MONEY stocks

Stocks Are Slumping. You Just Don’t Know It Yet

Here are three reasons the little-noticed slide in small stocks is likely to spread to the broad market.

Psst…The stock market may be slipping into a correction. Pass it on.

This seems like a silly thing to say, since a “correction” is technically a 10% drop in stock prices and both the Dow Jones industrial average and the Standard & Poor’s 500 index of blue chip stocks are at record highs. Not only that, the S&P 500 is up nearly 5% so far this year and 19% over the past 12 months.

But if you examine the market more closely, you’ll see some key segments that are getting close to or have crossed the 10% threshold recently.

Among them: small-company stocks, which tend to thrive when investors favor risk — or are egged on by the Federal Reserve to take chances with the availability of cheap credit. The Russell 2000 index of small-caps lost more than 9% of its value between early March and mid May before recovering a bit in last week’s rally:

^RUT Chart

^RUT data by YCharts

The slump is more pronounced for small growth-oriented companies, which are favored by aggressive, bullish investors. Small growth stocks fell as much as 12% between early March and mid May and are still dangerously close to the 10% level:

^RUO Chart

^RUO data by YCharts

This is also true for the smallest of the small stocks — shares of high risk but potentially high reward tiny companies that are only embraced by the market’s most aggressive lot:

^RTM Chart

^RTM data by YCharts

True, these are small slivers of the market and the broader indexes such as the S&P 500, the Dow, and the Nasdaq composite index are all up modestly so far in 2014 and up by double-digits over the past 12 months.

The recent behavior of the faltering areas of the market, though, could be a harbinger of what’s to come. “A stealth correction has been unfolding,” says Craig Johnson, a managing director at Piper Jaffray, and he believes the slide will likely extend to the Dow and S&P.

Here are three reasons this is likely to happen:

1) Small stocks tend to lag as bull markets get tired. Small caps have historically been a fairly reliable late-cycle underperformer. Indeed, the last two times small stocks dramatically underperformed was in 2007 (just as the financial crisis struck) and the late 1990s (leading up to the bursting of the bubble in 2000).

2) The performance gap between large-cap and small-cap stocks is widening. Since Jan. 1, the large cap S&P 500 index has returned nearly 5% while the small-cap Russell 2000 index is down nearly 2%. “The continued divergence between the Russell 2000 index and the popular large-cap indices is a clear indication of weakening breadth and slowing momentum, and suggests investors are making an attempt to reduce portfolio risk by rotating assets toward the traditionally defensive areas of the market,” says Johnson.

In fact, he and his team at Piper Jaffray studied past periods when small stocks underperformed blue chip shares by such a wide margin and found that in years when this occurred, the broad market eventually experienced a correction that typically lasted two and a half years and cost stocks more than 12% of their value.

3) The broad market is way overdue for a correction. “The S&P 500 will soon have gone 32 months without a decline of 10% or more, versus the average span of 18 months since 1945 and a median of 12 months,” says Sam Stovall, managing director of U.S. equity strategy for S&P Capital IQ.

There have been only four other times since World War II that the stock market went longer without a serious pullback.

Alas, those stretches ended with a bear market in 1966, the Crash of 1987, a correction in 1997, and the mammoth 2007-09 bear that lopped off more than half of the S&P 500’s value.

Of course, there’s no rule that says market corrections must turn into full-fledged bear markets.

MONEY stocks

Profit Growth Is Slipping and That’s Not Good for Stocks

As corporate earnings growth slows, stock valuations are climbing well above historic standards.

The fact that companies have been consistently generating record profits in recent years has certainly been a boon to the S&P 500 S&P 500 INDEX SPX 1.9574% .

Unfortunately, there will come a time when corporate earnings growth will inevitably slow — and that time may be now.

A government report released in late May found that overall corporate profits actually slumped in the sluggish first quarter, when a brutal winter weighed on business activity. The Bureau of Economic Analysis says that a key measure of corporate earnings fell 3% in the first quarter, compared to the fourth quarter of 2013. Versus the same period last year, profits slumped much more — 9.8%. This is true for both financial and non-financial companies.

