs that relate to the people that are in such desperate shape down there," Senate Democratic Leader Harry Reid said Monday. Two hours later, Frist told reporters that the Senate is delaying the estate tax measure. Frist last week said that Republican lawmakers would pursue a vote on estate tax repeal as the first order of business when the Senate returned after the August recess, which ends tomorrow. Democrats long have argued that the estate tax, currently being phased out until 2010, when it will be repealed for one year, benefits the wealthy and deepens federal budget deficits. Reid, of Nevada, said Monday that a Republican push for a vote on the estate tax soon after the hurricane would be "a travesty on top of a tragedy."
Arizona Republic - 9/6/05

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Estate Tax Update
With just a few days before Congress reconvenes, Senate Republicans are still at odds over a vote to fully repeal the estate tax, currently scheduled for the week of September 6.
Senate Majority Leader William H. Frist, R-Tenn., has repeatedly promised that either the first or second bill of the September session will be a cloture vote on H.R. 8, which would repeal the estate tax beginning in 2005. He has not publicly budged despite continued calls for compromise from prominent Republicans such as Senate Finance Committee Chair Chuck Grassley, R-Iowa, and the likelihood that the Senate will need to address the aftermath of Hurricane Katrina, which has caused widespread destruction along the Gulf Coast.
In a Farm Broadcasters News Conference on August 31, Grassley called the chances of achieving full repeal "zero," because it will need 60 votes to overcome any objection or filibuster. "We're short of 60 votes," he said.
Grassley said compromise efforts are progressing, with the "boundaries" of a "nebulous" deal likely encompassing an exemption of between $4 million and $6 million and a 15 percent to 35 percent tax rate. While H.R. 8 would cost almost $300 billion according to the Joint Committee on Taxation, Grassley said lawmakers are "shooting for a compromise that would cut that in half."
PGDC 9/1/05

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Hurricane Katrina Scams
Citing a number of scams that arose after last year's Tsunami disaster, experts are cautioning consumers to be wary of similar ploys asking for donations for the Hurricane Katrina victims.
Michigan Attorney General Mike Cox warns consumers to be particularly skeptical of e-mail requests for donations by unfamiliar organizations, which may be nothing more than identity thieves trying to collect consumers' personal information under false pretense. Even messages that seem to come from established charities can be scams. Consumers should contact organizations of their choice directly and never respond to unsolicited e-mails seeking money or personal information.
8/30/05 Charity Channel
An FBI official quoted in the story offered this advice: "People who want to make a donation or contribute to a cause should actively seek out reputable organizations and then contact them by telephone or by typing their Web address into a Web browser. The important point is that they initiate this contact on their own."
8/30/05 Washington Post article
Citizens seeking to make donations to help Hurricane Katrina victims should seek out qualified charities, the Internal Revenue Service said today. People who have a specific charity in mind can make sure that it is a qualified charity by searching an IRS-approved list available on the IRS Web site. IRS.gov has an on-line search feature that allows people to find qualified charities. Some organizations, such as churches and governments, may be qualified even though they are not listed. The IRS does not endorse any charity.
08/30/05IRS Newswire 2005-86

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KPMG Tax Fraud
KPMG LLP (KPMG) has admitted to criminal wrongdoing and agreed to pay $456 million in fines, restitution and penalties as part of an agreement to defer prosecution of the firm, the Justice Department and the Internal Revenue Service announced today. In addition to the agreement, nine individuals-including six former KPMG partners and the former deputy chairman of the firm-are being criminally prosecuted in relation to the multi-billion dollar criminal tax fraud conspiracy.
As alleged in a series of charging documents unsealed today, the fraud relates to the design, marketing, and implementation of fraudulent tax shelters. In the largest criminal tax case ever filed, KPMG has admitted that it engaged in a fraud that generated at least $11 billion dollars in phony tax losses which, according to court papers, cost the United States at least $2.5 billion dollars in evaded taxes. In addition to KPMG's former deputy chairman, the individuals indicted today include two former heads of KPMG's tax practice and a former tax partner in the New York, NY office of a prominent national law firm.
Editor's note - It is often said that if it appears too good to be true, then it probably isn't true.
8/30/05 IRS Newswire

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Congress and CARE
As Congress prepares to resume work after the summer, some observers are predicting that we will see action on charitable reform legislation. While this legislation may include the CARE Act, with provisions for tax-free gifts from IRA accounts, it will likely include much more. The Senate Finance Committee is contemplating stricter rules on donor advised funds and greater IRS oversight of charitable governance. Just as we saw with legislation last year to tighten the rules on tax deductions for donated automobiles, we now see more moves in that direction to address other areas of abuse. This expected action by Congress should not surprise anyone. Historically, Congress has consistently affirmed and protected the charitable tax deduction for bona fide donations. At the same time, Congress has consistently attacked schemes that attempt to misuse charitable giving by providing inappropriate benefits to donors and investors. Although this type of legislation is designed to protect legitimate charitable giving, it will cause an additional regulatory burden on many charities and donors because of the misdeeds of the few.
8/14/05 John Elbare, MBA, CFP www.pgcoach.org

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Please note, individual financial circumstances will vary. The information on this site is meant as general information and does not represent legal or tax advice.. As with all tax and estate planning, please consult your attorney or estate specialist. All material is copyrighted and is for viewing purposes only. This News and Information section has been compiled by Future Focus.
Please report any problems to webmaster. Revised: October 4, 2005 17:45.