January 27, 2023

On All Levels of the Economy, Concern About the Impasse

Some economists say the effects of lowering the federal government’s credit rating to AA from AAA can be measured in the billions of dollars in increased borrowing costs for the government, and in the billions more that consumers, corporations, states and municipalities will have to pay for their credit. It could also erode consumer and business confidence, slowing even further the economy and job creation.

The prospect of a downgrade by one of the credit rating agencies once seemed almost unimaginable. But the impasse in Washington over the government’s deficit and $14.3 trillion debt limit has led some global financial players to expect the change.

A downgrade on debt issued by the United States would have less severe consequences than a default, which takes places when a government fails to pay its creditors. Many Wall Street bankers on Tuesday said they still believed a default would be avoided because its consequences for the markets and economy could be catastrophic. They were less certain, however, what the cumulative effect might be of a downgrade.

The view among many on Wall Street on Tuesday was that long-term Treasury yields could edge up by 0.10 percentage points, to 0.70 percentage points. That would eventually increase the amount of interest the United States pays on its debt by as much as tens of billions of dollars each year. The government now pays $250 billion a year on interest costs to service its debt.

The size of the increase depends on how long the stalemate in Washington continues, Terry Belton, the global head of fixed-income strategy at JPMorgan Chase, said in a conference call with reporters on Tuesday.

On the high end, the government’s interest payments could climb an additional $100 billion a year, Mr. Belton said. “That is a huge number, representing a long-term permanent increase in U.S. borrowing costs.”

Rates would also increase on some markets priced off Treasuries, including mortgages, credit cards and student and auto loans, analysts warned.

For a typical consumer with a $200,000 mortgage, the increase in yields could translate into an increase of $200 to $400 a year in their loan payments, according to Citigroup analysts.

Treasuries are also widely held as collateral in the huge repurchase markets that are used by banks around the world to raise overnight loans, and in clearing houses for financial derivatives. If Treasuries decline in value, participants could be asked to put up more collateral, which could cause selling across a broad swath of the markets.

Mohamed El-Erian, the chief economist at the investment firm Pimco, said he believed lawmakers would reach an agreement to raise the debt ceiling and avert a default on the country’s debt, but that the nation’s rating would remain vulnerable.

“A downgrade would mean a weaker dollar, somewhat higher interest rates and a further blow to the already fragile national economic confidence,” Mr. El-Erian said. “This translates into weaker growth and even greater headwinds when it comes to job creation, which is absolutely critical at this stage.”

Standard Poor’s, one of the three major ratings agencies, has said that just raising the debt ceiling would not be enough. Without a “credible” plan by Congress for at least $4 trillion in savings, the agency has warned, the United States’ credit rating might still be downgraded.

Analysts and economists pointed to that stance this week when they expressed growing concerns about a downgrade. On Monday, some of the country’s largest state pension funds sent a letter to President Obama and Congress, warning that “the fallout will be felt all across America” and that economic growth “will stall for years to come.”

Standard Poor’s has warned that if the United States is downgraded, many other sectors and institutions could be as well, which would cause them to face higher borrowing costs. Among those it put on a negative credit watch in mid-July were some bond issues by Fannie Mae and Freddie Mac, a few insurance companies, 604 structured finance transactions that totaled $373 billion when issued and some municipal debt backed by the United States.

It was unclear whether the borrowing costs for these entities would climb much higher. Some investors said they did not give much weight to the difference between a triple-A and a double-A.

But in the broader economy, if money that might have gone to new purchases or increased investment were instead diverted to higher interest payments, the result could be slower economic growth and a higher jobless rate for the remainder of the year, analysts warn.

Macroeconomic Advisers said the country’s gross domestic product could slow in the second half of this year to 2.6 percent from a forecasted 3.2 percent, and that the jobless rate could end the year at 9.6 percent, above the 9.2 percent expected.

Joel Prakken, chairman of Macroeconomic Advisers, said any change in interest rates would probably be small and not felt for several years. “The real story is whether the uncertainty will cause consumers and companies to stop spending,” he said.

On that front, some analysts noted that corporations stopped spending long before the debt-limit debate hit the news.

“Companies clearly have had record cash on the books for a year and a half now,” said Alec Young, an equity strategist at Standard Poor’s Equity Research. “Yes, they’re not spending the money, they’re not hiring, but is it because of this issue?”

Eric Dash and Mary Williams Walsh contributed reporting.

