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Home Prices Gained in June, Survey Shows

August 27, 2013 by

Separate data released on Tuesday showed consumer confidence rebounded in August. Consumers were more upbeat about the future even though their assessment of their current standing fell.

Home prices rose 0.9 percent on a seasonally adjusted basis, according to the SP/Case Shiller composite index of 20 metropolitan areas. Economists had expected them to match May’s 1 percent gain.

The data is not likely to alter economists’ expectations that the housing recovery will continue, keeping it a sweet spot for an economy that grew just 1.7 percent in the second quarter.

But mortgage rates have climbed more than a percentage point since late May, largely on expectations that the Federal Reserve will soon start withdrawing its support for the economy by purchasing fewer bonds. Those monthly bond buys had kept long-term interest rates low.

Analysts said that suggests gains in home price gains may continue to slow in the months ahead, particularly since the sharpest rise in rates came in late June and early July, likely after many June contracts were already signed.

“We know housing prices tend to lag. You’re going to see mortgage applications fall first and then starts and permits will move. It will take time to show up in prices,” said Michael Hanson, U.S. economist at Bank of America Merrill Lynch.

Recent data has already shown a decline in mortgage applications and less demand to refinancing existing loans, while a report last week showed sales of new single-family homes fell sharply in July to their lowest level in nine months.

The SP/Case Shiller index showed prices in all 20 cities rose on a yearly basis, led by a 24.9 percent surge in Las Vegas. But only in six did they rise at a faster clip than in the previous month, down from 10 in May.

“Overall the report shows that housing prices are rising but the pace may be slowing,” David Blitzer, chairman of the index committee at SP Dow Jones Indices, said in a statement.

Without seasonal adjustment, prices rose 2.2 percent in June and on a national average were back at their spring 2004 levels. Prices remain well below their 2006 peak, which preceded a far-reaching collapse that helped plunge the U.S. economy into its deepest recession since the 1930s.

Compared to last June, prices rose a healthy 12.1 percent, just shy of the previous month’s 12.2 percent gain.

Still, U.S. consumers’ mood improved this month despite higher borrowing costs. The Conference Board, an industry group, said its index of consumer attitudes rose to 81.5 from 80.3, and the expectations outlook rose to 88.7 form 86.0. Polling ended on August 15.

Worries about building tension in Syria kept market reaction to the data subdued, with U.S. Treasury bond prices trimming gains slightly after the stronger-than-expected confidence data and the back-up in bond yields supporting the dollar. Major U.S. stock indexes were lower.

The confidence data contrasted with an earlier Thomson Reuters/University of Michigan consumer survey showing sentiment slipped in August.

“There is definitely sentiment building that the economy is going to get better, but it’s a bit puzzling to see confidence accelerate when current growth is rather weak,” said Thomas Simons, money market economist at Jefferies Co., adding growth over the past three quarters “has been just barely 1 percent.”

Jim O’Sullivan, chief U.S. economist at High Frequency Economics, said the level of the Conference Board’s expectations index is consistent with a roughly 3 percent rate of growth in real consumer spending, “which would be a pickup from around 2 percent currently.”

Economists expect growth to be stronger in the second half, a view shared by the Federal Reserve, which has based its projected reduction of stimulus on its economic outlook.

Markets largely expect the Fed will begin scaling back its bond purchases next month and possibly end them altogether by mid-2014, though some uncertainty over this remains.

If mortgage rates continue to climb, putting more pressure on housing, the outlook could get cloudier.

Still, rates remain low by historical standards and most economists do not expect the higher costs to end the recovery altogether. In the short-term, it could also spur potential buyers to act before rates rise further.

“It probably wouldn’t be a bad thing if home prices started slowing down a bit from double-digit rates of growth, and I think rising mortgage rates will be offset by the improving economic backdrop, as reflected in the pretty decent consumer confidence number,” O’Sullivan said.

