September 26, 2023

G.D.P. Report Gives Stocks a Lift

Stocks on Wall Street rose on Thursday on strong economic data and a possible large deal between Vodafone and Verizon, while a potential Western military strike on Syria appeared to be delayed for now.

In afternoon trading the major indexes were off their highs for the day: the Standard Poor’s 500-stock index was 0.3 percent higher, the Dow Jones industrial average was 0.2 percent higher and the Nasdaq composite was up 0.8 percent.

Data showed the American economy grew more quickly than expected in the second quarter thanks to a surge in exports. The strong numbers, alongside data suggesting a strengthening in job gains in August, could bolster the case for the Fed to wind down a major economic stimulus program that has been a pillar of the recent rally in equities.

The numbers show the economic recovery may have started in the first half of the year, and the economy is strong enough to allow for the Fed to scale back its stimulus, said Philip J. Orlando, chief equity market strategist at Federated Investors in New York.

Shares of the Vodafone Group traded in the United States jumped 7.5 percent after the company said it was in talks with Verizon Communications to sell its 45 percent stake in their joint venture, Verizon Wireless. Verizon shares rose 2.8 percent.

Merger and acquisition activity “tells us companies have a lot of firepower, the ability to use cash, a lot of debt they could utilize and currency for stock deals, all that is positive” for the market, Mr. Orlando said.

European stocks ended the trading day higher. London’s FTSE 100 gained 0.8 percent, the DAX in Frankfurt was 0.5 percent higher and Paris’s CAC 40 rose 0.7 percent.

Asian markets closed mostly higher, with Japan’s Nikkei up 0.9 percent and the Hang Seng in Hong Kong gaining 0.8 percent. But the Shanghai Composite fell 0.2 percent.

The dollar rose against the yen, though hard-hit currencies in India, Brazil and Indonesia bounced higher against the dollar as their central banks moved to stem capital outflows.

In the oil markets, the reduced likelihood of an immediate major supply disruption allowed United States benchmark oil to drop, but the price picked up in afternoon trading, down just 14 cents a barrel, to $109.96, after its near 4 percent gain over the last two days.

“The market is reassessing the supply implications of the conflict in Syria,” said Eugen Weinberg, global head of commodities at Germany’s Commerzbank.

Gold eased 0.4 percent, to $1,412.40 an ounce, after reaching a three-and-a-half-month high in Wednesday’s flight to safety.

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Markets Drift Lower, Awaiting Bernanke’s Testimony

Financial markets were lackluster Tuesday as investors paused for breath ahead of testimony from the Federal Reserve chairman, Ben S. Bernanke.

In afternoon trading the Standard Poor’s 500-stock index fell 0.4 percent, the Dow Jones industrial average fell 0.3 percent and the Nasdaq was 0.3 percent lower.

Mr. Bernanke’s comments on Wednesday to lawmakers in Congress could set the tone in markets for the rest of the summer. In particular, investors will be looking for any further guidance on when the Fed will start to reduce its monetary stimulus.

The Fed is currently spending $85 billion a month buying financial assets in the hope of keeping long-term borrowing rates low and stimulating the American economy. The new money created in recent years has been one of the key drivers of markets.

Economic figures in the United States are being largely viewed through the prism of Fed policy. Tuesday’s batch of numbers did little to affect expectations. The 0.3 percent monthly rise in industrial production during June was in line with expectations while the uptick in the annual inflation rate to 1.8 percent from 1.4 percent was largely discounted because it was because of a sharp rise in gasoline prices.

“It’s certainly possible that they could begin tapering their bond purchases later this year, but the absence of higher inflation and the stubbornly high jobless rate suggests that it may not need to do so in the near-term, particularly if those growth expectations fail to materialize,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors.

In Europe, the FTSE 100 index of leading British shares fell 0.5 percent to close at 6,556.35 while Germany’s DAX dropped 0.4 percent at 8,201.05. The CAC 40 in France ended 0.7 percent lower at 3,851.03.

Tuesday’s run of corporate news had little impact despite solid earnings from Goldman Sachs and Johnson Johnson. Coca-Cola’s, though, were disappointing as it reported falling profits and weak volume growth, particularly in North America.

Once Mr. Bernanke’s appearance before lawmakers is over, markets, particularly Wall Street, may return their focus to the earnings reports.