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Job Growth Suggests Resilience of U.S. Recovery

As many corners of the global economy are storm-tossed, with oil prices rising and rumblings of a government shutdown in Washington, economists are watching carefully to see if there will be a cumulative effect on hiring. The answer, so far, appears to be no.

President Obama and the Democrats quickly pointed to the numbers as proof that their policies, from the stimulus spending to the payroll tax cut, are working. Our economy is showing signs of real strength,” President Obama said to applause from several hundred employees at a UPS shipping facility in Landover, Md., where he appeared on Friday. But, he added,  “Although we got good news today we have to keep the momentum going.”

The private sector has added, on average, 188,000 jobs in each of the last three months. Manufacturing continued its unlikely — if still modest — revival in March, adding 17,000 jobs. Health care added 37,000 jobs in the month, and professional and business services added another 78,000, although about 37 percent of that came from increases in temporary help. It was the 13th straight month of private-sector job growth.

In all, the Bureau of Labor Statistics breaks the economy into 16 job sectors. The unemployment rate, while still perilously high in a few, has dropped in 13 of those since March 2010.

“The private sector of the economy has been the locomotive pulling the economy forward,” noted Sung Won Sohn, an economics professor at California State University, Channel Islands. “Record exports, better-than-expected retail sales and the increase in business capital spending are part of the good news.”

At the same time, March’s numbers offer more than a few cautionary signs that the national economy is not cured of all its ills. The ranks of Americans who have been without a job for 27 weeks or more remains painfully high, at more than six million.

The labor force has shrunk steadily since the beginning of the recession, to a point that just 64.2 percent of adults are either in the work force or looking for a job. That is the lowest labor participation rate in a quarter-century. Many economists have expressed hope that as unemployed Americans grow emboldened by signs of new hiring, they will re-enter the work force in greater numbers. That did not happen in March, as the participation rate was unchanged.

“It is still a very inhospitable market for unemployed workers,” said Heidi Shierholz, an economist with the liberal Economic Policy Institute. “We still have five unemployed workers for every opening and those are desperate times.”

The average workweek was also unchanged, at 34.3 hours, and average hourly earnings remained static. Both indicators point to an economy with much slack demand, some hints of deflation, and little upward pressure on wages. In other words, the economy is an engine still coughing. Real earnings, the Brookings Institution noted Friday, have fallen 1.1 percent in the past year.

“With excess supply of labor at very high levels, it is unlikely that we are going to see any meaningful acceleration in wage rates anytime soon,” Joshua Shapiro, an economist at MFR Inc., said Friday morning.

The unemployment rate for blacks and Latinos remains high, at 15.5 percent and 11.3 percent, respectively. (In 2007, the unemployment rate for blacks stood at 8.3 percent and 5.6 percent for Latinos.) State and local governments offer their own slough of despond. Local government has lost 416,000 jobs since an employment peak in September 2008, and shed another 15,000 jobs in March.

Quite a few signs, of late, have pointed to a touch of momentum in the economic recovery. Weekly unemployment claims have declined steadily, from the mid-400,000s to 388,000 last week. In most historical contexts, the latter number would be a touch grim coming so many months after the official end of the recession. But history shows that nations are slow to recover from financial shocks as severe as that of 2008, and many signs now point toward consistent, if still sluggish, growth in hiring.

“I suspect that the workers on the sideline will start coming back in,” Ms. Shierholz said.

The larger question is what the medium-term future augurs, and this month’s report offers less than a definitive answer. Will jobs continue to expand through the spring, and with enough vigor — 300,000 a month, say — to substantially reduce the unemployment rate? As Ms. Shierholz noted, if the economy adds 200,000 jobs a month, it will be 2019 before it reaches the employment rate that preceded the Great Recession.

  Many economists speak optimistically of the spring’s job growth, but some grow wary after that. The international storm clouds are many — spectacular debt problems in Europe, uprisings sweeping the oil-rich Middle East, and Japan with its many maladies. And then there is the possibility of a government shutdown in Washington, as the Republican-controlled House challenges the White House.

The worry is that these ills might press on consumer and business confidence.

“The first half of this year will be the best job market that we’ll see in this whole expansion,” said David Levy of the Jerome Levy Forecasting Center. “We’re riding the crest of earnings. But after that, and looking toward 2012, the situation is questionable.”

 

This article has been revised to reflect the following correction:

Correction: April 1, 2011

An earlier version of this article mistakenly described the number of long-term unemployed — those jobless for 27 weeks or more — as the highest in a generation.

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