September 30, 2022

Bank of England Comments Send the Pound Lower

LONDON — Barely four days in the job, Mark J. Carney, the new Bank of England governor, is already having an impact on markets here.

The pound dropped about 1.3 percent against the dollar and also fell against other major currencies on Thursday after the central bank said that any expectations that interest rates would rise soon from their current record-low level were misguided.

The statement, issued along with the bank’s monthly interest rate announcement, was itself a departure from previous practice and showed that Mr. Carney, who became governor on Monday, is already making his mark on procedures.

“The drop in the pound is byproduct of the comments, and the market reaction indicates just how eager it is for comments from the new regime,” Peter Dixon, an economist at Commerzbank, said.

The central bank decided to leave its main rate at 0.5 percent and also held its program of economic stimulus at £375 billion, or $570 billion. Recent data from the services and manufacturing industries had surprised some economists by showing faster rates of growth.

The bank said it decided to keep stimulus and the interest rate unchanged as “there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time.”

“In the committee’s view, the implied rise in the expected future path of bank rate was not warranted by the recent developments in the domestic economy,” the bank said.

Mr. Carney, a Canadian who succeeded Mervyn A. King as governor, is expected to communicate more clearly than his predecessor which steps the central bank might take to spur growth. The former governor of Canada’s central bank has also said he is a supporter of U.S. Federal Reserve-like guidance for how long interest rates may remain unchanged to give greater certainty to borrowers.

Many economists expect that Mr. Carney voted in favor of more quantitative easing, the Bank of England’s bond-buying program, at the two-day rate-setting meeting that started on Wednesday. But they also expect that he was outvoted, just as Mr. King was last month, amid some timid signs that a recovery is taking shape. The central bank will release minutes of the current meeting next month.

After barely avoiding a triple-dip recession this year, the British economy showed signs of improvement in June. The services sector unexpectedly grew at its fastest pace in more than two years, according to data from Markit Economics and the Chartered Institute of Purchasing and Supply. The manufacturing and construction industry also improved last month.

The housing market also showed signs of continued improvement. Approvals for home loans granted by banks rose more than expected to the highest level since 2009 in May, according to figures provided by the Bank of England. The average price for a home continued to increase in June, led by London, according to Hometrack, a research concern.

“The data has been stunningly good,” David Tinsley, an economist at BNP Paribas in London, said before the announcement Thursday. But he also said that it was too early to say the worst was over for the British economy and that he expected the Bank of England to expand its stimulus program in the future. “The situation is probably still more fragile than it appears,” he said.

Economic growth is still expected to remain weak as long as troubles on the Continent, Britain’s largest export market, persist and austerity measures continue to be a drag on the recovery. George Osborne, the chancellor of the Exchequer and the architect of Britain’s austerity program, last month announced additional spending cuts, including more public sector job cuts.

Real disposable household income fell 1.7 percent in the first three months of this year, the biggest drop since 1987, according to the Office for National Statistics. Inflation continues to hover above the central bank’s 2 percent target at 2.7 percent just as many consumers had their salaries frozen.

In another sign that not all is well among British consumers, Nicole Farhi, the upmarket fashion label, filed for a form of bankruptcy protection on Wednesday, the latest British retailer to face serious trouble as demand dwindles.

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Fundamentally: A Muted Recovery May Mean a Longer Bull Market

Yet the qualities that have kept the animal spirits from returning to Wall Street may explain why today’s bull market, which turned four years old this month, has outlasted the average rally. On Thursday, the end of a trading week truncated by the Good Friday holiday, the Standard Poor’s 500-stock index closed at a new record high.

“Like a marathoner who didn’t start out at a full sprint, will this bull have more stamina?” asks Sam Stovall, chief equity strategist at SP Capital IQ. “My belief is this rally could end up lasting longer.”

Bull markets do not typically die of old age, but rather from the side effects of a lengthy rebound, market analysts say. Those include an economy that begins to overheat and a sense of overconfidence that develops among companies, consumers and investors, leading to risky behavior.

At the peak of the average bull market since World War II, gross domestic product was accelerating at an annual rate of 4.2 percent, according to a recent analysis by Mr. Stovall. By contrast, the most recent G.D.P. report found that the domestic economy grew by a mere 0.4 percent annual rate in the fourth quarter of 2012.