(Editing by Chizu Nomiyama)

Article source: http://www.nytimes.com/reuters/2013/08/27/business/27reuters-usa-economy-homes-index.html?partner=rss&emc=rss

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Sharp Fall for Orders of Durable Goods

August 26, 2013 by

Manufacturing continues to struggle, and its weakness could prevent economic growth from picking up in the July-September quarter.

Orders for durable goods dropped 7.3 percent in July, the Commerce Department said Monday, the steepest drop in nearly a year. But excluding the volatile transportation category, orders fell only 0.6 percent. Both declines followed three straight months of increases.

Durable goods are items meant to last at least three years.

Economists tend to focus on orders for so-called core capital goods. Those orders fell 3.3 percent, but the drop followed four straight months of gains.

Core capital goods can show businesses’ confidence in the economy. They include items that point to expansion — including machinery, computers and heavy trucks — while excluding volatile orders for aircraft and military equipment.

The big drop suggested the third quarter was off to a weaker start than some had hoped. While economists cautioned that this was just one month of data, a few lowered their growth estimates for the July-September quarter after seeing the durable goods report. Economists at Barclays Capital now predict third-quarter growth at an annual rate of 1.9 percent, down from their previous forecast for 2.1 percent.

“At the very least, it is a reminder that the expected pickup in economic growth in the second half of the year will be gradual,” said Paul Ashworth, an economist at Capital Economics.

One bright spot was that unfilled orders for durable goods rose to their highest level since record-keeping began in 1992. Those are orders that were placed in previous months but had yet to be shipped. The increase suggested that output could remain steady in the coming months, despite the weak month of orders in July.

And orders for autos and auto parts rose 0.5 percent, the second monthly gain. Auto sales jumped 14 percent in July compared with a year earlier.

Manufacturing has slumped this year, hurt by weakness overseas that has dragged on American exports. But there have been signs that factory activity could pick up in the second half.

Article source: http://www.nytimes.com/2013/08/27/business/economy/sharp-fall-for-orders-of-durable-goods.html?partner=rss&emc=rss

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U.S. Producer Prices Flat, Point to Little Inflation Pressure

August 14, 2013 by

The Labor Department said on Wednesday a drop in natural gas and gasoline costs held back its seasonally adjusted producer price index. Analysts polled by Reuters had expected a 0.3 percent increase.

But it was the weakness in the index outside of volatile energy and food components that could garner more attention from Fed Chairman Ben Bernanke, who said last month the Fed might not end a bond-buying stimulus program until inflation begins to trend higher.

These so-called “core” prices, which are seen as indicators of trends in inflation, rose 0.1 percent during the month, below the 0.2 percent gain expected by analysts in a Reuters poll.

“The lower inflation trend could convince Fed officials to go slow on tapering (bond purchases),” said Kevin Logan, an economist at HSBC in New York.

The report helped push yields lower on long-term U.S. government debt, suggesting investors saw it as a sign the Fed might keep the major economic stimulus program in place for longer. U.S. stock prices edged lower.

Inflation has been cooling for much of the last year despite signs of growing strength in the economy, and the Fed warned last month that low inflation could hurt the economy.

Wednesday’s data showed the core index was up 1.2 percent in the 12 months through July, the lowest reading since November 2010. Analysts had expected that reading to fall to 1.4 percent from 1.7 percent in June.

Low inflation is worrisome because it can encourage businesses and consumers to delay purchases. This undermines the Fed’s efforts to boost consumption by lowering borrowing costs.

Central bankers also fear extremely low inflation because it raises the risk a major shock to the economy could send prices and wages into a downward spiral known as deflation. Bernanke pointed out this risk in July.

However, policymakers at the Fed have argued that temporary factors could be behind some of the weakness in inflation. Many private sector economists agree.

A steady fall in the unemployment rate appears to have the Fed nearly ready to begin unwinding its bond-buying stimulus program.