“Corporate earnings season is going to play a much bigger part in driving market sentiment in the coming weeks, than it has over the last couple of years,” said Craig Erlam, market analyst at Alpari. “With investors no longer able to rely on the Fed to drive equity markets higher, they have to make do with focusing more on the fundamentals, and nothing gives us a better overview of these than company earnings reports and their expectations for the coming quarters.”

Earlier in Asia, South Korea’s Kospi fell 0.5 percent to 1,866.36 while Hong Kong’s Hang Seng was flat at 21,312.38. China’s Shanghai Composite Index rose 0.3 percent to 2,065.72.

In currency markets, the euro was up 0.6 percent at $1.3143 while the dollar fell 0.5 percent to 99.35 yen.

Oil prices were steady, with the benchmark contract in New York down 23 cents at $106.09 a barrel.

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News From Egypt Stymies Indexes

The stock market ended slightly lower on Tuesday after reports of intensifying political turmoil in Egypt offset good news about the American economy.

Stocks rose much of the day on positive news about car sales, manufacturing and home prices. But the major market indexes turned lower in the afternoon as hundreds of thousands of protesters demand that President Mohamed Morsi be ousted.

The price of oil climbed close to $100 a barrel on concern that the crisis could disrupt the flow of crude oil from the region.

“It’s more or less Egypt unrest,” said Sal L. Arnuk, a co-founder of Themis Trading. “These very large protests are being televised and broadcast — that’s spooking people.”

The Standard Poor’s 500-stock index, which had been up as much as 9 points shortly before midday, closed down 0.88 point, or 0.1 percent, at 1,614.08.

The Dow Jones industrial average fell 42.55 points, or 0.3 percent, to 14,932.41 The Nasdaq composite index slipped 1.09 points, a fraction of a percent, at 3,433.40

Trading activity was lighter than normal as July 4 holiday nears. The stock market will close at 1 p.m. Eastern time Wednesday and reopen Friday.

Crude oil rose about $1 a barrel on news of the worsening political situation in Egypt. Oil closed up $1.61 at $99.60 a barrel in New York. It last crossed $100 on Sept. 14.

The market’s early gains came after several strong economic reports. Auto sales reached 7.8 million in the first six months of the year, the highest first-half total since 2007. Factory orders rose 2.3 percent in May, helped by a third straight month of stronger business investment. And home prices jumped 12.2 percent in May from a year earlier, the most in seven years, according to the real estate data provider CoreLogic. Economists are forecasting that the American economy added 165,000 jobs last month, according to data compiled by FactSet.

Investors and traders are also starting to focus on the quarterly corporate earnings season, which begin in earnest next week. Most corporate profits have come from cutting costs rather than increasing sales.

“We’re in the middle of a transition,” said Christopher J. Wolfe, chief investment officer at Merrill Lynch Private Banking and Investment Group. “You would expect to see, over the balance of this year and going into next year, somewhat stronger macroeconomic data that translates directly into stronger corporate revenue growth.”

In the bond market, interest rates showed little change. The price of the Treasury’s 10-year note, rose 1/32, to 93 23/32, while its yield slipped to 2.47 percent, from 2.48 percent late Monday.

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Markets Start the Week Lower

Stocks fell sharply on Monday, following the worst weekly decline for the Standard Poor’s 500-stock index in two months, on concerns that the Federal Reserve’s stimulus may be drawing to a close and a cash squeeze in China could further slow growth.

In morning trading, the S.P. was 1.6 percent lower, the Dow Jones industrial average fell 1.4 percent — about 220 points — and the Nasdaq composite lost 1.5 percent. European and Asian shares also slumped.

Banking shares in China tumbled to their biggest daily loss in almost four years after the People’s Bank of China, the country’s central bank, said lenders needed to do a better job of managing their cash and loans. The central bank is attempting to move China, the world’s second largest economy, away from credit-driven investment.

The S.P. 500 has fallen 2.3 percent in June, and is on track for its worst monthly performance since May 2012. The index is down 4.6 percent from its closing high on May 21.

“We are starting to see that follow-through in Asia, which is all part of the broader narrative — the focus on a lack of stimulus, a creeping higher in rates and the potential impact for less liquidity globally,” said Peter Kenny, chief market strategist at Knight Capital in Jersey City. “This underscores the power and the importance of Fed policy to global central banking.”

The shift out of assets which have benefited most from cheap money has been sharpest in the United States debt market, where yields on 10-year Treasury notes hit 2.6 percent on Monday, its highest level since August 2011.