Market peaks also tend to show other characteristics: unemployment tends to fall below 5 percent, as companies race to hire; around 60 percent of investors say they are “bullish,” according to sentiment surveys; and the price-to-earnings ratio for the Standard Poor’s 500-stock index jumps above 18.

Yet today, unemployment — though it has been drifting lower — is still at an uncomfortably high 7.7 percent. Only 38 percent of investors recently surveyed described themselves as bullish, according to the latest poll by the American Association of Individual Investors. And the stock market’s P/E ratio, based on the last 12 months of profits, stands below 16, which is close to the historical average.

“No doubt, circumstances have improved from a year or two ago, but I don’t get a sense that there’s much excess yet,” said James W. Paulsen, chief investment strategist at Wells Capital Management.

There are other signs that “we’re far from the levels of overconfidence that produce the types of excesses that beget a downturn,” Mr. Paulsen added. He noted, for instance, that investors were not overextending themselves by betting on the riskiest segments of the stock market. Household finances are improving. And the ratio of debt payments to disposable personal income is about as low as it has been since the early 1980s.

With regard to the private sector, Mr. Paulsen asked: “Are companies overstaffed, are they overbuilding plants, overstocking inventory, or overleveraging their balance sheets?” For that matter, he added, “is the Fed over-tightening?” Mr. Paulsen was referring to the fact that many bull markets die only after the Federal Reserve, sensing that the economy is overheating, raises interest rates to slow rampant growth.

To be sure, there are some signs that Wall Street firms and Main Street investors are starting to embrace risk-taking again.

For example, although merger-and-acquisition activity among domestic companies is still far off its 2006 highs in dollar terms, the actual number of deals hit a record number last year. And leveraged buyouts, transactions involving large amounts of borrowed money, are also starting to rise again after peaking in 2007, just before the financial crisis.

“Yes, you saw some big, splashy deals in M. A., but I still think we’re in the nascent stages of all of that,” said Mark D. Luschini, chief investment strategist at Janney Montgomery Scott.

As for individual investors, they have started to return to equity funds. Although they yanked a net $281 billion from stock mutual funds in 2011 and 2012, fund investors have poured a net $64 billion into stock portfolios this year through March 20.

Still, market analysts point out that even with these impressive inflows, bond mutual funds continue to pull in more money. “The fact that bond funds still enjoy higher flows than equities is not indicative of a love affair with stocks,” said Duncan W. Richardson, chief equity investment officer at Eaton Vance. “This is far from euphoria — this is just puppy love.”

MR. LUSCHINI said that while the market could yet experience a correction of 4 to 7 percent this year, a lack of market excesses leads him to believe that such a pullback would not kill the bull.

What would?

Historically, interest rate increases by the Fed have been a bull-slayer. But Ben S. Bernanke, the Fed chairman, is on record promising to keep short-term rates low until at least mid-2015. The central bank would need to see a rapidly improving job market or evidence that inflation is spiking before raising rates, market watchers say.

Yet “there’s very little inflation pressure today,” said G. David MacEwen, chief investment officer for fixed income at American Century Investments.

For inflation pressures to start building, wage pressures would have to intensify and factory capacity would have to be stretched. That typically happens only after manufacturing capacity utilization hits 80 percent and the unemployment rate falls below 7 percent, said James T. Swanson, chief investment strategist at MFS.

Right now, capacity utilization is at 78 percent and unemployment is at 7.7 percent. Still, Mr. Swanson said, it’s not inconceivable that at today’s pace of economic growth, the levels he described will be reached by year-end. That would usher in a much different market climate, perhaps one not so hospitable to an aging bull.

Paul J. Lim is a senior editor at Money magazine. E-mail:

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DealBook: The Brazilians Behind the Heinz Deal

3G Capital took Burger King Holdings private in 2010.LM Otero/Associated Press3G Capital Management took Burger King Holdings private in 2010.

Warren E. Buffett’s $23 billion acquisition of H. J. Heinz, a quintessentially American company, is almost a caricature of a Buffett acquisition.

But Mr. Buffett’s partner in the deal, the Brazilian-backed investment firm 3G Capital Management, has also shown a craving for iconic American businesses.