Many economists expect the Fed will begin reducing its monthly bond purchases in September. This has led to an increase in interest rates for home mortgages, although another report on Wednesday showed mortgage rates fell slightly last week.

(Reporting by Jason Lange; Editing by Chizu Nomiyama and Nick Zieminski)

Article source: http://www.nytimes.com/reuters/2013/08/14/business/14reuters-usa-economy.html?partner=rss&emc=rss

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Trade Gap Falls, Hinting At Pickup in U.S. Growth

August 6, 2013 by

The Commerce Department said on Tuesday that the United States trade gap fell more than 22 percent, to $34.2 billion, in June from May. That is lowest level since October 2009.

American companies shipped more aircraft engines, telecommunications equipment, heavy machinery and farm goods. As a result, exports rose 2.2 percent to a record high of $191.2 billion.

Imports declined 2.2 percent to $225.4 billion, in part because oil imports fell to the lowest level in more than two years.

Economists said the steep drop in the trade deficit would most likely lead the government to revise its economic growth estimate for the April-June quarter.

“We could see a sizable upward revision,” said Jennifer Lee, a senior economist at BMO Capital Markets.

Last week the government said the economy grew at a lackluster 1.7 percent annual rate in the second quarter, in part because trade cut nearly a full percentage point from growth.

But after seeing the June trade figures — which were not factored into last month’s growth estimate — some economists said growth could be closer to a 2.5 percent annual rate. The government reports its second estimate of growth for the April-June quarter on Aug. 29.

A smaller trade deficit lifts economic growth because it means consumers and businesses are spending less on foreign goods than companies are taking in from overseas sales.

Many economists say they think overall growth has started to rebound in the July-September quarter. Some say growth could come close to a 3 percent annual rate. A crucial reason is that several export markets, including Europe, are seeing improvement.

For June, United States exports to the 27-nation European Union rose 1.5 percent. That helped shrink the deficit with the region to $7.1 billion.

The deficit with China fell 4.3 percent, to $26.6 billion, while America’s deficit with Japan rose 2.2 percent, to $5.5 billion in June.

Article source: http://www.nytimes.com/2013/08/07/business/economy/trade-gap-falls-suggesting-faster-us-economic-growth.html?partner=rss&emc=rss

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Increased Factory Activity May Bolster U.S. Recovery

August 1, 2013 by

The Institute for Supply Management said on Thursday that its index of factory activity jumped to 55.4 percent in July from 50.9 percent in June. A reading above 50 percent indicates growth. The I.S.M. is a trade group of purchasing managers.

A gauge of production soared 11.6 points to 65 percent, the highest reading since May 2004. And a measure of hiring at factories rose to its best level in a year — the latest of several encouraging signs ahead of the July employment report, which will be released on Friday.

“The report builds the case for a second-half speedup in U.S. industrial production,” said Jonathan Basile, an economist at Credit Suisse.

Stronger growth at American factories could aid a sluggish economy that has registered tepid growth over the last three quarters. And it could provide crucial support to a job market that has begun to accelerate but has added mostly lower-paying service jobs.

Businesses are placing more orders that are likely to be filled in the next few months. Steady gains in new-home sales and construction are supporting strong growth in industries like wood products, furniture and electrical equipment and appliances. And healthy auto sales are lifting growth in the production of metal parts and components.

Bradley Holcomb, chairman of the institute’s survey committee, said production would probably fall back a bit after its big jump in July. Some of the gain reflects a reduction in backlogged orders, he said.

Still, the big increase in new orders suggests that output growth will remain steady.

The Federal Reserve is likely to take note of the manufacturing gains. It downgraded slightly its assessment of the economy after its policy meeting this week. That led to speculation that the Fed might continue its bond purchases longer than anticipated.

But Fed officials say they are hopeful that growth will pick up in the second half of the year. And if factories continue to strengthen and add more high-paying jobs, the Fed might become convinced that the economy is on the right track. If so, it could reduce the pace of its bond-buying program later this year. The bond purchases have helped keep long-term interest rates low to encourage more borrowing and spending.