This rise in rates and the brighter outlook for the American economy, which was behind the Fed’s decision, has favored the dollar against most major currencies. The dollar index was up 0.4 percent at 82.66 points on Monday, building on last week’s 2.2 percent rally, its biggest weekly gain in 19 months.

Against the yen, the dollar was down 0.2 percent to 97.71 yen, while euro fell 0.3 percent to $1.3078, a level not seen since June 6.

Tenet Healthcare, a hospital operator, said it would buy smaller rival Vanguard Health Systems for $4.3 billion, or $21 per share including debt, to expand into new geographies. In early trading Vanguard shares jumped 67.1 percent and Tenet gained 7.1 percent.

Rising interest rates served to dent gold prices, weighing on mining stocks, while other commodities were also pressured by strength in the dollar.

Barrick Gold Corp will lay off up to a third of its corporate staff at its Toronto headquarters and other offices, sources said, as the world’s top bullion producer intensifies downsizing amid a slump in the price of gold. United States-listed shares dipped 3.6 percent.

Freeport McMoRan Copper and Gold has restarted some operations at the world’s second-biggest copper mine after receiving approval from the Indonesian government. Freeport shares shed 3 percent.

European equity markets remained weak despite data showing German business morale picking up for a second straight month in June, pointing to a slow recovery for Europe’s largest economy. The Euro Stoxx 50 of euro zone blue chips was down 1.8 percent, and the FTSE 100 in London lost 1.5 percent.

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Fed Stimulus Still Needed to Help Recovery, Bernanke Says

While acknowledging the risks of historically low interest rates and the Fed’s aggressive policy of buying government bonds to help stimulate the economy, Mr. Bernanke said in testimony that “a premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery.”

After his opening statement, however, Mr. Bernanke seemingly opened the door a bit wider to tapering down.

Under questioning by Representative Kevin Brady, a Texas Republican who chairs the Joint Economic Committee, Mr. Bernanke said the Fed could prepare to “take a step down” in the next few meetings if the outlook for the labor market improved.

“It’s dependent on the data,” he said. “If the outlook for the labor market improves, we would respond to that.”

Mr. Brady asked if the tapering could begin before Labor Day, prompting Mr. Bernanke to say, “I don’t know.”

“We are buying a certain amount of assets each month,” he continued. “We are looking for increased confidence and in steps respond to that.”

In his opening statement, Mr. Bernanke said that since last summer, “financial conditions in the euro area have improved somewhat,” helping lessen the headwinds faced by the American economy as well.

He noted that the federal government’s fiscal policy had become “significantly more restrictive,” even as the Fed had pursued a looser monetary policy. The expiration of the payroll tax reduction in January and tax increases, as well as automatic spending cuts imposed by Congress and lower military spending, will collectively “exert a substantial drag on the economy this year.”

Speculation had been rising in recent weeks that the Fed might be preparing to taper its bond purchases, which total $85 billion a month. The bond-buying program has been credited with increasing growth, but some observers worry it could create a bubble in the prices of assets like stocks.

At its most recent meeting this month, the Fed said it was “prepared to increase or reduce the pace of its asset purchases,” prompting some analysts to speculate that bond purchases might be reduced in the coming months.

“In considering whether a recalibration of the pace of its purchases is warranted,” Mr. Bernanke told the Joint Economic Committee, the Fed “will continue to assess the degree of progress made toward its objectives in light of incoming information.”

Stocks on Wall Street surged after Mr. Bernanke’s remarks but pulled back in afternoon trading.

This article has been revised to reflect the following correction:

Correction: May 22, 2013

An earlier version of this article incorrectly described the timing given by Mr. Bernanke of a potential Fed move. He said the Fed could prepare to “take a step down” in the next few meetings, not the next few weeks.

This article has been revised to reflect the following correction:

Correction: May 22, 2013

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Today’s Economist: Bruce Bartlett: The Bush Tax-Cut Failure


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Ten years ago this month, Congress enacted the third major tax cut of the George W. Bush administration. Its centerpiece was a huge cut in the tax rate on dividends. Historically, they had been taxed as ordinary income, but the Bush plan, enacted by a Republican Congress, cut that rate to 15 percent. The tax rate on ordinary income went as high as 35 percent.

Today’s Economist

Perspectives from expert contributors.