Now, there are a variety of ways to measure the health of profits. In the private sector, economists often look at overall earnings growth for companies in the S&P 500.

By this measure, profits are still climbing, but the rate of that growth is slowing noticeably. In fact, expectations for both first quarter and second quarter earnings have been cut in half in less than a year.

Falling earnings chart
Source: S&P Capital IQ

A big reason why is that the economy is not rebounding as strongly as was thought, and overall corporate revenues are growing only modestly.

Sales Dwindling
Source: Thomson Reuters

Yet stock prices have been surging faster lately than the rate of both earnings and revenue growth. “Over the past few years multiple expansion has been the key factor lifting equity market levels higher,” notes Tom Stringfellow, chief investment officer for Frost Investment Advisors.

Forward PE ratios
Note: P/E based on forecasted profits over next 12 months. Source: Bloomberg

Indeed, virtually every part of the stock market is now trading at higher price/earnings ratios — based on forecast profits over the next 12 months — then they have historically. And that’s never a good sign.

TIME housing

Here Are the 3 Least Expensive Places to Buy a House in America

2013 Getty Images

And the 5 most expensive places, too

Getting restless in your current state? Check your bank balance before you move. We compiled data on over 100 million homes to find the three priciest (and least pricey) states for buying a house.

Note that we used final sales prices—not list prices—and that all numbers are from February, 2014.

Least Expensive

48. West Virginia – $95,000

While West Virginia’s Jefferson County includes several high-priced properties, Nicholas and Wood County are home to some of the most affordable houses in the nation, with median selling prices of $55,000 and $60,000, respectively. As a general rule, houses in West Virginia tend to get more expensive to the north and east (nearer to Washington DC) and less expensive to the south and west.

49. Ohio – $91,450

West Virginia’s northern neighbor, Ohio, earns the second-to-last spot on the list, with a median home selling price of just $91,450. The two counties most responsible for Ohio’s depressed market include Adams ($25,750), which lies just north of the Kentucky border, and Paulding ($33,675), which sits just south of #50 on this list.

50. Michigan – $82,000

Despite the auto industry’s resurgence, Michigan houses remain the cheapest in America, particularly near Flint and Detroit. During the 2007/2008 downturn, homes in Michigan’s largest county, Wayne, dropped from over $100,000 to under $15,000 in a matter of months. Recovery has been slow. Today, those same houses sell for a median price of only ~$25,000. (Note that Michigan home selling prices are particularly volatile from month to month—depending on sales, median values can jump up and down $50,000 every 30 days.)

Most Expensive

1. Hawaii – $412,400

The country’s youngest state is also the most expensive, with a median home selling price of $412,400. The biggest offender is Honolulu County, which includes the state’s capital and many of the priciest oceanfront properties—most houses in Honolulu sell for over $450,000. Popular tourist destination Maui is Hawaii’s next most-expensive county, with the median house going for $426,000.

2. California – $355,000

California is home to some of the priciest individual counties in America, including San Francisco ($960,000), Marin ($760,000), and San Mateo ($762,000). Silicon Valley might house some of the most successful entrepreneurs in the world, but for the rest of us, it’s quickly becoming impossible to afford. Those determined to live in The Golden State at a reasonable price should prospect north and east of the Bay Area in countries like Modoc, Lassen, and Del Norte, each of which offer houses at prices well under $100,000.

3. New York – $314,000

An international business center and perennial tourist favorite, New York City and its surrounding counties make New York state a particularly pricey region. Manhattan ($830,000) features New York’s most expensive properties, while Westchester County ($550,000) and Brooklyn ($525,000) also clock in far higher than national averages. Even with more affordable houses along the outskirts of the state, the median home selling price remains $314,000, good enough for third in the nation.