The health of the job market is crucial to the Fed’s decision. Other reports this week have been encouraging.

The Labor Department said the number of Americans applying for unemployment benefits fell last week to a five-and-a-half-year low. Applications are a proxy for layoffs. When layoffs decline, it suggests companies are confident in their staffing levels and may add more workers.

Article source: http://www.nytimes.com/2013/08/02/business/economy/increased-factory-activity-may-bolster-recovery.html?partner=rss&emc=rss

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Home Prices Up 12.2 Percent in May

July 30, 2013 by

WASHINGTON — U.S. home prices jumped 12.2 percent in May compared with a year ago, the biggest annual gain since March 2006. The increase shows the housing recovery is strengthening.

The Standard Poor’s/Case-Shiller 20-city home price index released Tuesday also surged 2.4 percent in May from April. The month-over-month gain nearly matched the 2.6 percent increase in April from March — the highest on record.

The price increases were widespread. All 20 cities showed gains in May from April and compared with a year ago.

Prices in Dallas and Denver reached the highest level on records dating back to 2000. That marks the first time since the housing bust that any city has reached an all-time high.

Home values are rising as more people are bidding on a scarce supply of houses for sale. Steady price increases, along with stable job gains and historically low mortgage rates, have in turn encouraged more Americans to buy homes.

One concern is that higher mortgage rates could slow home sales. But many economists say rates remain low by historical standards and would need to rise much faster to halt the momentum.

Svenja Gudell, senior economist at Zillow, a home price data provider, said a big reason for the recent price gains is that foreclosed homes make up a smaller proportion of overall sales. Foreclosed homes are usually sold by banks at fire-sale prices.

“Typical home values have appreciated at roughly half this pace for the past several months, which is still very robust,” Gudell said.

Gudell said higher mortgage rates and a likely increase in the number of homes for sale in the coming months should slow the pace of price gains and stabilize the housing market.

The index covers roughly half of U.S. homes. It measures prices compared with those in January 2000 and creates a three-month moving average. The May figures are the latest available. They are not adjusted for seasonal variations, so the monthly gains reflect more buying activity over the summer.

Despite the recent gains, home prices are still about 25 percent below the peaks they reached in July 2006. That’s a key reason the supply of homes for sale remains low, as many homeowners are waiting to recoup their losses before putting their houses on the market.

Dallas and Denver, the two cities that reached record highs, were not hit hard by the housing bust and therefore didn’t experience the sharp price swings like cities in Nevada, Arizona, California and Florida.

In Dallas, prices fell only 11.2 percent from their previous peak in June 2007 through February 2009. That’s far less than Las Vegas, where prices plummeted by more than half. Since bottoming out, home prices in Dallas have increased nearly 14 percent.

In Denver, prices dropped 14.3 percent from August 2006 until they also hit bottom in February 2009. Since then, they have risen 17.3 percent.

The biggest price gains are occurring in many of the states that experienced the worst housing bust.

Prices jumped 24.5 percent in San Francisco in May from a year earlier, the largest increase. Las Vegas reported the next biggest gain at 23.3 percent, followed by Phoenix at 20.6 percent. All three remain well below their peak prices.

The smallest yearly gains were in New York, at 3.3 percent, followed by Cleveland with 3.4 percent and Washington, D.C. at 6.5 percent.

Higher home prices help the economy in several ways. They encourage more sellers to put their homes on the market, boosting supply and sustaining the housing recovery. And they make homeowners feel wealthier, encouraging consumers to spend more. Banks are also more willing to provide mortgage loans when homes are appreciating in value.

Mortgage rates have surged since early May, though the increase would have had little impact on the current report. The average rate on a 30-year fixed mortgage has jumped a full percentage point since early May and reached a two-year high of 4.51 percent in late June.