This initiative originated with the economist R. Glenn Hubbard, who had been chairman of the Council of Economic Advisers when the proposal was sent to Congress. Mr. Hubbard was a strong believer that the double taxation of corporate profits – first at the corporate level and again when paid out as dividends – was a major economic problem.

During the George H.W. Bush administration, Mr. Hubbard had been deputy assistant secretary of the Treasury for tax policy and wrote a Treasury report advocating full integration of the corporate and individual income taxes.

Mr. Hubbard had also spearheaded enactment of big tax cuts in 2001 and 2002 that he said would jump-start the American economy. In an op-ed article in The Washington Post on Nov. 16, 2001, he predicted that the soon-to-be-enacted 2002 tax cut, which President Bush signed on March 9, 2002, would “quickly deliver a boost to move the economy back toward its long-run growth path.”

Mr. Hubbard predicted that it would create 300,000 additional jobs in 2002 and add half a percentage point to the real gross domestic product growth rate.

There is no evidence that the tax cut had any such effect. The unemployment rate remained above 5.7 percent all year, rising to 5.9 percent in November and 6 percent in December. The real G.D.P. growth rate fell each quarter of 2002, and by the fourth quarter growth was at a standstill. Hence the need for yet another big tax cut.

The idea of the 2003 legislation was to raise dividend payouts, thereby bolstering personal income, and raise the prices of common stock, which would improve household balance sheets. As President Bush explained in his signing statement, “This will encourage more companies to pay dividends, which in itself will not only be good for investors but will be a corporate reform measure.” He also said the dividend tax cut would “increase the wealth effect around America and help our markets.”

The Treasury Department issued a fact sheet on July 30 asserting that the decline in dividends had been a cause of the weak stock market and noting that dividend payouts had risen since enactment of the tax cut on May 28.

Subsequent research, however, found that the increase in dividends was a short-term phenomenon and mainly at companies where stock options were a major form of executive compensation. A 2005 Federal Reserve Board study found that the United States stock market did not outperform European stock markets after the dividend cut. Nor did stocks qualifying for lower dividend taxes outperform those, such as real estate investment trusts, that did not qualify for lower dividend taxes. Non-dividend paying stocks slightly outperformed dividend-paying stocks, and many corporations that did pay higher dividends scaled back stock repurchases by a similar amount.

Share repurchases were a common way that corporations returned profits to shareholders. They raised stock prices, which were untaxed as long as shareholders held the stock and were taxed at low capital gains tax rates when sold.

A 2006 Federal Reserve study found that a third of corporations cut share repurchases by the same amount they increased dividend payouts. Hence only the form of shareholder compensation changed, not the amount. A 2010 Federal Reserve study found little change in total dividend payouts after the 2003 rate cut as a percentage of corporate earnings. It concluded that the tax cut had little, if any, effect.

A 2008 study published in the National Tax Journal surveyed investment professionals to see their reaction to the dividend tax cut. It found that the tax cut was less significant than other factors, such as corporate cash flow and cash holdings that were unaffected by the tax change.

A 2011 study by the Treasury Department examined household portfolios. It found no evidence that households shifted their investments from those whose return was taxed as ordinary income into dividend-paying stocks whose income was taxed less.

Finally, a January 2013 study by Danny Yagan of the University of California, Berkeley, examined the impact of the 2003 tax cut on corporate investment. He found zero change.

It is hard to find even a reputable conservative economist willing to say anything good these days about President Bush’s tax and economic policies. In 2009, the Harvard economist Dale Jorgenson said he saw no redeeming features in them.

In 2011, the economist Alan Viard of the conservative American Enterprise Institute told Bloomberg News, “The effects of the Bush tax cuts on growth were ambiguous at best.” He added, “They were not much of a poster child for pro-growth tax policy.”

Even Mr. Hubbard now seems unwilling to defend the tax cuts he shepherded into law. Earlier this year, he was asked by The New York Times what he thought about the repeal of many of the Bush-era tax cuts on Jan. 1. He said many of those tax cuts were no longer relevant to our tax and economic problems.

Mr. Hubbard even suggested that higher revenues, long a Republican no-no, were not a bad thing. “We need a tax system that can promote economic growth and raise the revenue the American people want to devote to government,” he said.

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Economix Blog: Based on Relative Yields, Stocks Look Cheap



Notions on high and low finance.

