July 22, 2017

Economix Blog: Stephen King’s Economic Horror Stories

Stephen D. King, chief economist for HSBC.HSBC Stephen D. King, chief economist for HSBC.

Book Chat

Talking with authors about their work.

Stephen D. King, chief economist at HSBC, was paged at an airport a few years ago. When he showed up at the information desk, the obviously disappointed attendant said, “Oh, you’re not the Stephen King that writes books.”

“Yes, I am,” Mr. King responded, pulling a book from his bag.

The book, his first, was called “Losing Control: The Emerging Threats to Western Prosperity.” The cover showed a picture of a city on a stormy night. It looked like a bit of a horror story. Mr. King says the attendant was duly impressed.

Mr. King’s second book, “When the Money Runs Out: The End of Western Affluence,” is another attempt to scare people, and governments, into making better decisions.

My conversation with him, edited for brevity, follows.

Why are you worried about the West?

We have had a golden age of growth in the Western world, and I wonder whether that golden age was associated with a series of one-off gains that are by their nature unrepeatable. The opening of trade, within the O.E.C.D. and then between East and West, led to a one-off jump in the efficiency of resource allocation around the world. Women entered the work force. Educational attainment rose. Consumer credit, in the United States, went from 40 percent of income in the 1950s to 140 percent in 2007. But the underlying growth rate was falling even before the onset of the financial crisis.

I often ask economists where growth will come from. More finance? More health care? More housing? Economists hate this question. They basically say that the economy will figure it out.

The funny thing about the debate between proponents of stimulus and austerity is that everyone expects the same outcome. Economists always think growth is coming. But they can’t point to the source. So what if it’s not?

But there is also a long tradition of doom-saying in economics, dating back to Thomas Malthus, and so far history has been on the side of the optimists.

The difference in my book is I’m not suggesting that growth is going to come to a grinding halt. I’m simply saying that there is a gap that has opened up between the promises and entitlements and the actual pace of growth, and closing that gap is going to be a challenge. The subtitle of my book, “The End of Western Affluence,” is not suggesting that we’re going to be worse off but rather that the expectations we currently have cannot easily be met.

I’m rather different from someone like Robert Gordon, who would say that we have finished with the technology story. I think that’s far too pessimistic. I think that technology will continue to improve, and living standards will continue to rise. The problem is that they will not rise at the pace that was assumed previously. And the problem is that we have continued to make promises to ourselves that are based on the old growth rates. And the promises cannot be met if the actual growth rates are smaller than the assumed growth rates. The totality of these claims is too great in comparison to the total income.

O.K., but you’re still in the position of predicting that economic growth will disappoint expectations.

It’s very easy and natural to assume that you’re going to see a rebound. People often say today that there’s a risk of a Japan-style lost decade. If you look at the numbers over the last 10 years it already has happened. There has been a departure of hope from reality. The risk is that we end up with another lost decade. People are assuming that growth will be faster. We can assume that. But what happens if that’s wrong?

Can China save us? Is it possible that we’ll see a repeat of the virtuous cycle that followed the Western industrial revolution, where an expanding consumer class drives an era of growth?

The rise of China and India has brought huge benefits to global growth. The peculiarity is the way that that growth has been apportioned hasn’t really brought the benefits to the West that perhaps were expected. China’s income gains are up 130 percent, India is up 80 percent, the U.K. is up 4 percent. What’s surprising here is, if you’d known 10 years ago how strong China and India were going to be, you might have revised up your forecasts for the Western world. But that didn’t turn out to be justified. The West surprised to the downside. If you look at South Korea, it wasn’t until per capita incomes reached about $15,000 per year that you started to see a big shift in the types of goods and services being consumed. At that point it may well be the case that the U.S. and Europe begin to engage significantly with countries like China and India, but I personally think that’s still quite a long way – 10, 20 years’ time.

Can central banks save us?

That has been the claim that central banks have made in recent years, that we can return through monetary policy to the growth rates of old. And it has not been as successful as central banks wanted to project or as others wanted to expect. There has been a gap that has opened up between financial hope and economic reality. If you look at the performance of equity markets since 2008, it has been really very similar to what you’ve seen in previous economic cycles, but the performance of the economy has been much worse.