3G, whose principal owner is the billionaire financier Jorge Paulo Lemann, adds ketchup to a portfolio that has included burgers and beer. Mr. Lemann played a major role in the multibillion-dollar merger of the Brazilian-Belgian beer giant InBev with Anheuser-Busch.

And in 2010, 3G took Burger King Holdings private in a leveraged buyout valued at about $3.3 billion. In April, just 18 months after taking it private, 3G sold shares of Burger King back to the public, but still retains majority ownership of the company. The firm has also previously invested in Wendy’s.

The ascendance of 3G and Mr. Lemann as major players on the global mergers-and-acquisition stage reflects the rise of Brazil as an economic power. Armed with strong balance sheets and a growing domestic economy, Brazilian companies have emerged as prominent buyers of American companies. In 2009, for instance, the Brazilian beef company JBS paid $800 million for a majority stake in Pilgrim’s Pride, the Texas chicken company.

Mr. Lemann, 73, who is worth $19.1 billion, according to the Bloomberg Billionaires Index, is said to have come up with the idea to buy Heinz and brought it to his friend Mr. Buffett. The two men have known each other for decades, having served together on the board of Gillette. Berkshire Hathaway is also a large shareholder of Anheuser-Busch InBev. Mr. Lemann and his partners serve on the Anheuser-Busch InBev board.

Mr. Lemann, whose Swiss father emigrated to Brazil a century ago, is a former Brazilian tennis champion who played at Wimbledon. He has lived in Switzerland since 1999, after an attempted kidnapping of his children.

He has been a major player in Brazil since the 1970s, when he acquired a small financial firm and built it into Banco de Investimentos Garantia, one of Brazil’s largest investment banks. Credit Suisse acquired his company for about $675 million in 1998. He and his business partners also gained control of a Brazilian brewery and built it into AmBev, one of the world’s largest beer companies.

The point person on the transaction for 3G, which houses its investment operations in New York, is Alexandre Behring. Known as Alex, Mr. Behring is a Brazilian native who graduated from Harvard Business School in 1995 and lives in Greenwich, Conn.

Another tidbit about 3G: for several years, it employed Marc Mezvinsky, the husband of Chelsea Clinton. Mr. Mezvinsky left 3G in 2011 and has since set up is own hedge fund.

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The Texas Tribune: Twenty Years Later, Nafta Remains a Source of Tension

The agreement between the United States, Mexico and Canada, ratified 19 years ago Saturday, also made two of Texas’ land ports among the country’s busiest and delivered a multi-trillion-dollar cumulative gross domestic product for its member countries.

But unions and consumer-advocacy groups say Nafta has had negative effects in Mexico and the United States. They say that resulting outsourcing and lower wages have hurt the United States’ domestic economy and that Mexico’s rural industries have destabilized.

As economists look to build on Nafta’s momentum to improve trade relations between member nations, critics say they should look to past failures to avoid similar mistakes in the future.

Nafta, which was enacted in 1994, eliminated existing tariffs on more than half of the exports from Mexico to the United States and gradually phased out remaining tariffs between all member countries.

The pact has benefited all three members. In 2010, the United States had $918 billion in two-way trade with Canada and Mexico, according to the office of Ron Kirk, United States trade representative.

Economists say that progress has come despite enhanced global security measures following the Sept. 11 attacks and an eruption of drug-related violence in Mexico. During a recent symposium here, economists and policy makers celebrated Nafta’s success and brainstormed ways to build on it and bolster economic output. The symposium concluded with a clear message: the future is wide open.

“We must continue to build upon Nafta and think more as a region in order to be more competitive globally,” said Gerónimo Gutiérrez, the managing director of the North American Development Bank, which was created by the governments of Mexico and the United States after Nafta’s inception and helps finance and develop infrastructure projects on the border.

But critics of Nafta say ithas resulted in a loss of United States manufacturing and shipping jobs and in less production oversight. They say Nafta has also displaced Mexican agricultural workers into other sectors or forced them to immigrate illegally to the United States.

“There have been huge disparities in the number of people entering the work force and the number of jobs available,” said Timothy A. Wise, the policy research director at the Global Development and Environment Institute at Tufts University. “That resulted in the huge migration problem despite the increased enforcement.”