Mortgage rates jumped after Chairman Ben Bernanke said the Federal Reserve could slow its bond-buying program later this year if the economy continues to improve. The Fed’s bond purchases have kept long-term interest rates low, encouraging more borrowing and spending.

In recent weeks, Bernanke and other Fed members have stressed that any change in the bond-buying program will depend on the economy’s health, not a set calendar date.

Since those comments, interest rates have declined. The average on the 30-year mortgage was 4.31 percent last week.

The Fed begins a two-day policy meeting Tuesday and could clarify its remarks further when the meeting concludes on Wednesday.

Article source: http://www.nytimes.com/aponline/2013/07/30/us/politics/ap-us-home-prices.html?partner=rss&emc=rss

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Jobless Applications Fall to Lowest Since 2008

May 9, 2013 by Leave a Comment

The Labor Department said on Thursday that the less volatile four-week average of new jobless claims dropped 6,250, to 336,750. That is the fewest since November 2007, a month before the recession began.

Weekly jobless claims applications have fallen about 9 percent since November and are now at a level consistent with a healthy economy. The last time jobless claims were lower was in January 2008, when they were 321,000.

Economists were largely encouraged by the decline.

“This is a very positive trend and we should embrace it,” Jennifer Lee, an economist at BMO Capital Markets, said in an e-mail to clients.

The job market has also improved over the last six months. Net job gains have averaged of 208,000 a month from November through April. That is up from only 138,000 a month in the previous six months.

New jobless claims are in effect a proxy for layoffs, and much of the job growth has come from fewer layoffs — not increased hiring. Layoffs fell in January to the lowest level on records dating back 12 years, though they have risen moderately since then. Overall hiring remains far below prerecession levels and unemployment remained high at 7.5 percent in April.

For hiring to increase enough to rapidly lower the unemployment rate, companies must gain more confidence in the economy. But some employers have held off adding new workers in recent months, possibly because of concerns about the impact of federal spending cuts and tax increases.

Dean Maki, an economist at Barclays Capital, said the decline in new jobless claims suggested that companies were not too worried about the fiscal drag of spending cuts and tax increases. He noted that employers were responding to the government’s actions by reducing hiring and cutting back on their employees’ hours — not laying off workers. That means they anticipate the weakness will be temporary.

About 4.9 million people collected unemployment aid in the week that ended April 20, the most recent period for which figures are available. That is about 90,000 fewer than the previous week.

Separately, the Commerce Department said Thursday that wholesale inventories rose 0.4 percent in March compared with February, when they had fallen 0.3 percent.

Sales in March dropped 1.6 percent, the biggest setback since March 2009, when the country was in recession. Sales had risen 1.5 percent in February.

Inventory rebuilding can be a positive for economic growth because it means stronger production at the nation’s factories. The March increase left inventories at $503.1 billion, up 4.7 percent from a year ago and 30.7 percent above the recession low.

But increased restocking at a time of falling sales can signal trouble for the economy. The falling demand could lead businesses to reverse course and cut their stockpiles. Those cutbacks would damp factory production and economic growth.

The buildup of inventories in March was largely a result of a 0.5 percent increase in restocking of durable goods. These are items that are expected to last at least three years.

Article source: http://www.nytimes.com/2013/05/10/business/economy/jobless-applications-fall-to-lowest-since-2008.html?partner=rss&emc=rss

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Economix Blog: Hawks and Doves at the Fed

April 25, 2013 by Leave a Comment

The economist Dean Baker recalls a story about Janet Yellen, the Federal Reserve vice chairwoman, that seems at odds with the story that opens my profile of Ms. Yellen in Thursday’s paper.

I wrote that in July 1996, Ms. Yellen was concerned that the Fed might drive inflation too low. Mr. Baker wrote Thursday that in September 1996, Ms. Yellen pressed for higher interest rates because she was concerned that inflation was too high.

The stories are both true and, taken together, do a nice job of illustrating the complexity of labeling Fed officials in general, and Ms. Yellen in particular.