China’s Culture of Compliance Is Crippling the Country

Demonstration at Tiananmen Square in Beijing, China on June 01st, 1989.
Standing tall A Chinese youth at a demonstration in Beijing’s Tiananmen Square on June 1, 1989 Eric Bouvet—Gamma-Rapho/Getty Images

Next week will be the 25th anniversary of Tiananmen Square. It was a turning point not only for China, but also for the world, in the sense that it heralded a new era in which growing wealth and growing political freedom in emerging markets didn’t necessary go hand in hand. This year, China will very likely overtake the U.S. as the world’s largest economy. It has certainly become wealthy. But it has also become less free–as have so many of the world’s largest developing nations–think Russia, Turkey, many parts of Africa and Latin America, etc.

The question is, that can juxtaposition last another 25 years—or even another five? It’s something I’ve been thinking about a lot lately, particularly as I delve into New Yorker writer Evan Osnos’ very interesting new book on China, “Age of Ambition: Chasing Fortune, Truth and Faith in the New China” (FSG). The core premise of the book is that individual ambition and authoritarianism in countries like China will inevitably come into conflict with one another. As people get richer, they want more freedom, and they put pressure on their governments to deliver it. The problem is that these governments are often much better at delivering wealth than they are at delivering anything close to liberal democracy.

I think we may be reaching a tipping point in the next few years around that juxtaposition between growth and choice in the emerging world. China is, as always, the most dramatic example of this. The recent cyber-hacking scandal, for example, was portrayed by many pundits as yet another example of how the Middle Kingdom is leaping ahead of U.S. government and business interests, stealing American intellectual property and using it to gain a competitive edge. But as I argued, China’s IP theft actually underscores what a “me too” economy the Middle Kingdom still is. China is good, very good, at copycatting other people’s ideas (Osnos’ stories of various Chinese entrepreneurs, like the village woman behind the Chinese version of, are fascinating on this score), but it has yet to create many global brands–aside from Lenovo’s computers and the college mini-fridges made by the low-end white goods producer Haier.

I think the lack of a top-shelf innovation culture has a lot to do with the lack of choice in Chinese society. I once spoke to a Wal-Mart executive in China who told me that he had trouble getting employees in one department to address basic problems in another–picking up boxes that had fallen off a shelf, or order new supplies, for example–because they were afraid of stepping out of their silos. That’s not about work ethic–the Chinese have that in spades–but a culture of compliance. In China, it’s important, sometimes deadly important, to swim in your own lane.

Another issue with the growth of higher end Chinese business is that entrepreneurs don’t trust the stability of the government. I’ve heard time and time again from wealthy people in China (many of whom are looking to get their money out – witness the percentage of high end property purchases in luxury real estate markets worldwide that are made by the Chinese) is that it doesn’t pay to develop businesses for the long haul here, because uncertainly and political risk is so high. People tend to get in, get out, and become serial entrepreneurs, rather than spending decades working on innovation, a la developed countries like the U.S., Japan, or Germany.

How will all this affect China? If the Middle Kingdom can’t make the leap to the “middle income” stage of development, which history shows is the trickiest one (only a handful of developing countries globally have made it), then unemployment will rise and social stability will fall. How will that affect Americans? In a sense, it already is. Trade tensions mean many U.S. companies are rethinking how, or if, they’ll do business in China, with myriad ramifications for us all. For more on all of that, as well as the economic legacy of the Tiananmen event, listen to my radio show, Money Talking, on WNYC this week.

TIME Economy

Economy Shrinks for First Time Since 2011

A rail mounted gantry crane, center, as well as a Straddle Carrier, right, used to unload and load a container ship at the Norfolk International Terminal in Norfolk, Va. on March 26, 2014.
A rail mounted gantry crane, center, as well as a Straddle Carrier, right, used to unload and load a container ship at the Norfolk International Terminal in Norfolk, Va. on March 26, 2014. Steve Helber—AP

The U.S.' Gross Domestic Product contracted by 1 percent in the first quarter of 2014, marking the first contraction in years as government economists revised earlier figures by taking stock of additional glum measures

The U.S. economy shrunk by 1% in the first quarter of 2014, according to government data released Thursday, marking the first economic contraction in three years.