My Off the Charts column this week looks at the popularity of junk bonds. Since 1999, they have outperformed stocks during both bull and bear markets. Issuance of such bonds has risen to record levels around the world, and yields are at historic lows.

Those declining yields have produced capital gains for bond owners, making the bonds more attractive to those who invest based on recent history.

As I talk to people these days, there seems to be widespread conviction that stocks are expensive, and that getting into the market now is highly risky. After all, the Dow Jones industrial average and the Standard Poor’s 500-stock index have risen to nominal record highs at a time when the American economy is hardly putting on an inspiring performance and Europe continues to stumble along.

Somehow people are not impressed by the fact that the S.P. 500 has earnings that are about 80 percent higher than they were in 1999, when the index reached levels almost as high as those reached this year.

At the suggestion of Bob Barbera, the co-director of Johns Hopkins University’s Center for Financial Economics, I compared the earnings yield on the S.P. 500 to the yield on the Bank of America Merrill Lynch high yield bond index since 1994. Here are the results:

There are, of course, caveats. The earnings yield is simply the operating earnings for the companies in the stock index over the past 12 months, divided by the price of the index at the end of each quarter. There is no guarantee that earnings will be as good over the next year. (But of course, there is no guarantee that all bonds will continue to make their interest payments, either.) The earnings yield is the inverse of the more commonly cited price-earnings ratio.

Earnings come in varying qualities, as companies play games with numbers. The operating earnings are compiled by S.P., which tries to eliminate one-time events from reported profits, but S.P. no doubt makes some decisions about which people could quarrel. These numbers should not be taken as absolutely definitive.

And earnings yield is not the same thing as a dividend yield. Presumably the earnings that are not paid out in dividends are being reinvested for the shareholders’ benefit, but you won’t have to work very hard to find historical examples where that did not work out well for the shareholders.

But with all that, it is clearly unusual for stocks to be yielding more than bonds. And stocks have upsides that bonds lack. Earnings may rise. (They usually do, at least over time.) Bond payouts are fixed. If they change, it will be because the company ran into trouble and halted earnings payments.

At current low levels of interest rates, it is hard to make a case that junk bonds are a better investment than stocks.

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Retail Sales Barely Rise, Hinting at Slow Growth

The Commerce Department said on Wednesday that retail sales edged up 0.1 percent after a 0.5 percent rise in December.

The small increase suggested that the expiration of a two-percentage-point payroll tax cut on Jan. 1 and higher tax rates for wealthier Americans were weighing on the economy.

Still, economists said consumer spending was unlikely to buckle given rising home values, moderate job growth and rallying stock market prices.

“We are starting to see the impact of higher taxes, but we have a positive wealth effect from increasing house prices and a boost from equities,” said Robert Dye, chief economist at Comerica Bank. “My expectation is that consumers are able to continue to increase spending, but only moderately.”

Core sales, which exclude automobiles, gasoline and building materials and correspond most closely with the consumer spending component of gross domestic product, ticked up 0.1 percent.

Consumer spending, which accounts for about 70 percent of the American economy, grew at a 2.2 percent annual rate in the fourth quarter. That helped to soften the blow to the economy from slower inventory accumulation and sharp cuts in military spending.

The government said last month that economic output slipped at a 0.1 percent rate in the final three months of 2012.

However, the retail sales report showed core sales were a bit stronger in November and December than previously reported. In addition, businesses, excluding auto dealerships, accumulated slightly more inventory in December than earlier thought.

Taken together with a smaller trade deficit in December, the data suggested the government would raise its estimate for fourth-quarter gross domestic product when it publishes a revision later this month. Even so, the economy most likely grew at a rate under 1 percent in the fourth quarter, economists said.

Growth in consumer spending is expected to retreat from the pace of the fourth quarter as households adjust to smaller paychecks and higher gasoline prices. Prices at the pump have increased 30 cents so far this year.

Estimates of consumer spending growth in the first quarter currently range from 0.7 percent to 1.8 percent.

Some economists were encouraged that consumers had maintained purchases, though at a slow pace, despite a reduction in their disposable incomes.

“By no means are we completely out of the woods when it comes to the impact of higher taxes,” said Michael Feroli, an economist at JPMorgan Chase. “Evidence from past episodes suggests it could take up to two quarters for spending to fully adjust to new tax realities.”

A softer pace of consumer spending is expected to limit G.D.P. growth to a 1.8 percent rate this quarter, according to a Reuters poll of economists. For the year as a whole, economists expect growth of just 2.3 percent.