Supporters say Nafta was not conceived to solve domestic problems for any member country. Instead, they say, the growth in the nations’ G.D.P.’s speaks to the pact’s positive effects. They include the creation of six million jobs in the United States tied to Nafta policies, more than $500 billion in goods and services traded between the United States and Mexico, and the ports of Laredo and El Paso being among the United States’ busiest.

Through September, about $172.5 billion in trade with Mexico passed through the Laredo port and about $65 billion through El Paso, according to United States census data analyzed by WorldCity, which tracks global trade patterns. Canada remains the country’s top partner, with $462.3 billion in trade during the same time frame, ahead of China, which is at $389.7 billion and Mexico, with $369.5 billion.

“I don’t think that Nafta was created to alleviate every single social problem in Mexico. It could not, and it has not,” Mr. Gutiérrez said. “I think that Mexico would be worse off if it wasn’t for Nafta today.”

Public Citizen, a nonprofit advocacy group with offices in Washington and Austin, cites United States Department of Labor data to support what it says is a negative impact on the American work force because of rising imports or offshoring production.

In Texas alone, Public Citizen said, there have been almost 2,500 companies whose workers or union affiliates have filed petitions with the department for training or temporary assistance under its Trade Adjustment Assistance program.

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Fed to Maintain Rates Near Zero Through Late 2014

The announcement means that the Fed does not expect the economy to complete its recovery from the 2008 crisis over the next three years. By holding short-term rates near zero beyond mid-2013, its previous estimate, the Fed hopes to hasten that process somewhat by reducing the cost of borrowing.

The Fed said in a statement that the economy had expanded “moderately” in recent weeks, but that unemployment remained at a high level, the housing sector remained in a deep depression, and the possibility of a new financial crisis in Europe continued to threaten the domestic economy.

The statement, released after a two-day meeting of the Fed’s policy-making committee, said that the Fed intended to keep rates near zero until late 2014.

In a separate set of statements, the Fed said that 11 of the 17 members of the committee expected that the Fed would raise interest rates at the end of that period. It noted that the committee expects growth to accelerate over the next three years, from a maximum pace of 2.7 percent this year to a maximum pace of 3.2 percent next year and up to 4 percent in 2014.

This is the first time the Fed has published such detailed predictions by its senior officials about future policy decisions. The Fed’s chairman, Ben S. Bernanke, said Wednesday that he hoped the forecast would stimulate growth by convincing investors that interest rates will remain low for longer than previously expected.

The economic impact, however, is likely to be relatively modest. Investors already expected the Fed to keep rates near zero into 2014, a judgment reflected in the prices of various assets whose values depend on the movement of interest rates.

Moreover, interest rates on many kinds of borrowing already are hovering near historical lows, and pushing rates down gets harder as you approach zero. And tight lending standards make it impossible for many people and businesses to get loans.

“I wouldn’t overstate the Fed’s ability to massively change expectations through its statements,” Mr. Bernanke said at a press conference Wednesday. “It’s important for us to say what we think and it’s important for us to provide the right amount of stimulus to help the economy recover from its currently underutilized condition.”

The new forecast is part of an effort by the Fed to exert greater influence over the expectations of investors to increase the impact of its policies. The Fed can influence current interest rates directly, but its influence over future rates depends on what investors think the Fed will do in the future.

The Fed also issued Wednesday a statement elaborating on its legal mandate to maintain stable prices and to limit unemployment.

The statement said that the Fed aims to increase prices and wages by about 2 percent each year. It is the first time that the Fed has publicly described an inflation target, although its commitment to that goal has been widely understood for years. Mr. Bernanke has long supported a formal inflation target.

The Fed also said that it was equally committed to minimizing unemployment, but that its goal would vary based on economic circumstances. At present, the statement said, it would like the unemployment rate to drop below 6 percent.

The Fed said in a statement that “such clarity facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.”

The economic projections that the Fed released Wednesday show that the central bank expects to meet its inflation goal over the next three years, but that unemployment will remain significantly above its goal.

The Fed said that it expects the economy to expand between 2.2 percent and 2.7 percent this year, a slightly slower pace than its November forecast that growth could reach 2.9 percent. The Fed also reduced its forecast of growth in 2013. It now projects growth of up to 3.2 percent instead of 3.5 percent.