Is there any reason, then, to think that we don’t face another lost decade?

It’s possible. Shale and gas in the U.S. could be dramatically transformational. So far energy prices are still elevated by the standards of 10 years ago, but there might be a benefit. It’s possible that trade volumes could pick up a lot faster than I’m currently assuming. It’s possible that southern Europe may see an increase in competitiveness that may help their economies recover more strongly in the years ahead. They’re all possible, but the problem I have is if you look at the projections made by policy makers currently they don’t just say that these things are possible, they project that these things are happening. There’s an element of wishful thinking.

You argue that governments must start to prepare for slower growth in order to limit the negative consequences. Are there steps that individuals ought to take as well?

I think one thing that people should be doing is thinking carefully about how they invest their money. People tend to say I fully intend to retire at 60 or 65 and therefore I have to find an asset that will allow me to do so. But the hunt for yield that that engenders may actually cause bubbles. The reality is that there isn’t a collection of assets in general that will allow everyone to retire when they want to.

The boomers who’ve got property wealth and so on should think about how to transfer that to their children. Rather than spending all of that in their own time, they should think about the possibility that their children will need some help and possibly more help than we’ve seen in the past.

Article source: http://economix.blogs.nytimes.com/2013/07/12/stephen-kings-economic-horror-stories/?partner=rss&emc=rss

Loan Practices of China’s Banks Raising Concern

One message read: “China Merchants Bank will issue a high interest financing product starting from June 28th to 30th. The product will be 90 days with a 5.5% interest rate. Please call us now.”

A day later came another. “Warm reminder: The interest rate of yesterday’s product has been raised to 6%. (Product duration is 90 days). There is limited access to this product. First come first served.”

The offers are not coming from fly-by-night operators but some of China’s biggest banks. They are raising huge pools of cash to finance a relatively new and highly profitable sideline business: lending outside the scrutiny of bank regulators.

The complex way they go about making off-the-balance-sheet loans is at the heart of China’s $6 trillion shadow banking industry, which the government is now trying to tame. Efforts to rein in the dodgy lending practices put stock markets worldwide in a tizzy in late June.

China’s regulators — and a fair number of economists, policy makers and investors — worry that legitimate banks are using lightly regulated wealth management products to repackage old loans and prop up risky companies and projects that might not otherwise be able to borrow money.

Analysts warn that shadow banking is helping drive the rapid growth of credit in a weakening economy, which could lead to — in the worst situation — a series of bank failures. “This is the biggest uncertainty I’ve seen in my 18 years following the China market,” Dong Tao, an economist at Credit Suisse, said of shadow banking. “You don’t know how banks are deploying capital. And you don’t know the credit risks.”

What banks are doing, analysts say, is pressing customers to shift money from the old, regulated part of their operations — savings deposits — into the new, less regulated part consisting of high-yielding wealth management products that can circumvent government interest rate controls and be used to finance high-interest loans to desperate customers.

China’s leaders are so worried about credit risk that last month the country’s central bank tightened credit in the interbank market, where banks typically go to borrow money from other banks.

The move sent short-term interest rates soaring, and for a day at least, created a debilitating credit squeeze.

The stock markets in China calmed down last week. But financial institutions are hinting that cash is still hard to come by. Some banks temporarily suspended lending in order to preserve cash, according to Caixin, the Chinese business magazine.

Other banks are raising cash by offering a new slate of wealth management products. Nearly every major Chinese bank sold a short-term wealth management product that had to be completed by the end of June, according to a telephone survey. China Merchants Bank did not respond to requests for an interview.

Many of the investments pay 6 percent annual interest, which is far above the highest savings deposit rate set by bank regulators: 3.3 percent.

Consumers withdraw money from their regular savings account and put it into a wealth management product that promises a much higher rate. “Usually banks will have higher-yielding products at the end of each quarter,” said Wang Yanan, a 24-year-old accountant who works in Shanghai. “If I happen to have money at those moments, I’ll buy some.”

Though the products are popular, their disclosure is often poor. Bank employees insist the principal is guaranteed, but contracts for wealth management products are usually vague, simply noting there could be risk. Most offer little detail about where the money will be invested.

