March 29, 2024

Growth Halted in 4th Quarter on U.S. Cuts

Disappointing data released Wednesday underscore how tighter fiscal policy may continue to weigh on growth in the future as government spending, which increased steadily in recent decades and expanded massively during the recession, plays a diminished role in the United States economy.

Significant federal spending cuts are scheduled to take effect March 1, and most Americans are also now paying higher payroll taxes with the expiration of a temporary cut in early January.

The economy contracted at an annual rate of 0.1 percent in the last three months of 2012, the worst quarter since the economy crawled out of the last recession, hampered by the lower military spending, fewer exports and smaller business stockpiles, preliminary government figures indicated on Wednesday. The Fed, in a separate appraisal, said economic activity “paused in recent months.”

Still, economists said the seemingly bleak gross domestic product report was not a sign that another recession was looming. The preliminary data showed relatively strong spending by consumers and businesses, even as military spending posted its sharpest quarterly drop in 40 years.

Forecasters expect that growth this year will rebound to a still-anemic 1.5 percent, a little lower than the pace it has managed over the last three years.

“This is the tip of the iceberg on fiscal austerity from Washington,” said Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch. “It was exaggerated this quarter by the unusually large drop in defense spending, but that and higher taxes will start hurting” in the coming months.

The drop in American exports stemmed in part from a drop in economic growth in Europe, where governments have also been cutting spending in a bid to balance budgets. The parallel contractions are likely to provide fodder for economists who argue that austerity efforts have gone too far in many developed economies.

The surprisingly weak numbers could also force politicians to limit the cuts that are scheduled to take effect if Congress fails to produce a budget bargain in the coming weeks and strengthen the argument that deficit reduction is a lesser concern than job creation.

“Our economy is facing a major headwind, and that’s Republicans in Congress,” said the White House spokesman Jay Carney.

Republicans said the White House was not advancing concrete plans for creating new jobs and stimulating the economy.

“The bad GDP news makes it even more unbelievable that Obama has been ignoring job growth in his 2nd term agenda,” Reince Priebus, chairman of the Republican National Committee, posted on Twitter.

The Fed said Wednesday that it would continue its efforts to revive growth by holding short-term interest rates near zero and increasing its holdings of Treasury securities and mortgage-backed securities by $85 billion a month. Those policies aim to reduce borrowing costs for businesses and consumers.

“The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline,” the Fed said in a statement.

Unemployment has not declined since the Fed started its latest round of purchases in September. The rate was 7.8 percent in December, the same as three months earlier. The government will report the rate for January on Friday.

Although economists expected output to decline substantially from the 3.1 percent annual growth rate recorded in the third quarter, the negative G.D.P. number still caught Wall Street off-guard. It was the weakest economic report since the second quarter of 2009, although revisions in February and March could alter the figure.

“I’m a little surprised,” said Michael Feroli, chief United States economist at JPMorgan.

Like some other observers, Mr. Feroli said there were hints the economy was performing slightly better than the headline number suggested.

Article source: http://www.nytimes.com/2013/01/31/business/economy/us-economy-unexpectedly-contracted-in-fourth-quarter.html?partner=rss&emc=rss

U.S. on Track to Meet Goal of Higher Exports

WASHINGTON — Two years ago, President Obama popped a surprise into his State of the Union address: His administration would double American exports in five years, helping to create two million jobs.

The bold promise sent the eyebrows of economists and policy experts upward, even as they applauded its intent.

“How will he perform this miracle?” Leslie H. Gelb, president emeritus of the Council on Foreign Relations, asked at the time. “It really is a mystery.”

Two years later, the administration is on track — for now — to meet its ambitious goal. Growing exports have been one of the central drivers of the recovery, accounting for about half the nation’s economic growth since the recession ended. Economists say the administration deserves credit for some of the gains. It has pressured China to increase the value of its currency and open its markets to American businesses. It has worked closely with American companies looking to sell goods and services throughout the world.

Exports are running at about $180 billion a month, according to Commerce Department data, up from $140 billion a month two years ago. They are currently growing at an annual pace of about 16 percent — a percentage-point higher than necessary to double exports to $3.1 trillion by 2015.

But while economists and trade experts praise the export boomlet, they warn that some of the reasons behind the rise, including announcing the goal when exports were at a low point, may be waning.

“I’d say 90 percent is due to macro trends,” said Gary C. Hufbauer, a senior fellow at the Peterson Institute for International Economics. “You could say the best thing the Obama administration did for trade is the stimulus program,” bolstering domestic and global demand, he added.