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U.S. Stocks Rally on Manufacturing Growth

Wall Street stocks rocketed higher on Tuesday, the first day of trading in the new year, fueled by a report that showed manufacturing strength in the American economy.

But traders and others noted that volumes were thin and that many wary investors remain sidelined, awaiting further direction from the euro zone or seeking clarity on the strength of the domestic economy.

And like last year, the myriad challenges facing the euro zone remained front and center for many investors, as leaders there warned of more trouble and turbulence ahead.

The Dow Jones industrial average closed with a jump of 180 points – a 1.5 percent gain. Earlier in the session, the Dow had soared by more than 2 percent.

Likewise, the Standard Poor’s 500-stock index gained 1.5 percent, and the Nasdaq composite index closed up 1.7 percent.

In a rare turn, Bank of America’s stock, which was hammered by investors for most of last year, was one of the strongest performers of the day. Its stock climbed 6 percent to $5.86, while Citigroup was up 8 percent to $28.46.

Some analysts pointed to a new report on American manufacturing as buoying investors’ spirits. The Institute for Supply Management, a trade group of purchasing managers, said its manufacturing index rose to 53.9 points in December from 52.7 in November. Readings above 50 indicate expansion.

Despite the stronger tenor of the report, other analysts remained cautious about drawing broader conclusions.

“The investor base got badly burned this time last year when many who were pessimistic in late 2010 switched to being optimistic in early 2011,” said Cary Leahey, senior economist at Decision Economics.

Investors raised their forecasts for economic growth and “upped their expectations of corporate earnings — and equity performance peaked in the second quarter and growth turned out to be about half of what people had hoped,” Mr. Leahey said.

Joseph Saluzzi, a co-head of trading at Themis Trading, said he didn’t feel the early move up in the session signaled a new, buoyant resolve among investors and that the relatively low trading volumes didn’t indicate a flood of sidelined cash moving into the markets.

“Nothing is really going to change until you start to see some real hard economic numbers that show growth. We’ve seen these sort of inklings before and they haven’t led to much in the past,” Mr. Saluzzi said.

Later in the week, more economic data will be released that investors hope will start to bring a bit more clarity to how strong the economy was running late last year.

Major retailers will release sales data, which will provide some gauge of consumer spending during the holiday season. And on Friday, the closely watched American employment figures for December will be released.

The early consensus in the market was that the economy generated another 150,000 jobs during the month. But even if true, some analysts said the market’s reaction could be muted.

“The market is primed for a good report by recent standards, but it will be a mediocre report by historical standards,” said Mr. Leahey.

Forecasts for much of the euro zone this year appear more bleak.

Chancellor Angela Merkel of Germany warned on New Year’s Eve that “next year will no doubt be more difficult than 2011,” as austerity measures across much of Europe put economic growth at risk.

Earlier Tuesday, Asian stocks rose. Hong Kong’s Hang Seng Index, on its first trading session of 2012, jumped 2.4 percent, South Korea’s Kospi index rose 2.7 percent and Australia’s S.P. ASX 200 gained 1.1 percent. Markets in Japan and mainland China remained closed for the extended New Year’s holiday.

Oil prices followed equities higher. Benchmark crude for February delivery rose $4.25 to $103.07 a barrel  on the New York Mercantile Exchange.

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New Data Shows Sharp Slowdown in Growth Rate

The broadest measure of the economy, known as the gross domestic product, grew at an annual rate of less than 1 percent in the first half of 2011, the Commerce Department reported on Friday. The figures for the first quarter and the second quarter, 0.4 percent and 1.3 percent respectively, were well below what economists were expecting, and signified a sharp slowdown from the early months of the recovery.

The government also revised data going all the way back to 2003 that showed the recession was deeper, and the recovery weaker, than initially believed.

“There’s nothing that you can look at here that is signaling some revival in growth in the second half of the year, and in fact we may see another catastrophically weak quarter next quarter if things go wrong next week,” said Nigel Gault, chief United States economist at IHS Global Insight, referring to the debt ceiling talks.

With so little growth, the economy can hardly withstand further shocks from home or abroad, and worrisome signals continue to emanate from heavily indebted European countries.

If the domestic economy were to contract, any new recession would originate on President Obama’s watch — unlike the last one, which began a year before he was elected.