The figure, from revised estimates released by the Commerce Department, was revised downwards from an earlier estimate of 0.1% growth in gross domestic product, as government economists took stock of additional glum measures. The Commerce Department noted that on top of a winter wallop to retail and construction, real GDP was dragged down further by a rise in imports and a marked decline in inventory growth. The last time real GDP contracted was in the first quarter of 2011 at the tail end of a punishing recession.

Corporate profits also declined by an estimated 9.8%, the largest drop recorded by the Commerce Department since the fourth quarter of 2008.

Still, analysts predicted that the contraction, while unsettling, would not last into the second quarter. Recent monthly data points to signs of economic life, including a drop in jobless claims and jumps in durable good orders and retail sales.

TIME faith

The Economy Is More Important Than Fighting Over Evolution

An evolutionist went fly-fishing with Tea Partiers, and they had more in common than she thought.

Last week, the New York Times reported that yet another Christian school—this time Tennessee’s Bryan College—is embroiled in a debate about the instruction of evolution on its campus. As a theologian, pastor, and seminary president I believe in evolution, and we certainly don’t teach creationism here at Union Theological Seminary. I also know that for this and many other issues you can’t just go to the Bible and find a passage that tells you exactly what to think.

However, reading the article left me feeling confused. Why, almost a century after the Scopes trial, are Christians still fighting about evolution—an issue wholly unrelated to Jesus’ gospel charge—while ignoring the egregious sin of systemic wealth inequality? When it comes to economic justice and the abolition of poverty, you don’t need any interpretive tools to approach the Christian Scriptures. Each page in our Holy Book addresses economic realities and makes clear to those gathered under the gracious arms of God what kind of world we should seek: a world where there is no poverty. It is not ambiguous.

Since I was three years-old, my family and I have jigsawed ourselves into the proverbial station wagon every summer and driven into the wilderness for three weeks of fly fishing. This past summer, I couldn’t find anyone who would agree to go along, and—mostly because I needed the kind of soul renewal that comes with it—I decided I was going to do it by myself. I signed up to go twenty miles into the Bob Marshall Wilderness on horseback with a group of people I didn’t know to fly fish for 10 days. We were an amazing, offbeat coterie and we got to know each other really well, really quickly. It wasn’t until the third day that I accidentally found out that everyone in the group was a member of the Tea Party.

There was great laughter when everyone realized that I had discovered it. They confessed that they quickly realized I was a liberal Yankee. What struck me most about our conversations around issues of economics was that the language and concerns that were spoken did not, on the whole, sound very different at all from those that I hear from my students here at Union, one of the most socially and politically progressive seminaries in the country. During Occupy Wall Street, 62 students went down from Union to Zuccotti Park, set up their tents, built their camp fires, and lived there for three months to bear witness to their desire for a new economic reality.

Among my new Tea Party friends and my long-beloved students, I heard three things passionately echo over and over again, with little discrepancy.

First, there is a shared conviction that the economic system in which we presently live is completely corrupt, and that Wall Street and the leaders of corporate America are not concerned about the flourishing of common people.

Second, there is a deep concern about the failure of our political system to work on behalf of the United States citizenry. Both Tea Partiers and Occupiers demand a government that is truly of the people, not one that merely masquerades as such.

Third, there is an anxiety about the destruction of the values of community—the values that mark how we care for our children; how we decide what we eat; how we build homes for ourselves; and how we constitute communities where we feel safe.

I travel with a flyer in my pocket that I was able to pull out several more days into the trip and share with them. It’s called the Freedom Budget for All Americans, drafted in 1966 by the A. Philip Randolph Institute in Atlanta under the leadership of Reverend Dr. Martin Luther King, Jr. and Bayard Rustin. This manifesto for economic change reminds me of the work ahead.

“We are budgeting our resources,” it says, “so that our nation can achieve freedom from want.” It’s not a complicated socialist or communist vision: guaranteed full employment, full production and high economic growth, an adequate minimum wage, farm income parity, guaranteed income for all who are unable to work, a decent home for every American family, modern health services for all, full educational opportunities for all, updated social security and welfare programs, equitable tax and money policies. It’s a Christian vision of economic justice in which people thrive because their basic human needs are met.