A separate report from the Labor Department showed that higher oil prices helped push up the cost of imported goods by 0.6 percent last month. Import prices had fallen by 0.5 percent in December.

Still, nonpetroleum import prices edged up just 0.1 percent in January and have risen just 0.2 percent over the last year, showing a lack of broad inflation pressure.

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Japan’s Bond-Buying Plan Quickly Meets Criticism

Following the lead of their counterparts in the United States, Japan’s central bankers announced Tuesday what they called a groundbreaking effort to reinvigorate the country’s long-moribund economy and defeat deflation.

With no more room left to cut interest rates and previous steps unsuccessful, the Bank of Japan is taking a page from the Federal Reserve’s playbook and will pump trillions more yen into the economy by directly buying government bonds and other assets. It also doubled the country’s official inflation target to 2 percent. The action came after months of intense pressure on the Bank of Japan from the country’s audacious new prime minister, Shinzo Abe, to take more aggressive action to bolster the economy.

But as in the United States, there are doubts about just how much of an effect the move will have in Japan. Three rounds of asset purchases since the onset of the financial crisis have successfully headed off deflation in the American economy but failed to generate the kind of growth necessary to return employment to prerecession levels.

Japan’s move is also likely to further devalue the yen in the long term — causing some to worry about a possible round of competitive devaluations as countries weaken their currencies to bolster growth in exports. On Tuesday, however, the yen actually rose against the dollar and the euro amid disappointment that the Bank of Japan’s efforts had not gone far enough.

Traditionally, curbing inflation, not worrying about deflation, has been the principal task of central bankers. But when economies enter prolonged periods of slow growth, or even contraction, other concerns come to the fore. Ben S. Bernanke, the Federal Reserve chairman, was keenly aware of Japan’s long-running struggle with deflation as well as the American experience in the Great Depression when he began the first round of United States asset purchases, or quantitative easing, in November 2008.

After a second round of quantitative easing beginning in November 2010, the Fed started a third round in September. It said in December that it would continue to purchase $85 billion in Treasury securities and mortgage-backed securities each month until the job market improved. After considerable pressure, European central bankers also began moving more aggressively last year, vowing to do “whatever it takes” to keep the euro zone from fracturing.

Given the scale of the efforts in the United States and Europe, many experts were disappointed by the Bank of Japan’s action because the expanded asset purchases will not begin until 2014. They complained that was a waste of valuable time in turning around an economy whose descent into deflation has become a test case of the effects of doing too little in the face of an economic slowdown.

To make matters worse, the Bank of Japan’s new plan to purchase 10 trillion yen, or $112 billion, in assets each month sounds more aggressive than it actually will be, said Gustavo Reis, senior international economist at Bank of America Merrill Lynch. That is because many of the securities the Bank of Japan will be purchasing are in the form of short-term debt that will quickly mature, so the additional purchases will equal about $112 billion a year — not a month — beginning in 2014.

By contrast, he said, the Fed’s balance sheet is expected to expand by a trillion dollars in 2013.

“The Bank of Japan should be more aggressive,” Mr. Reis said. “It’s a step forward, but given where their economy is, they need to do more.”

In fact, with such a small annual increase in asset purchases, it is unlikely Japan will achieve 2 percent inflation, analysts said. The Consumer Price Index for 2012 fell 0.5 percent, according to government statistics. The Bank of Japan’s announcement “will likely disappoint those who expected the policy board to answer Abe’s call for a ‘different kind of B.O.J. policy,’ or significantly ramp up its pace of easing,” Izumi Devalier, an economist with HSBC, said in a note to clients.

While certainly better than inaction, there is evidence that unconventional monetary policy can only do so much to lift overall economic growth.

The Fed’s monetary policy seems to be having a much more significant effect on asset prices than it has on the underlying economy, said Larry Kantor, head of research at Barclays. He noted that nearly four years after markets hit bottom in March 2009, stocks in the United States had more than doubled in value. By contrast, “most people would characterize the economic recovery as weak.”

For all the challenges in the United States and Europe, Japan’s economy, the world’s third largest, has been depressed for much longer; the 1990s are regarded as a “lost decade,” and the last 10 years are proving to be not much better. Deflation, an all-around fall in prices, profit and incomes, has plagued the country since the late 1990s.