Article source: http://www.nytimes.com/2013/07/02/business/global/loan-practices-of-chinas-banks-raising-concern.html?partner=rss&emc=rss

Economic Data Shows Weak Gains

The survey, from the payroll provider ADP, found that May’s gain was above April’s revised total of 113,000 but much lower than the gains ADP reported over the winter. Those numbers averaged more than 200,000 a month from November through February.

Productivity rose at a seasonally adjusted annual rate of 0.5 percent in the first quarter, after a 1.7 percent decline in the October-to-December period, the Labor Department said on Wednesday. With productivity growth slow, companies might have to add workers if demand for their products continues to grow.

The first-quarter performance was revised down slightly from an initial estimate of a 0.7 percent first-quarter increase. The revision reflected the fact that the government lowered its estimate of overall economic output in the first quarter to a rate of 2.4 percent, from 2.5 percent. Productivity is the amount of output per hour of work.

Labor costs actually fell in the January-to-March quarter, dropping at an annual rate of 4.3 percent after having surged at an 11.8 percent rate in the fourth quarter.

The trend in productivity has been fairly weak in recent years. For all of 2012, productivity rose just 0.7 percent, after an even smaller 0.6 percent rise in 2011.

Those gains were less than half the average growth in 2009 and 2010, shortly after many companies laid off workers to cut costs during the recession. And it is below the long-run trend of 2.2 percent annual growth in productivity dating to 1947.

But most economists say they expect higher Social Security taxes have started to weigh on consumers. That should slow economic growth in the second and third quarters.

The ADP survey is derived from payroll data and tracks private employment. It has diverged at times from the government’s more comprehensive monthly jobs report, which will be released on Friday. In April, the government said private employers added 176,000 jobs, much higher than the ADP’s estimate.

Economists say the gap between the ADP survey and the government figures has narrowed since Moody’s Analytics began compiling the numbers eight months ago. Still, it has differed from the Labor Department’s report by about 40,000 a month since then.

“The ADP survey has never been the most reliable indicator,” Paul Ashworth, an economist at Capital Economics, said in a note to clients.

Economists forecast that the government’s report will show employers added 170,000 jobs in May, according to a survey by FactSet. The unemployment rate is expected to stay at a four-year low of 7.5 percent.

Most economists said the ADP report would not prompt them to change their forecasts.

The ADP report found that manufacturing companies cut 6,000 jobs last month. Construction firms added only 5,000, below the previous month’s 15,000 gain, and retail hiring has also been weak.

Article source: http://www.nytimes.com/2013/06/06/business/economy/economic-data-shows-weak-gains.html?partner=rss&emc=rss

Private Sector Added 135,000 Jobs in May, Survey Shows

Private employers added 135,000 jobs in May, the ADP National Employment Report showed on Wednesday, an acceleration from April but missing forecasts for a gain of 165,000. April’s private payrolls were revised down to an increase of 113,000 from the previously reported 119,000.

“The number was weak,” said Mark Zandi, chief economist at Moody’s Analytics, which jointly developed the report.

“The ADP (data) is suggesting instead of job growth stepping up, it’s actually stepping down as we move into the summer months,” Zandi told reporters. “It’s not like we’re falling off a cliff, it just feels like we’re throttling back a little bit.”

The ADP report showed manufacturers shed payrolls in May and a separate report indicated jobs growth in the vast services sector was weak last month, with a gauge of employment at services firms falling to its lowest in close to a year.

The pace of economic growth is expected to cool in the current quarter from the 2.4 percent rate seen in the first three months of the year, partly due to fiscal belt-tightening in Washington.

The goods producing sector cut 3,000 jobs in May, with a drop of 6,000 positions at manufacturing firms, which could be partially due to defense spending cutbacks, Zandi said.

U.S. stocks were lower in morning trade, while Treasury debt prices climbed. The dollar was slightly weaker against a basket of currencies.

Activity in the U.S. services sector picked up slightly in May, with the Institute for Supply Management’s services index edging up to 53.7 last month from 53.1 in April. That topped economists’ expectations for 53.5.

A reading above 50 indicates expansion in the sector. The May reading was still off this year’s peak of 56.0, which was hit in February.

The forward-looking new orders component rose but the employment measure slipped to the lowest level since last July at 50.1 from 52.0.