The debate in July 1996 was about the Fed’s long-term goals.

The Fed’s chairman at the time, Alan Greenspan, maintained that the Fed should seek to eliminate price inflation. Asked by Ms. Yellen how he would define price stability, Mr. Greenspan responded, “I would say the number is zero, if properly measured.”

Ms. Yellen replied, “Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way.”

The entire transcript, which is very much worth reading, is available on the Fed’s Web site.

The debate in September 1996 was about that moment in time.

Inflation was still running at an annual pace of about 3 percent, and Ms. Yellen was concerned that the pace would rise.

The former Fed governor Laurence H. Meyer tells the story as follows. The full version is here.

“Before the September 1996 FOMC meeting, Janet and I went to see the Chairman to talk about the policy decision at that meeting and at following meetings. This was the only time I ever visited the Chairman (at my initiative) to talk about monetary policy, before or after a meeting. Janet and I were both worried about inflation, even though it was very well contained at the time. We told the Chairman that we loved him but could not remain at his side much longer if he continued, as he had been doing for some time, to push the next tightening action into the next meeting, and then not follow through. He listened, more or less patiently. I recall, though this may have not been the case, that he just smiled and didn’t say a word. After an awkward silence, we said our good-byes.”

Ms. Yellen, in other words, did not want inflation to fall below 2 percent, but she also did not want it to rise above 3 percent. She had a somewhat greater tolerance for inflation than Mr. Greenspan, but she was more concerned that inflation would rise, so she wanted to raise interest rates.

Mr. Greenspan, by contrast, had less tolerance for inflation, but also was less concerned that inflation would rise. So he held rates steady.

Ponder this for a moment: Which one was the hawk and which the dove?

Article source: http://economix.blogs.nytimes.com/2013/04/25/hawks-and-doves-at-the-fed/?partner=rss&emc=rss

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E.U. Data Shows Reduced Deficits but Higher Debt Burdens

April 22, 2013 by Leave a Comment

PARIS — An austerity push in Europe helped to reduce government budget deficits in 2012 for a fourth straight year, official data showed Monday, but debt burdens grew amid a recession that was expected to last through 2013.

Outlays exceeded revenue by 3.7 percent in the 17-nation euro zone, down from 4.2 percent in 2011, Eurostat, the E.U. statistical agency, reported from Luxembourg. For all 27 nations of the European Union, the government deficit fell to 4 percent from 4.4 percent.

Euro zone debt measured as a percentage of gross domestic product rose to 90.6 percent, from 87.3 percent in 2011. For the entire Union, debt rose to 85.3 percent of G.D.P. from 82.5 percent a year earlier.

Ben May, an economist in London with Capital Economics, noted that the numbers appeared impressive, comparing favorably with those of the United States and Britain, where government deficits last year exceeded 8 percent of G.D.P., and with Japan, where the deficit was more than 10 percent.

“But the fact that most economies’ deficits have fallen by less than expected and that the consolidation has coincided with deeper than anticipated recessions confirms that the costs have been large,” Mr. May wrote. And he noted that Germany, which last year posted a small budget surplus, accounted for about 60 percent of the improvement.

Austerity began in Europe when, after the credit bubble collapsed, speculative attacks began on the sovereign debt of euro members like Greece, Ireland, Portugal and Cyprus. Led by Germany, governments responded with a reaffirmed commitment to hold their deficits to a maximum of 3 percent of G.D.P, and debts to no more than 60 percent.

Fiscal “hawks” argue that deficit spending is merely a means of pushing the cost of politically unpopular action onto future generations. But austerity, whereby government spending is cut and taxes increased, reduces demand in the overall economy and drives up unemployment, at least in the short term.

If it causes recession, austerity may also make it harder to reach debt-reduction goals, since the denominator of the debt-to-G.D.P. ratio shrinks.

