Inverness Real Estate Fall-2005 Dollars & Sense: The Reality Of Large Numbers

“Oil is at a record high.” “The national debt of the United States is out of control.” “Hurricane Katrina is going to cause a recession.” These are common themes in the media today. Allow me to use the fall issue of this magazine to put some things into perspective.

$11.6 trillion!* This is the Gross Domestic Product (GDP) or the value of all goods and services produced in the USA. This is not the profit or net worth of the country but more like the revenue of our economy.

The national debt is currently $7.949 trillion.* This is a large number but manageable as it represents 68% of GDP. Consider that in 1948 the debt was 122% of GDP and in 1981 is was 33% of GDP. We are currently in the middle of this range.

Hurricanes Katrina and Rita are likely to cost the Federal Government $200 billion or more.* Although, this is a huge number, it is only 2% of our national GDP. But, I believe there is strong data to support that the cost of these storms alone will not send our economy into a recession.

The value of oil consumed by our economy annually is $396 billion with oil at $70 per barrel.* The highest inflation-adjusted price of oil was close to $90/barrel in 1980. We must compare real dollars to get a fair comparison. Even with price of oil near $70, it is only 3% of our GDP. At the present time, the main reason for the higher price of oil appears to be global demand rather than price manipulation as was the case in the 1970’s.

During the past year, the companies in the S&P 500** earned profits of $630 billion.* This is pure profit. This, in comparison to the other numbers, shows that our economy is strong and can handle the challenges that the hurricanes and higher-priced oil are presenting. Market performance in the past 2-3 years has also been positive, but emotionally it has been difficult to overcome the impact of the negative years from 2000-2002.

This year the United States Treasury has received $76 billion* in unexpected tax revenue. As people make more money, they pay more taxes. This is further proof that the economy is improving

Currently, individuals are holding nearly $2 trillion in money market assets.* This easily- moved money often causes significant daily movements in the markets. Therefore, 100-point moves in the Dow Jones** Industrials are not uncommon.

So this is the point: the next time you see a large number in the newspaper, remember the context. We live in a world of big numbers. Learn to think in terms of percentages. This perspective will help you evaluate the information thrown at you.

Oh, by the way …did you know that Americans spend $630 million per year on golf balls!!

Please feel free to call with any questions or comments.

* Source: United States Government Figures

** The S&P 500 and the Dow Jones 30 are unmanaged indices and cannot be invested into directly. Past performance is does not guarantee future results.

Eric Freckman is a Certified Financial Planner® with Guillaume & Freckman, Inc. located in Inverness IL and can be reached at 847.934.0010 or eric.freckman@lpl.com

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