It is startling that fifty years later we have not—on a national level—taken steps toward the realization of any of these desires. In fact, in some areas, we’ve moved backwards. We must be better.

Perhaps what we need are more fly fishing moments, where our perceptions are challenged and we glimpse the possibility of a movement. Anything less than the abolition of poverty is too costly.

Serene Jones is President of Union Theological Seminary in the City of New York where she holds the Johnston Family Chair in Religion and Democracy. She is Vice President of the American Academy of Religion, an ordained minister in the United Church of Christ and the Christian Church (Disciples of Christ), and author of Trauma and Grace: Theology in a Ruptured World. This piece is adapted from one of her recent sermons, preached at Trinity Episcopal Cathedral in Cleveland. She tweets online at @SereneJones.

TIME housing

Huge Jump in Housing Recovery

It’s finally fair to call a real estate bull market.

This month’s S&P/Case-Shiller Home Price Index was up 0.9% month-over-month (comparing data for March, just released today, to February). That’s a good data point, but Case-Shiller — an index of housing prices in 20 metropolitan areas around the country — is notoriously tough to read from any one data point.

The algorithm that generates the data is proprietary, and the index seems to be more volatile than many other measures of housing prices, particularly in terms of reporting higher highs and lower lows. The government number, for instance, the Federal Housing Finance Agency House Price Index, shows price up 6.6% in the first quarter of 2014 from a year ago; Case-Shiller’s analogous number is up 10.3%.

The extreme sensitivity is great for journalists, because the Case-Shiller index is always “crashing” or “plummeting” or “leaping” or “surging.” It’s much tougher for consumers, who are generally trying to get an idea of what’s happening to the prices of the asset class into which they’ve sunk much, if not all, of their hard-earned money.

In an attempt to read those tea leaves last month, and separate the caffeinated from the decaf, I had written that Chicago might well be a bellwether for how real estate was behaving “throughout the nation.” From the current Case-Shiller data, we learn that it’s both leaping and surging, up 0.7% in March over the previous month, and up 11.5% year-over-year. To put that in perspective, Chicago Real Estate Daily notes that the jump is “the biggest increase in 25 years.”

To be fair, Chicago (like many cities in the U.S.) is in a very low-inventory situation, so prices are being pushed upwards by eager shoppers fighting over the last properties on the shelves. For an even better read on that market, we’ll need to see if these high prices induce sellers to list their homes, and watch the subsequent behavior of prices.

But for now, all looks sunny, with each and every one of the twenty cities in Case-Shiller reporting higher prices than a year ago. The leaders were out West, with Las Vegas up 21.2% over a year ago, San Francisco up 20.9%, and San Diego up 18.9%. The smallest gains were registered by New York (up 6.6% year-over-year), Charlotte (up 4.9%), and Cleveland (up 3.9%). Month-over-month, only New York declined, down 0.3% from February to March. Anyone watching the reports of record Manhattan condo prices might question why New York dropped at all, and why the annual gain isn’t in the double-digits — but the answer is that apartment sales aren’t included in Case-Shiller calculations.

Taking a glance at the finer-grained FHFA numbers, 71 of the 100 metro areas tracked showed price appreciation from the last quarter of 2013, even after seasonal adjustments. FHFA noted in a release that the index has increase for “23 of the last 24 months.” Seems like the bulls are running.

TIME Egypt

A Tale of Two Sisis

Egypt's Military Chief Visits Moscow
Field Marshal Abdul Fattah al-Sisi Sasha Mordovets—Getty Images

The extraordinary rise of Abdul Fattah al-Sisi will be complete this week with his all-but-certain election to Egypt's presidency. But the story of a man who shares his last name illustrates the enormous challenges facing the former military commander when he takes office

For Abdul Fattah al-Sisi, life has gotten better and better since the overthrow of Hosni Mubarak.

The career military man was doing well even before the popular revolt of January 2011 ended the three-decade reign of the Egyptian president: al-Sisi sat on the general staff, holding the delicate portfolio for military intelligence.