The euro zone economy contracted 0.3 percent in 2012, and economists expect another decline this year. While there was a general consensus in Europe about the need for tough budget-balancing measures, especially as Germany, amid election-year politics, was unwilling to consider alternative action, the tide may now have begun to turn given continuing economic weakness and a euro zone unemployment rate of 12 percent.

France’s deficit last year, at 4.8 percent of G.D.P., fell short of President François Hollande’s target of 4.5 percent. Spain posted a budget deficit of 10.6 percent, worse than the 10.2 percent the European Commission had forecast. Both countries face a struggle to meet their financial targets for 2013 amid the economic malaise, economists say.

Greece, the E.U. member most battered by the crisis, posted a deficit of 10 percent of G.D.P., up from 9.5 percent a year earlier. Its debt fell to 157 percent of G.D.P. from 170 percent after a bailout in which bondholders were forced to write off part of the value of their Greek holdings.

Article source: http://www.nytimes.com/2013/04/23/business/global/eu-data-shows-reduced-deficits-but-higher-debt-burdens.html?partner=rss&emc=rss

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Today’s Economist: Casey B. Mulligan: Small Companies and the Affordable Care Act

April 3, 2013 by Leave a Comment

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Small businesses have spoken out against the Affordable Care Act, but medium-size businesses, customers and taxpayers may be the ones ultimately harmed.

Today’s Economist

Perspectives from expert contributors.

Beginning next year, the Affordable Care Act will penalize employers that fail to offer health insurance to their employees. Because small employers are especially unlikely to offer health insurance (see Table 3 in this paper from the Congressional Budget Office), and large businesses are likely to avoid the penalties because they already offer insurance, the penalties seem like an attack on small business.

But the Affordable Care Act simultaneously rewards employees at small companies by heavily subsidizing their purchases of health insurance on the exchanges created by the law. Because employees cannot take the subsidies with them if they switch to a large company offering health insurance, the subsidies are, in effect, subsidies to the small businesses themselves, helping them compete more cheaply in the market for employees.

Employees at the smallest companies, with fewer than 50 employees, are eligible to receive the subsidies, even though their employers are exempt from the penalties.

Indeed, some medium-size businesses that currently offer health insurance say they find the smaller company “penalty plus subsidy” combination attractive and plan to drop their health insurance plans in order to partake in it, too, even though their participation will entail a penalty.

The Affordable Care Act also created tax credits for small business that are already available. These credits perhaps have too many strings attached to be attractive to employers, because only 770,000 employees (in an economy with more than 130 million) worked for employers claiming the credit in 2010 (see Page 9 of this report from the Government Accountability Office). The Affordable Care Act also promised to provide small-business employees a choice of health plans, but implementation of that plan has been pushed back until 2015.

Many small businesses are not as good with bureaucracy and red tape as large businesses are – that’s one reason they did not offer health insurance in the first place. The employee subsidies coming online next year are pretty complicated, as evidenced by the 21-page application that must be completed by each employee, and the fact that any one year’s subsidy has to be estimated based on historical employee data, advanced from the Internal Revenue Service to the insurer, and then later reconciled when the employee’s family income for the year can be fully documented.

I suspect that large businesses will have human resource personnel dedicated to helping company employees complete the application and obtain and accurately reconcile the subsidy to which they are entitled. Employees at smaller business may have to fend for themselves.

We also have to remember that businesses compete for customers and for employees. A business that experiences a little direct harm from the act may benefit on the whole because competitors are harmed more. This is especially true because of the heavy penalty the law puts on businesses that expand from 49 to 50 employees: that one hire will cost the employer $40,000 annually in penalties, on top of that employee’s usual salary and benefits.

Thus, the type of company that may benefit the most from the law is not necessarily large or small but a company with small competitors that have been looking for opportunities to expand their market share, and in the process bring the number of their employees to more than 49.

Article source: http://economix.blogs.nytimes.com/2013/04/03/small-companies-and-the-affordable-care-act/?partner=rss&emc=rss

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