Even with the lackluster growth, the services industry held up better than its manufacturing counterpart, which contracted in May, according to data from ISM released earlier in the week.

Data on Wednesday added to signs of a slowdown in manufacturing as new orders for factory goods rose in April but not enough to reverse the prior month’s plunge.

In a busy day for economic releases, yet another report showed unit labor costs fell in the first quarter by 4.3 percent, the most in four years, although the reading appeared to be distorted by a shift in employee compensation during the prior period to avoid a tax hike.

FED IN FOCUS

The ADP figures come two days ahead of the government’s more comprehensive labor market report, which includes both public and private sector employment.

That report is expected to show job growth increased only slightly, with nonfarm payrolls seen rising by 170,000 compared to the 165,000 seen in April.

Friday’s report will get even more scrutiny than usual with investors trying to gauge when the Federal Reserve may slow its current $85 billion a month bond-buying program, which is aimed at propping up the economic recovery.

“We have been seeing significant differences in ADP and nonfarm payrolls for months but regardless, it still doesn’t suggest that the labor market is strong enough for the Fed to start tapering,” said Andrew Wilkinson, chief economic strategist at Miller Tabak Co.

Since the report was revamped late last year, ADP’s figures have missed the government’s private payrolls numbers by an average 42,000 in either direction, according to High Frequency Economics.

“That 42,000 average miss for the past seven months is better than the 58,000 average in the prior seven months, although seven months of history is not conclusive,” wrote Jim O’Sullivan, High Frequency Economics’ chief U.S. economist.

Nervousness that the Fed may taper bond purchases sooner than had been expected sent fixed 30-year mortgage rates up 17 basis points to average 4.07 percent in the week ended May 31, the Mortgage Bankers Association said.

Last week’s interest rate was the highest since April 2012 and the first time rates have been above 4 percent since early May of last year.

Demand for refinancing was hit hardest by the acceleration in rates, with applications slumping 15.0 percent. The gauge of loan requests for home purchases – a leading indicator of home sales – held up relatively better, falling just 1.6 percent.

(Additional reporting by Angela Moon in New York and Jason Lange and Lucia Mutikani in Washington; Editing by Andrea Ricci)

Article source: http://www.nytimes.com/reuters/2013/06/05/business/05reuters-usa-economy-employment-adp.html?partner=rss&emc=rss

In Wake of Japanese Market Dip, Investors Find Comfort in Higher Factory Output

Industrial production rose by a better-than-expected 1.7 percent in April from a month earlier, as exports started to recover on the back of a yen that has weakened by almost 20 percent in the last six months. But exports were still down 2.3 percent from the same month a year earlier.

Core consumer prices, which exclude fresh food, fell 0.4 percent in April from a year earlier, for the sixth straight month of declines, though the clip was slower than the 0.5 percent decline in the year to March.

Prices were supported partly by rising energy costs, as the weak yen added to Japan’s fuel import bills.

Consumer prices in Tokyo for the month of May rose 0.1 percent from a year earlier, the first increase in more than four years, a sign that nationwide prices could soon follow suit, ending the deflation that has long weighed on Japan’s economy.

Household spending cooled slightly after a strong showing in the first quarter, rising 1.5 percent in April from a year earlier in price-adjusted real terms. That uptick fell short of a median market forecast of 3.1 percent, though economists still expect spending to gain traction as consumer sentiment continues to improve.

The data offered a reprieve to recent market anxiety. A rally in the Japanese stock market, propelled by optimism over Prime Minister Shinzo Abe’s efforts to overhaul the long-suffering economy, has faltered in the last week as investors became nervous over the effectiveness of those efforts, as well as their potential side effects.

A 5.2 percent slide in Tokyo shares on Thursday took the Nikkei 225-share index to more than 13 percent below its peak last week. The sharp market correction followed a surge of more than 80 percent in the index from mid-November to mid-May, when trading suddenly turned volatile as investors took stock of the challenges that face Mr. Abe’s economic turnaround program.

Tokyo shares rebounded on Friday morning, with the Nikkei index jumping over 200 points, or 1.59 percent, in the opening minutes of trade.