But he was just getting started. When the Muslim Brotherhood’s Mohamed Morsi was elected president in 2012, al-Sisi was named minister of defense, as well as chief of general staff. And when Morsi fell out of favor with Egyptians a year later, with millions marching for his removal last June 30, al-Sisi rose to the occasion, removing the country’s first and only freely-elected president in a coup that most Egyptians call a second revolution.

In January he was promoted to Field Marshal, and polls say that in balloting that begins Monday, he will be elected president.

The scope of the challenge now facing the next president might best be understood by the post-Revolution experience of another al-Sisi. Mohamed Mahmoud al-Sisi shares the family name with the candidate, but that’s all. In 2011, he had his own business selling finely crafted gold jewelry made in a shop he owned. He commuted daily from a Cairo suburb, and says he took home 5,000 Egyptian pounds a month, worth about $870 at the time. His wife and four daughters, aged 12 to 3, ate fish one night, chicken the next, beef when they liked. Money was not a problem—he had so much, he says, he was investing in the Egyptian stock market–but governance was. So he joined the throngs in Tahrir Square, chanting the slogan of the Revolution, “Bread, Freedom, Dignity, Social Justice,” and cheered when Mubarak surrendered his office.

Then his troubles began, he says. First, the stocks collapsed. The father of four had invested in companies that looked rock solid under Mubarak, including Ezz Steel; its shares plummeted from $25 just before Tahrir to $5 after its president, a Mubarak man, was convicted of money-laundering.

Egypt became a dangerous place, and not just to investors. The political uncertainty created a security vacuum, and crime rates soared. One day men with knives confronted al-Sisi as he left his workshop, carrying finished gold jewelry to client shops. The thieves took it all.

“I was a gold maker and I had my own workshop, and I lost all my money and now I’m doing this,” says al-Sisi.

He stands in a Cairo alley, holding a platter. On the platter are paper plates. Some hold peanuts. Others, chick peas. Each plate sells for two Egyptian pounds, or about 23 cents. His government ID card still reads “gold maker” but al-Sisi, 40, spends his workdays moving through the side streets of Zamalek, a relatively prosperous island in the Nile, imploring people smoking water pipes to buy one of his snacks.

On a good night, he makes 70 Egyptian pounds, or $10. On a bad night, 50 pounds, or $7. “From bad to worse,” he says. “The economy is going lower and lower and lower.”

His monthly income, which formerly approached $900, now ranges from $84 to $125. Most nights the girls eat macaroni and rice. “Some vegetables, but not much,” he says. The family has meat only on feast days, two or three times a year. “Now fruit is the third priority. I know it’s important to my children, but first I have to feed them,” al-Sisi says. “My children love apples, the red and the yellow. Now when they are asking for it, I just cry. I cannot afford it any more.”

The candidate al-Sisi is asked constantly about the economy. By some measures, 25 percent of Egyptians live in poverty. By others, the measure approaches 50 percent. A poll released Thursday by Pew Research Center found that 76 percent of Egyptians describe the economy as “bad,” up from 64 percent just after the revolution. Tourism is staggering, and hard currency is so scarce the government has been failing to pay the international firms that pump its oil.

“If things go according to the plan we have prepared, we will see an improvement in two years,” the former field marshal told Sky News Arabia in a May 11 interview. Except for championing energy-saving lightbulbs, however, he has declined to share his economic plan with Egyptians, or anything else that would constitute a platform.

A few days before balloting began, his campaign released a color-coded “Map of the Future,” which appeared to recycle a 30-year-old plan to create a band of cities in what is now desert. Critics say the expense would be beyond Egypt’s means, already burdened by subsidies that keep the prices of food and fuel artificially low, and deter investment.

The al-Sisi selling peanuts says he might not even vote. “Most likely he will be like Mubarak,” he says, of the candidate who shares his name. “This is their nature, the men from the army.” He admits only to the dimmest flicker of hope, rising from the general’s personal religious piety. “Yes,” he says, “this is a very good and important point, and yes it gives hope. But only if the whole system is changing. Otherwise it’s not enough.”