Since last year, when Mr. Abe was still opposition leader, he has urged the central bank to do more after previous rounds of asset purchases failed to reverse deflation. He stepped up the pressure on the bank after a landslide victory by his Liberal Democratic Party in parliamentary elections in December, which catapulted him to office for the second time since a short-lived stint in 2006-7.

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Today’s Economist: Casey B. Mulligan: The iPhone and Consumer Spending


Casey B. Mulligan is an economics professor at the University of Chicago.

That the introduction of iPhone 5 increases consumer spending is no triumph for Keynesian economics, but merely an advertisement for plans by the Bureau of Economic Analysis to improve national accounting.

Today’s Economist

Perspectives from expert contributors.

Suppose there were an island economy with 100 able-bodied adults, all of whom work as fisherman, each catching a fish a day. The 100 fish are eaten by the island people, which makes inflation-adjusted daily consumer spending in the economy – or consumption, as economists call it – equal to 100.

(In order to clarify concepts and measurement practices, I have deliberately kept this model economy simple, with no unemployment, liquidity traps and the like.)

Now suppose that 10 of the fisherman decide to quit fishing to build, nurture and tend to an apple orchard. In the beginning, the orchard produces no apples, so consumer spending drops to 90 fish a day, because only 90 adults are out fishing while the other 10 are developing an orchard.

Time passes, and a bountiful 100-apple harvest occurs. Because the apples taste good, the island fishermen obtain all 100 apples from 10 orchard owners in exchange for fish. The apple harvest has by itself boosted consumption in the economy, which suddenly jumped from 90 fish a day to 90 fish a day plus 100 apples.

It would be ridiculous to proclaim that the apple harvest and its effect on consumer spending prove that the economy is plagued by a liquidity trap, or to insist that the immediate effect of the harvest on consumer spending is independent of the quality of the apples. By construction, this model economy has no Keynesian features, yet nonetheless a harvest has a large effect on measured consumption.

Consider now the American economy, in which Apple has just released its iPhone 5, and some economists say they believe that the release itself will noticeably increase aggregate consumer spending. Paul Krugman has gone even further, to assert that the increase is a proof for Keynesian economics and that the “short-run benefits from the new phone have almost nothing to do with how good it is.

Even if Keynesian economics were completely wrong, economists would expect the iPhone 5 release to cause consumer spending and gross domestic product to be greater than it was before the release, to a degree related to the phone’s overall value to consumers. Note that, as in my island economy, the development of Apple products reduces consumption before the release, because the people working on the coming products are not available to produce consumer goods during that time.

Much of the development work on the iPhone 5 did not, before its release, count as investment or G.D.P. (G.D.P. is the sum of public and private consumption and public and private investment). The national accounts treat research and development activities as intermediate inputs, which means that they are subtracted from revenue for the purpose of determining a corporation’s contribution to national production.

This same is true for, say, Apple’s legal expenses in developing patents (many of which are discussed on the Mactech Web site) and license terms for their new product.

These development activities appear as G.D.P. only when the product is completed and sold. If the product is not valuable, it will not sell and will not count for much, although national consumption could still rise if upon project completion the developers move out of development and into the production of consumer goods.

(Research and development employees usually receive wages during the development phase, but their prerelease compensation comes out of corporate profits).

For the purposes of understanding the timing of economic activity, the national accounts’ treatment of research and development is a weakness, because it recognizes the developers’ activity at the wrong time – only after the product is released. Economists at the Bureau of Economic Analysis (the agency producing our nation’s accounts) are aware of this weakness, how it has become acute with the rise of the technology sector and steps they might take to improve the accounts. They are doing the best they can with the data and economic research results that are available.

Measured consumption rises in the quarter when people buy their new iPhones, not when they actually use them (in my island model, the consumption would be measured when the apples are bought, not when they are eaten). IPhones are durable goods that are used for years after Apple sells them as new, including by second and third owners.

Curiously, the timing of measured iPhone consumption would be markedly different if Apple or cellular carriers had chosen to rent the phones rather than sell them, because the measured consumption would occur each month when users paid their rental fees (the Bureau of Economic Analysis is aware of this weakness and rectifies it in sectors where it is most acute, like the housing sector).

The iPhone 5 release is no occasion to cheer for wasteful government spending, but perhaps does help make the case for a larger budget at the Bureau of Economic Analysis, so that it can continue its progress on measuring the amount and timing of economic activity.

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