Still, it remains unclear whether Mr. Abe’s agenda, nicknamed Abenomics, can bring about a goal, set by the Bank of Japan, to achieve 2 percent inflation over the next two years in a country where prices have fallen for over a decade.

To jolt Japan out of its deflationary slump, the central bank unleashed an audacious stimulus program last month, promising to inject $1.4 trillion into the economy to kick-start growth. In addition, the government bolstered spending on public works projects. The stimulus has also driven the yen to a 4 1/2-year low against the dollar, a boon to Japan’s exporters.

But many economists have called the two-year time frame ambitious. A recent Reuters poll of analysts suggested that the Bank of Japan might have to pursue its program for up to five years before it stokes enough inflation.

Some members of the Bank of Japan’s policy board are also skeptical of the two-year time frame, according to minutes released this week.

A spike in long-term interest rates, which poses high risks for Japan’s highly indebted government, has added to the worries.

Analysts and investors are also eager for progress on promised structural overhauls, which many see as crucial to the overall economy-lifting efforts of Mr. Abe’s government.

“The falling share prices point to the dangers that are inherent in Abenomics,” Ryutaro Kono, chief economist for Japan at BNP Paribas, said in a research note.

The program “at first triggered an asset bubble and brought about an economic euphoria,” Mr. Kono said. “But the endgame is a higher risk of financial ruin.”

Other analysts took a brighter view. “A lot of investors were sitting on the sidelines as the market soared, hoping for a pullback,” Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets, said in a note to clients Friday. “They now have that opportunity.”

Bettina Wassener contributed reporting from Hong Kong.

Article source: http://www.nytimes.com/2013/05/31/business/global/in-wake-of-market-dip-japanese-investors-find-comfort-in-higher-factory-output.html?partner=rss&emc=rss

Euro Zone Economy Shrinks; Recession Returns in France

The latest figures, released Wednesday, marked the longest recession for the euro countries since the currency was introduced in 1999.

The 17-nation euro zone contracted by 0.2 percent in the first quarter from the last three months of 2012, Eurostat, the statistical agency of the European Union, reported from Luxembourg, less than the 0.6 percent decline recorded in the fourth quarter, but more than economists’ expectations of a 0.1 percent fall.

The economy of the overall European Union, made up of 27 nations, shrank by 0.1 percent.

Germany, with the largest economy in Europe, was almost stagnant in the first quarter, managing growth of just 0.1 percent from the prior three months, when it shrank by 0.7 percent, the Federal Statistics Office reported in Wiesbaden.

France, the second-largest economy in Europe, contracted for a second consecutive quarter, meeting the common definition of a recession. The economy shrank by 0.2 percent, the same decline as in the fourth quarter of 2012.

Britain, the third-largest E.U. economy, but not a member of the euro, last month posted 0.3 percent first-quarter growth.

Among the “peripheral” euro nations, Spain’s economy shrank by 0.5 percent, the same as Italy’s. Portugal shrank by 0.3 percent, and Cyprus’s economy, the victim of a financial sector meltdown and bailout, shrank 1.3 percent. Data on Greece were not immediately available.

More than five years after the meltdown of the U.S. housing market set off the global financial crisis, the 27-nation European Union remains in turmoil, buffeted by a lack of confidence in member states’ public finances and demands for budgetary rigor to address those concerns. Unemployment in the euro zone reached a record 12.1 percent in March, and economists do not expect the labor market to turn around before next year, at the earliest.

Despite its troubles, the E.U. market remains the world’s largest, and its weakness is doubly worrying at a time when the rest of the world is not growing strongly enough to take up the slack. Moody’s Investors Service warned Wednesday that the weakness in the euro zone, combined with the mandatory “sequestration” budget cuts in the United States, would weigh on the world economy, with growth in the Group of 20 nations this year of just 1.2 percent, picking up to 1.9 percent in 2014.

In annualized terms, the euro zone economy contracted by about 0.8 percent in the first quarter, lagging far behind the 2.5 percent growth in the United States.

Japan, which reports its first-quarter G.D.P. figure on Thursday, is expected to post an annualized figure of about 2.8 percent. China in April reported 7.7 percent first-quarter growth.