That will not stop Mr. Obama from promoting export success in his State of the Union address on Tuesday. The White House pushed through three long-stalled free-trade deals, with Colombia, Panama and South Korea. In November, it also announced the framework for a trade and investment agreement among nine Pacific nations, the Trans-Pacific Partnership.

“If we’re going to grow, it’s going to be because of exports,” Mr. Obama told a meeting of business executives at the Asia-Pacific Economic Cooperation meetings in Hawaii in November.

Trade experts say those changes have done some good — but note that American exports got a major boost from economic trends over the last two years, including a global rebound from the depths of the recession and rising prices for commodities, like wheat, cotton and petroleum products.

Indeed, the Obama administration started its five-year clock when global trade volumes were near their recession-era lows. Manufacturing exports of goods like airplanes and machinery, for instance, have snapped back to nearly their prerecession peak.

“We’ve had 15 percent growth,” said Andrew B. Bernard, a professor at the Tuck School of Business at Dartmouth. “A lot of that is recovering — just getting back to where normal life would be. And a lot of it has to do with the rapid recovery of our trading partners.”

He said an “optimistic” — but more realistic — benchmark for annual export growth in the coming years was about 8 percent.

In the last two years, the recovery — and roaring demand from developing countries — also helped to drive up prices for commodities to the benefit of American farmers, miners and energy companies. Farm exports reached a record $137.4 billion in the 2011 fiscal year, which ended Sept. 30, beating the previous annual peak by $22.5 billion, or 20 percent. Sales of petroleum products also hit a record of about $90 billion in 2011, making fuels the country’s single biggest export.

“Coming out of global economic recession, trade does tend to come back faster,” said Ron Kirk, the United States trade representative.

But, he said, “the export initiative is real. And the success has been, actually, pretty remarkable,” he said. “We’re doing everything we can to facilitate trade, knock down barriers and do export promotion.”

Still, the global trends that aided American export growth in the last two years appear to be diminishing, and 2012 poses new headwinds.

First, global investors are flocking to the safety of the stronger dollar in light of the crisis in Europe. That has pushed the borrowing costs of the United States to near-record lows. But it makes American exports relatively more expensive and might mean that developing economies will turn to cheaper, euro-denominated goods and services.

More worrying is a global slowdown and easing commodity prices. Europe, the nation’s biggest trading partner, is on the brink of recession. And the International Monetary Fund and World Bank are also warning that the emerging-market economies that provided the bulk of growth in the global recovery are cooling off.

A financial crisis in the euro zone could slash global trade by more than 7 percent, the World Bank forecast this week. And even if Europe merely muddles through, the bank expects global trade growth of 4.7 percent in 2012, down from 12.4 percent two years ago.

An emerging-market slowdown might prove even more consequential for American exporters than woes in rich European countries. Much of the export growth in the last two years has come from countries like China, South Korea, Brazil and India, and developing countries now buy a majority of exported goods and services. Sales of goods to China, for instance, have grown fivefold over the last decade — while exports to all countries have roughly doubled.

Many forecasters remain optimistic that exports will continue expanding in 2012, if not quite as quickly. And the long-term trends remain in the favor of the United States, as growing emerging-market economies move hundreds of millions of consumers into the middle class.

“There’s a view that there’s more potential” for American exports to China, a senior administration official said.

“If there were a stronger and better market opening, a better playing field and more protection of intellectual property and trade secrets, we could be doing more business with each other.”

In this year’s State of the Union, the White House is expected to announce new measures to help bolster trade, including a new task force to monitor and enforce trade rules.

Article source: http://feeds.nytimes.com/click.phdo?i=347c45ce5e43dbb4a0f8b60298827f10

Economix Blog: The Euro Zone Crisis and the U.S.: A Primer

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

The potential effect of the euro zone crisis on the United States has been the subject of several recent articles, including Annie Lowrey’s on Saturday. Here’s a primer summarizing the three main channels through which the fiasco across the Atlantic could hurt the American economy: trade, stock markets and (most worrisome) a contagious credit crisis.

1) Trade. There are two ways that a European catastrophe could hurt American exports.

First, it could shrink our customer base in Europe. Europe buys 22 percent of our exports, according to the Bureau of Economic Analysis. If Greece and other countries implode, causing a severe recession in Europe, orders for American products and services would fall.

Second, the crisis could shrink the United States customer base around the world. As investors become more concerned about the stability of the euro zone, they will stop investing in the euro. When there is less demand for euros, the value of the euro gets cheaper. By comparison, the dollar gets more expensive. That makes American-made products more expensive, so American products become less attractive to customers worldwide.

2) The stock market. European stock markets and American stock markets are strongly correlated, as shown by indices for both in the chart below:

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Of course, this chart doesn’t show what’s cause and what’s effect. A statistical analysis by economists at Deutsche Bank, however, has found that American markets seemed to drive European markets from the onset of the financial crisis in 2007 to March 2010, and since then the reverse has been true: movements in the European markets seemed to be leading movements in American ones.