“I will not speak big words,” Mohamed al-Sisi says. “All I care about is that they give people the minimum wage, not less. And that they cast a kind look to the poor people. Social justice.”

TIME Economy

These 7 States Are Running Out of Water

California Drought
Cracks in the dry bed of the Stevens Creek Reservoir in Cupertino, Calif., on March 13, 2014. Marcio Jose Sanchez—AP

This post is in partnership with 24/7Wall Street. The article below was originally published on

The United States is currently engulfed in one of the worst droughts in recent memory. More than 30% of the country experienced at least moderate drought as of last week’s data.

In seven states drought conditions were so severe that each had more than half of its land area in severe drought. Severe drought is characterized by crop loss, frequent water shortages, and mandatory water use restrictions. Based on data from the U.S. Drought Monitor, 24/7 Wall St. reviewed the states with the highest levels of severe drought.

In an interview, U.S. Department of Agriculture (USDA) meteorologist Brad Rippey, told 24/7 Wall St. that drought has been a long-running issue in parts of the country. “This drought has dragged on for three and a half years in some areas, particularly [in] North Texas,” Rippey said.

While large portions of the seven states suffer from severe drought, in some parts of these states drought conditions are even worse. In six of the seven states with the highest levels of drought, more than 30% of each state was in extreme drought as of last week, a more severe level of drought characterized by major crop and pasture losses, as well as widespread water shortages. Additionally, in California and Oklahoma, 25% and 30% of the states, respectively, suffered from exceptional drought, the highest severity classification. Under exceptional drought, crop and pasture loss is widespread, and shortages of well and reservoir water can lead to water emergencies.

MORE: 10 Companies Paying Americans the Least

Drought has had a major impact on important crops such as winter wheat. “So much of the winter wheat is grown across the southern half of the Great Plains,” Rippey said, an area that includes Texas, Oklahoma, and Kansas, three of the hardest-hit states. Texas alone had nearly a quarter of a million farms in 2012, the most out of any state, while neighboring Oklahoma had more than 80,000 farms, trailing only three other states.

In the Southwest, concerns are less-focused on agriculture and more on reservoir levels, explained Rippey. In Arizona, reservoir levels were just two-thirds of their usual average. Worse still, in New Mexico, reservoir stores were only slightly more than half of their normal levels. “And Nevada is the worst of all. We see storage there at about a third of what you would expect,” Rippey said.

The situation in California may well be the most problematic of any state. The entire state was suffering from severe drought as of last week, and 75% of all land area was under extreme drought. “Reservoirs which are generally fed by the Sierra Nevadas and the southern Cascades [are] where we see the real problems,” Rippey said. Restrictions on agricultural water use has forced many California farmers to leave fields fallow, he added. “At [the current] usage rate, California has less than two years of water remaining.”

The U.S. Drought Monitor is produced by the U.S. Department of Agriculture (USDA), the National Oceanic Atmospheric Administration (NOAA), and the National Drought Mitigation Center at the University of Nebraska-Lincoln. 24/7 Wall St. reviewed the seven states with the highest proportions of total area classified in at least a state of severe drought as of May 13, 2014. We also reviewed figures recently published by the USDA’s National Agricultural Statistics Service as part of its 2012 Census of Agriculture.

MORE: The Most Polluted Cities in America

These are the seven states running out of water.

1. California
> Pct. severe drought: 100.0%
> Pct. extreme drought: 76.7% (the highest)
> Pct. exceptional drought: 24.8% (2nd highest)

California had the nation’s worst drought problem with more than 76% of the state experiencing extreme drought as of last week. Drought in California has worsened considerably in recent years. Severe drought conditions covered the entire state, as of last week. Governor Jerry Brown declared a state of emergency earlier this year as the drought worsened. California had 465,422 hired farm workers in 2012, more than any other state. Farm workers would likely suffer further if conditions persist. The shortage of potable water has been so severe that California is now investing in long-term solutions, such as desalination plants. A facility that is expected to be the largest in the Western hemisphere is currently under construction in Southern California, and another desalination facility is under consideration in Orange County.