That Germany grew at all was a result of increased household consumption, Germany’s statistics agency said, as exports and investment declined. Jörg Krämer, chief economist at Commerzbank in Frankfurt, estimated in a research note that the unusually cold weather had subtracted as much as 0.2 percentage point from German growth.

Even though Germany eked out a positive figure, it was “really in contractionary territory” in the quarter, Philippe d’Arvisenet, global head of economic research at BNP Paribas, said. He said more recent data showed clear evidence of a German rebound in the second quarter.

Mr. d’Arvisenet estimated that the euro zone economy would shrink this year by about 0.5 percent, following a 0.6 percent contraction in 2012. Growth is likely to return in 2014, he said, “but probably below 1.0 percent.”

Article source: http://www.nytimes.com/2013/05/16/business/global/germany-france-economic-data.html?partner=rss&emc=rss

China Trade Figures Rise Slightly, but Weaknesses Persist

HONG KONG — Trade figures for April released by the Chinese government on Wednesday morning were slightly better than economists expected, but still indicated that demand was fairly weak in foreign markets and in China itself.

Exports and imports both increased last month compared with a year earlier, but the figures were harder than usual to interpret because April of last year was so weak. Imports and exports all but stopped growing in April of last year as a wide range of industries, perceiving a short, sharp domestic economic slowdown that would last until early autumn, stopped buying industrial commodities, even as foreign buyers cut orders as well.

Compared with that weak base, China’s trade figures for last month looked somewhat better. Exports rose 14.7 percent from a year ago, while imports increased 16.8 percent.

But the trade figures were far from strong enough to suggest that foreign demand could pull China out of what seems to be a deepening economic malaise. Although official figures still show the economy steaming along at a growth rate of nearly 8 percent, a range of purchasing manager surveys last month showed growing worry among business executives across China.

“China is in a very difficult position now,” as American and European consumers seem wary of further increases in the coming months in their purchases of Chinese goods, said Diana Choyleva, an economist in the Hong Kong office of Lombard Street Research, an economic analysis firm.

The discouraging shift in sentiment, after a fairly weak economic performance in March as well, comes despite enormous lending through the autumn, winter and early spring. China’s leaders were able to turn the sharp economic slowdown a year around by flooding the economy with bank and trust loans, and other credit.

But the heavy lending has brought about considerably less economic growth than earlier rounds of monetary easing, raising worries that China’s investment-dominated economy is running out of economically viable projects to pursue and may not be able to shift quickly enough to consumer-led growth.

China has scheduled the release of April inflation data on Thursday, and a wide range of April economic statistics next Monday, including including industrial production, fixed asset investment and retail sales.

Another uncertainty about Wednesday’s trade data lies in whether the export figures are even accurate, or whether they have been artificially inflated. A gradual rise in the value of the renminbi against the dollar over the last year, together with expectations that this rise will continue, has created an incentive for exporters to overstate the value of the goods they ship out of the country, as a way to bypass China’s currency controls and bring more dollars into the country to convert into renminbi.

The Chinese government has opened an investigation into whether exporters are overinvoicing clients, after export data in the first quarter showed unusual patterns, including a surge in reported Chinese exports to Hong Kong that did not match Hong Kong data.

Louis Kuijs, an economist in the Hong Kong office of the Royal Bank of Scotland, estimated that overinvoicing of exports accounted for more than half of the year-on-year growth in China’s exports last month. By adjusting for this, he said that the true growth in China’s exports last month appeared to be more like 5.7 percent than 14.7 percent.

 There has been little sign of manipulation of import figures, which appear to show that domestic demand is holding up a little better than overseas demand.

 

Article source: http://www.nytimes.com/2013/05/08/business/global/china-trade-figures-rise-slightly-but-weaknesses-persist.html?partner=rss&emc=rss

Government Spending Cuts Contribute to Slower Growth

As chief executive of a small Michigan military contractor, Nanocerox, he had already cut his work force by one-third. But it was not enough. And if the government spending cuts mandated by Congress continue, he said, more people will go in the coming months.

The squeeze Mr. Kelly is facing is one reason markets are jittery about what the Labor Department’s latest report on unemployment and job creation will reveal about the economy on Friday. After a strong start to the year, several economic indicators beginning in March have pointed to much slower growth, largely because of the fiscal headwinds from Washington, economists say.