If Congress leaves existing budget plans intact, some of the government’s economic assistance, like the payroll tax cut, will phase out and thereby act as a drag on growth.

And by many economists’ thinking, whatever additional budget cuts Congress eventually agrees to (or does not) will weaken the economy even further.

On the one hand, if legislators cannot come to an agreement to raise the debt ceiling by Tuesday, the United States may be unable to pay all its bills. Borrowing costs across the economy could then surge, because so many interest rates are pegged to how much it costs the federal government to borrow. The forecasting firm Macroeconomic Advisers has predicted that the resulting financial mayhem would most likely plunge the economy back into recession.

On the other hand, if legislators do reach an agreement, it will probably include austerity measures that could chip away at the already fragile recovery. Spending cuts — particularly if they take effect sooner rather than later, as some of the House’s more conservative members want — will weaken the economy, since so many industries and workers are directly or indirectly dependent on government activity.

Macroeconomic Advisers has estimated that the plan of Senator Harry Reid, the Nevada Democrat who serves as majority leader, for example, could shave a half a percentage point off growth as its spending cuts peak.

Citing the debt reductions that Congress undertook in 1937 and that ushered in the most severe phase of the Great Depression, some economists fear that imposing austerity measures too soon could likewise result in a recessionary relapse.

Simply prolonging the debt negotiations could also damage prospects for growth in the third quarter, as businesses and families wait to make big purchases until the threat of a federal default subsides.

“The business and consumer uncertainty over whether the government will be able to pay its bills is the biggest thing weighing around our neck right now,” said Austan Goolsbee, the departing chairman of the President’s Council of Economic Advisers.

The economy is smaller today than it was before the Great Recession began in 2007, though the country’s labor force and production capacity have grown. The outlook for digging out of that hole is getting weaker by the day, and analysts across Wall Street have already begun slashing their forecasts for output and job growth for the rest of this year. Usually, a sharp recession is followed by a sharp recovery, meaning the recovery growth rate is far faster than the long-term average growth rate; last quarter, though, output grew at less than half of the average rate seen in the 60 years preceding the Great Recession.

Particularly distressing to economists is that consumer spending — which, alongside housing, usually leads the way in a recovery — has been extraordinarily weak in recent quarters. Inflation-adjusted consumer spending in the second quarter barely budged, increasing just 0.1 percent at an annual rate, the Commerce Department report showed.

“People are spending more, but that spending is being absorbed in higher prices, not in buying more stuff,” said John Ryding, chief economist at RDQ Economics.

Even the brightest parts of the latest report were bittersweet. For example, motor vehicle output fell much less than was predicted after the natural disasters in Japan disrupted supply chains. But that means there will probably be a less buoyant bounce in coming months in autos, which economists were counting on to raise growth rates later this year.

Some economists cautioned not to read too much into this figure, though, or any individual quarterly number from the last report. The Commerce Department will probably make substantial revisions to the latest numbers, just as it did on Friday for the data released over the previous decade. Among the more jarring revisions in its latest report was the downgrade for growth in the first quarter of this year, from the original estimate of a 1.9 percent annual growth rate to a rate of just 0.4 percent.

“Sometimes it feels like I’m a physicist who’s been flipped into a different universe trying to explain these revisions, rather than an economist tracking output growth,” said Mr. Ryding. “The economy is clearly performing poorly, though we don’t know quite how poorly because these individual quarterly revisions can sometimes be something of a joke.”

The slow growth rate is largely responsible for stubbornly high joblessness across the country. Businesses are sitting on a lot of cash, but are still reluctant to hire because there is so much uncertainty about the future of the economy and whether they will continue to have a steady flow of customers. As of June, 14 million Americans were actively looking for work, and the average duration of unemployment has been climbing to record highs month after month.

Slow growth takes not only a human toll, but a fiscal one. Tax revenues do not expand enough to pay down the nation’s debt.

Given some festering inflation concerns, it also seems unlikely that the Federal Reserve will swoop in with another round of monetary easing to invigorate the economy.

“There’s not going to be additional monetary stimulus, and it’s hard to imagine any fiscal stimulus given the current discussion in Washington,” Mr. Ryding said. “So what’s going to get us out of this? The inevitable conclusion is time, and that’s not very satisfactory.”

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