2. Nevada
> Pct. severe drought: 87.0%
> Pct. extreme drought: 38.7% (5th highest)
> Pct. exceptional drought: 8.2% (4th highest)

Nearly 40% of Nevada was covered in extreme drought last week, among the highest rates in the country. The drought in the state has worsened since the week of April 15, when 33.5% of the state was covered in extreme drought. According to the Las Vegas Valley Water District (LVVWD), the main cause of the drought this year has been below average snowfall in the Rocky Mountains. Melting snow from the Rocky Mountains eventually flows into Lake Mead, which provides most of the Las Vegas Valley with water. John Entsminger, head of both the LVVWD and the Southern Nevada Water Authority, said that the effects of the drought on the state has been “every bit as serious as a Hurricane Katrina or a Superstorm Sandy.”

3. New Mexico
> Pct. severe drought: 86.2%
> Pct. extreme drought: 33.3% (6th highest)
> Pct. exceptional drought: 4.5% (5th highest)

More than 86% of New Mexico was covered in severe drought as of last week, more than any state except for Nevada and California. Additionally, one-third of the state was in extreme drought, worse than just a month earlier, when only one-quarter of the state was covered in extreme drought. However, conditions were better than they were one year ago, when virtually the entire state was in at least severe drought, with more than 80% in extreme drought conditions. NOAA forecasts conditions may improve in much of the state this summer.

Visit 24/7 Wall St. to see the remaining states on the list.

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We’re Traveling, Video Gaming and Hitting the Bars Like Before the Recession

Household spending on consumer goods hit $10 trillion for the first time, driven by experience-craving Millennials and retiring boomers.

Americans spent a record $10 trillion on consumer goods last year, signaling a level of confidence not seen since the meltdown, according to trend watcher Mintel Group. Spending should outpace inflation this year and reach $12 trillion by 2018.

U.S. consumer expenditures grow almost every year. But they fell during the recession, and the projected 20% rise over the next five years is impressive in light of polls and indicators that suggest a great many people continue to struggle.

Some of the renewed optimism and increased spending owes to the greater wealth of the wealthiest Americans, who have benefited from the stock market rebound and housing recovery. This could add more fuel to the debate over rising income inequality, which has propelled Thomas Piketty to overnight stardom. Income inequality is now the fourth most important trend in America, based on an informal poll by Strategic Business Insights. The issue rates behind demographic shifts, mobile technology, and cyber concerns; ahead of youth unemployment and climate change.

But the spending rebound can’t be entirely a story of the rich getting richer. Home ownership rates may have fallen from nearly 70% before the recession, and many homeowners remain underwater on their mortgage. Still, 64.8% of Americans own their homes, according to Census data from the first quarter. They have benefited from the recovery as well. The jobs picture has brightened a bit too.

Mintel describes a broad-based spending rebound: Twice as many Americans now say they spend—not save—“extra” money and a greater share say they regularly have extra money. Much of the spending is coming from young adults, Mintel says. Social media gives this experience-craving generation unprecedented insight into travel and other possibilities, and they are willing to pay. Boomers able to retire are also driving spending. This helps explain the hottest categories:

  • Vacation A year ago, 41% of families said they were spending less on vacations than the previous year. Now just 30% say they are spending less. Mintel projects outsized total spending growth in this category of 27.3% the next five years.
  • Leisure Millennials’ spending in this category remains below average but is on the rise. Young adults, especially men aged 18 to 34, are most likely to say they are spending more. Video gaming is a top choice, and more than half of Millennials prefer to engage in this activity alone. Mintel expects outsized spending growth of 28.5% over five years.
  • Bars Nearly one in 10 adults say they have increased spending on alcoholic drinks outside the home, and more now say they are spending about the same on drinks while fewer say they are spending less. Mintel projects outsized growth of 23.7% over five years to $115 billion a year. Perhaps good times are back after all—at least for some.

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