Additionally, many American companies depend on revenue from Europe, as you might have guessed from the export numbers noted above. Deutsche Bank analysts estimate that about 15 to 20 percent of corporate revenues of companies in the Standard Poor’s 500-stock index are generated by Europe. For companies in the materials, energy and tech sectors, the share earned in Europe is even higher.

When these companies do badly, and their shares drop, the pain is felt much more broadly in the United States. Declines in the stock market mean less valuable portfolios for Americans across the country, causing consumers to feel poorer and be less willing to spend money.

This is known as the wealth effect. We saw it when housing values first plunged, leading Americans to realize they weren’t as rich as they thought they were.

3) Debt exposure and a contagious credit crisis. This is the biggest worry, since global financial markets are deeply interconnected.

Europeans owe lots of money to one another — and to other countries — as you can see in this debt graphic. For example, American banks own a lot of French debt, and French banks own a lot of Italian debt. If Italy defaults, French banks are in trouble. If those French banks then default, American banks are likewise compromised. With these banks insolvent (or at the very least illiquid), it becomes harder for American companies and consumers to borrow.

The contagion can also spread rapidly because once one country falls, investors get antsy about the fate of their investments in similarly indebted countries. So investors start selling off those assets en masse too, creating a self-fulfilling prophecy and causing those countries to implode. And so the domino effect continues.

Even just worrying about these types of scenarios can seriously damage financial markets, because people stop lending if they suspect someone major somewhere won’t be able to pay the debt back. Already banks are tightening their lending standards for borrowers who have significant exposure to Europe, according to the Federal Reserve’s latest Senior Loan Officer Opinion Survey on Bank Lending Practices.

Part of the reason the global Great Recession began (and was so devastating) was that healthy credit markets are crucial to the functioning of any economy. If there is a broad tightening of credit, economic activity seizes up as well.

Article source: http://feeds.nytimes.com/click.phdo?i=4fa69653c734938b89913d95fa0735a2

U.S. and China Data Highlight Weakness in Global Economy

The United States trade deficit was essentially unchanged in August at $45.6 billion, its lowest level since April and $100 million narrower than a year earlier. Exports and imports both slipped by $100 million, to $177.6 billion and $233.2 billion, respectively.

The trade deficit was slightly narrower than analysts’ expectations. The level for July was revised downward from $44.8 billion.

A narrower trade deficit could lead to a slightly higher level for the gross domestic product, said Clark Yingst, the chief market analyst for the investment firm Joseph Gunnar, “but not exactly for the reasons that we’d like.” Sipping imports are a bad sign for the United States economy, since it shows weakness in consumer demand.

“In an ideal world we would like to see exports and imports growing at relatively strong rates, but with exports growing even faster than imports,” said Mr. Yingst.

Economists have also expressed concern that Europe’s slowing economy is leading to a reduction in demand for American exports. Alcoa, the aluminum producer, said its lower profit, reported earlier this week, was due in part to weak demand there.

Trade data from China for September showed that the country’s booming pace of export growth had begun to ease, as the global upheaval and a gradual rise in the value of the renminbi took their toll. The country’s trade surplus narrowed to $14.5 billion in September, from $17.8 billion in August. But the slimmer surplus was unlikely to defuse fully the criticism of American lawmakers, who argue that Beijing is keeping its currency unfairly low against the dollar.

On Tuesday, the United States Senate passed a bill that would impose tariffs on certain Chinese goods if the Treasury Department determined that China was undervaluing its currency to its advantage.

“Although Chinese imports remain close to record levels, some impact from weaker global growth was to be expected, and the fall in year-on-year growth in September suggests this is starting to happen,” Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong, wrote in a note to clients.

Economists are concerned that the American economy could be further damaged if this trend continues, especially if European demand remains weak.

The International Monetary Fund also warned Thursday that Asia could suffer “clear” financial and economic spillovers from continued problems. The fund forecast relatively robust growth of 6.3 percent for the region this year and 6.7 percent in 2012 on average, slightly before a previous forecast of 6.8 percent for 2011 and 6.9 percent for 2012 made in April.

The fund’s worries were tempered by a degree of confidence about Asian domestic demand cushioning the region from global upheaval.

“Domestic demand is still resilient, and it should continue to sustain activity across the region,” the I.M.F. said.

Joshua Brustein reported from New York and Bettina Wassener reported from Hong Kong.

Article source: http://feeds.nytimes.com/click.phdo?i=142f013aad044499d745c73b457cd56e