Bob’s Journal for 6/22

The Rise in Noneconomic Spending and What It Means to You

We’re in an age when noneconomic spending by businesses and governments is increasing, and that will have significant economic consequences.

For many years, businesses spent and invested primarily to reduce costs or increase productivity. Results of that were a productivity boom, rising profits and margins, and inflation anchored at 2% or less. Prices of many goods steadily declined.

But that era is over.

Much business spending and investment now is for noneconomic reasons, meaning that the expenditures aren’t made primarily to reduce costs or improve productivity. Karen Karniol-Tambor of Bridgewater Associates is credited with developing the concept of noneconomic spending.

When deciding where to locate manufacturing facilities or which suppliers to use, the main consideration no longer is determining the lowest cost option.

Now, the reliability of the supply chain is a major concern. Businesses want to reduce their vulnerability to trade wars, political conflicts and a country’s internal issues.

Even if supplies cost more, businesses want their supply chains to include countries that are on good terms with their own, a practice known as friend-shoring.

Climate change also is a factor in business investment and spending decisions. Some businesses are under government mandates to reduce their use of fossil fuels or other inputs. Other businesses are pursuing such goals without government prodding, knowing that it is likely to increase costs and decrease efficiency, at least in the short term.

Businesses also are looking for protection from climate change by moving facilities and supply sources to areas less likely to suffer disruptions from storms and other events.

Governments are pursuing their own noneconomic spending. The United States has begun a more aggressive industrial policy in which it subsidizes or provides incentives for certain types of businesses or activities.

Governments also are spending more on infrastructure, and sometimes the infrastructure spending is designed to subsidize businesses.

A result of all these trends is that prices of goods aren’t likely to repeat the steady decline of the last several decades. Labor costs also are likely to rise as a percentage of revenue. Inflation is more likely to be anchored at 3% or higher instead of 2% or lower.

Economic growth also is likely to be lower over the long term because of noneconomic investments.

Some of this noneconomic spending will be offset by innovations, such as artificial intelligence (AI). But the benefits of AI aren’t likely to be felt for a while. The likely outcome is that the negative effects of the noneconomic spending will be the stronger force in the near term, leading to higher inflation and lower growth.

Recover Forgotten 401(k) Accounts

About $1.65 trillion are in “forgotten” or “left behind” 401(k) accounts.

Many workers change jobs several times during their careers. There frequently are oversights when making a job change, and too often a 401(k) account is one of the oversights.

As of May 2023, there were about 29.2 million forgotten or left behind 401(k) accounts, according to Capitalize, a financial technology company. The firm estimates those accounts hold assets worth about $1.65 trillion, a 20% increase over two years. The firm says these accounts are about 25% of all 401(k) assets.

When a 401(k) account is forgotten or overlooked, the account owner no longer is managing it. The owner can be missing out on profitable opportunities or suffering unnecessary losses. The forgotten accounts are usually charged annual fees by the plan administrator.

In the worst-case scenario, the account owner forgets about or loses track of the account. The money isn’t recovered by the owner or beneficiary.

The account eventually might be turned over to a state’s lost or abandoned property office.

The tax code allows a plan to automatically redeem accounts worth under $5,000 when the owner no longer is an employee and hasn’t communicated with the administrator. Usually, if it hasn’t heard from the former employer, the plan administrator sets up a “safe harbor IRA” in the account owner’s name and transfers the account balance to the IRA.

An employee has several options for handling a 401(k) account after leaving an employer. The options are confusing to many employees, and they are dealing with a number of issues at the time. Many decide to defer making a decision about their 401(k)s, because there is no rush.

But eventually, some forget about the account.

Several large 401(k) administrators are putting together an organization that will automatically transfer a 401(k) from one plan to another when a worker changes employers. But success will require many plan administrators to participate.

In the meantime, employees should remain aware of their 401(k) accounts when switching jobs or leaving an employer. The best option in most cases is a rollover. The account can be rolled over to either the new employer’s 401(k) plan or to the employee’s IRA.