Job cuts like the kind at Nanocerox remain the exception, rather than the rule. On Thursday, the government said weekly unemployment claims were at a five-year low.

The problem is that companies have not been hiring. This week, a survey of private sector hiring in April came in well below expectations, while indications for everything from retail sales to manufacturing have also been soft recently.

Whatever the data ultimately show for April, economists like Diane Swonk, chief economist for Mesirow Financial in Chicago, say the economy would be showing much more momentum if it were not for the combination of higher payroll taxes that went into effect in January, as well as the process of automatic spending cuts known as sequestration that began to bite last month.

“What’s the biggest drag on the economy? The government,” Ms. Swonk said. “If the government simply did no harm, we could be at escape velocity.”

Without the impact of federal cuts and higher taxes, Ms. Swonk estimates, annual economic growth would be close to 4 percent, above the 2.5 percent pace she is expecting in 2013.

Like most economists, Ms. Swonk says she does not think the economy will fall back into recession or experience a pronounced rise in unemployment. Instead, economists on Wall Street are looking for the economy to have created 140,000 jobs in April, below average compared with the monthly rate of 168,000 jobs added in the first quarter but better than the 88,000 jobs created in March. The unemployment rate is expected to remain at 7.6 percent.

That’s down considerably from the 10 percent peak in unemployment recorded in October 2009, but still well above where levels for joblessness should be this far into a recovery. Nearly 12 million Americans are unemployed and looking for work, according to the Labor Department, and almost 40 percent of them have been jobless for more than six months.

As long as the unemployment rate remains above 6.5 percent, the Federal Reserve has vowed to keep buying tens of billions of dollars worth of bonds each month to help stimulate growth. That has buoyed Wall Street, and helped the stock market reach record highs, but it has yet to translate into the kind of job gains the Fed wants to see.

Other central banks have been getting into the act, too. The European Central Bank cut rates on Thursday in a bid to restore growth, and the Bank of Japan recently started an aggressive stimulus effort.

In particular, economists will be watching Friday’s report to see if the manufacturing sector shed more jobs in April. The government is generally furloughing employees rather than laying them off, but private contractors that supply the Pentagon have been trimming their work forces outright.

Julia Coronado, chief North American economist at BNP Paribas, predicted the impact of the sequester would increase in the months ahead. “We’ve seen orders for defense-related goods really slow down,” she said. “There are definitely signs of a cooling.”

“We’re not in a free fall,” she added, “but it highlights the difficult nature of this recovery.”

Although sequestration did not officially go into effect until March, the Pentagon and some other agencies began cutting back last year. At Mr. Kelly’s company, Nanocerox, that has meant a sharp slowdown in orders for powder derived from rare-earth minerals that is used in a wide range of high-technology products, like advanced lasers and air-to-air missiles. With just $2.5 million in revenue, the company, based in Ann Arbor, Mich., had to react quickly as demand from the Pentagon and big contractors like Raytheon evaporated.

“It’s a tough, tough environment,” Mr. Kelly said. “We’re trying to sell the company. It’s sad because our technology is the next generation for the military.”

Article source: http://www.nytimes.com/2013/05/03/business/economy/government-spending-cuts-contribute-to-slower-growth.html?partner=rss&emc=rss

Unemployment in Euro Zone Continues to Rise

The unemployment rate in the 17-nation currency union ticked up by one-tenth of a percentage point from February, when the previous record was set, Eurostat, the statistical agency of the European Union, reported from Luxembourg. A year earlier, euro zone joblessness stood at 11 percent.

A separate report Tuesday from Eurostat showed inflation dropping sharply in the euro zone, well below the European Central Bank’s target of 2 percent a year. The annualized rate of inflation for consumer prices was just 1.2 percent in April 2013, down from March, when inflation stood at 1.7 percent.

The reports, along with other recent data suggesting that the economy is healing more slowly than many had hoped, could prompt the European Central Bank to take action at its policy meeting on Thursday. The central bank could cut its key interest-rate target, already at a record low of 0.75 percent, by a quarter point, economists say, though the impact of such a move would probably be slight, because banks remain less than eager to lend.

“Stabilizing the peripheral euro zone countries will take at least until the end of 2013,” Ralph Solveen, an economist with Commerzbank in Frankfurt, said. As a result, he said, unemployment would probably keep rising “until next spring.”