To discover if you have an overlooked 401(k) account, contact the plan administrators or human resources (HR) offices of former employers. You also can check the Abandoned Plan Database on the U.S. Department of Labor website. There are other online databases, such as the National Registry of Unclaimed Retirement Benefits.

You also should review the online unclaimed property listings for every state in which you’ve lived.

Why Does Chevron Have a Higher ESG Score than Tesla?

Many investors want to consider a company’s environmental, social and governance (ESG) policies when choosing investments, but doing so can be difficult.

A number of businesses offer ESG ranking services, and investors can buy ETFs that invest based on the rankings. But the rankings might not match an investor’s values and preferences, according to an analysis in Barron’s.

Consider recent changes to the S&P ESG Index.

Tesla finally was added to the index after years of being excluded.

The oil company Chevron also was added to the index. Tesla receives lower ESG scores than the other automakers and Chevron.

This ranking, and many others, consider all three factors: social policies, governance policies and environmental policies and practices. The factors generally are given equal weight.

Tesla scores highly on the environmental component, though it does trail fellow automaker Volvo. But Tesla doesn’t do well on the social and governance components.

While Chevron doesn’t score well on environmental policies, it does so well on social and governance that it soars past Tesla on the total score.

The governance score includes transparency and disclosure and includes the extent to which a company responds to 61 industry specific questionnaires. Tesla doesn’t complete many of the questionnaires and its disclosure practices only rate a medium score.

Perhaps this is why Tesla CEO Elon Musk has described ESG rankings and scores as “a scam.”

To consider nonfinancial factors in your investment decisions, you have to rely on indexes such as this one and accept their standards, values and weighting of different factors or you have to do the research yourself.

The Data

Retail sales increased 0.3% in May after increasing 0.4% in April. Excluding autos and gas, retail sales rose 0.4% in May after rising 0.5% in April.

Over 12 months, overall retail sales increased 1.6%, compared to 1.2% at the end of April.

Home builders are more optimistic. The Housing Market Index from the National Association of Home Builders (NAHB) increased to 55 in June from 50 in May. That’s the highest reading since July 2022 and ends an 11-month streak of the index being 50 or below.

Housing starts increased 21.7% in May after declining 2.9% in April. The May percentage increase is the largest since October 2016, and the number of housing starts in May was the highest since April 2022.

The Empire State Manufacturing Index increased to 6.6 in June from negative 31.8 in May. The May number was a four-month low.

But the Philadelphia Fed Manufacturing Index declined to negative 13.7 in June from negative 10.4 in May.

Industrial production declined 0.2% in May after increasing 0.5% in April. Over 12 months, industrial production increased 0.2% as of the end of May and 0.4% as of the end of April.

Manufacturing production increased 0.1% in May after rising 0.9% in April. Over 12 months, manufacturing production was down 0.3% as of the end of May and 0.8% at the end of April.

The Consumer Sentiment Index from the University of Michigan rose to 63.9 as of mid-June from 59.2 at the end of May.

Both the current conditions and expectations components of the index increased. Plus, inflationary expectations declined.

New unemployment claims were unchanged at 262,000 in the latest week, but the previous week’s number was revised higher. The latest week’s claims were the highest since October 2021.

Continuing claims, which lag a week behind new claims, increased to 1.775 million from 1.755 million.

The Markets

The S&P 500 rose 0.49% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.41%. The Russell 2000 decreased 1.49%. The All-Country World Index (excluding U.S. stocks) fell 0.38%. Emerging market equities declined 0.64%.

Long-term treasuries gained 2.07% for the week. Investment-grade bonds increased 1.37%. Treasury Inflation-Protected Securities (TIPS) added 0.84%. High-yield bonds were unchanged.

In the currency arena, the U.S. dollar declined 0.60%.

Energy-based commodities increased 2.90%. Broader-based commodities rose 3.10%, while gold declined 0.41%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here, respectively. You can be among the first to write a review.

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