For the 27-nation European Union, the March jobless rate was unchanged, at 10.9 percent. Eurostat estimated that 26.5 million men and women were now unemployed in Europe, including 5.7 million young people.

Both the euro zone and European Union jobless figures are the highest Eurostat has reported since it began keeping the data in 1995 in the days before the euro. In comparison, the unemployment rate in the United States was 7.6 percent in March.

Six years after Wall Street’s bad bets on the United States housing market began to sink the global financial system, the European economy remains trapped in torpor with little relief in sight. Governments have tightened the screws on public finances to meet deficit targets, and companies remain extremely reticent about hiring. The euro zone’s gross domestic product is widely expected to decline for a second consecutive year in 2013.

Manufacturers are largely dependent on demand from outside Europe for growth. Carmakers, which employ about two million people in Europe, anticipate sales in the European Union this year to fall back to levels last seen in the early 1990s. In that dismal landscape, PSA Peugeot Citroën, the French automaker that ranks No. 2 in Europe behind Volkswagen, said Monday that its unions had agreed to a plan to close a plant near Paris and to reduce its French work force by more than 11,000.

While a decline in energy prices helped to push the inflation rate lower, Jennifer McKeown, an economist in London with Capital Economics, argued that the jobless problem was probably itself part of the reason for the downward pressure on prices. She said in a note that it would be “a disappointment” if the E.C.B. failed to ease rates and “announce further unconventional policies to boost bank lending.”

Two nations are staggering under depression-level jobless rates: Greece, where the European sovereign debt crisis began, had a rate of 27.2 percent in January, the latest month for which data are available; Spain had unemployment of 26.7 percent in March. Portugal was next at 17.5 percent. Germany, which has the largest economy in the European Union, was at just 5.4 percent, with only Austria, at 4.7 percent, lower. Britain’s rate stood at 7.8 percent, while France’s was at 11 percent.

Mr. Solveen forecasted that the euro zone economy would shrink by 0.2 percent this year, but he pointed to progress in some countries, including Italy and Spain, in addressing problems that he said would eventually help turn things around. Still, Spain’s “catastrophic” unemployment rate is a reminder that its burst housing bubble is still sapping the economy.

“The correction there has to go on,” he said, “because there is still a huge number of unsold homes.”

Mr. Solveen said that Germany had reduced its dependence on its euro zone neighbors, and the key to its economic growth was now tied to the global economy.

Article source: http://www.nytimes.com/2013/05/01/business/global/european-unemployment-sets-another-record.html?partner=rss&emc=rss

Japan Household Spending Surges

A recent run of data has provided encouraging early hope that Abe’s push for aggressive fiscal and monetary policies to get the world’s third-largest economy motoring is having the desired effect.

Separate data on Tuesday also showed the jobless rate fell to the lowest in more than four years, providing another piece of evidence that domestic demand could play a critical role in underwriting economic growth in coming months.

While Japan’s industrial production rose less than expected in March due to tepid demand overseas, economists are confident that exports and factory output will eventually pick up due to a weaker yen.

On the whole, the figures suggest that expectations for Abe’s combination of fiscal spending, monetary stimulus and structural reforms, known as “Abenomics,” are having a positive impact on the household sector although the corporate sector is lagging behind.

“I expect the first quarter gross domestic product growth to exceed an annualized 2 percent, and if the corporate sector catches up with households, the pace of growth could accelerate,” said Yoshiki Shinke, senior economist, Dai-Ichi Life Research Institute.

“Recovery in exports has been slow and so has industrial output, but as a weak yen is expected to impact shipments from now on, exports and factory output will pick up in coming months.”

Abe’s policy mix has so far driven the yen to a four-year low against the dollar and sparked a 50 percent rally in Japanese share prices from November, which has helped buoy consumer sentiment.

Confidence in Japan received another boost on April 4 when the Bank of Japan launched its radical monetary expansion campaign, promising to inject about $1.4 trillion into the economy in less than two years.

Household spending soared 5.2 percent in March from a year earlier in price-adjusted real terms, Ministry of Internal Affairs and Communications showed on Tuesday, as some individual investors cashed in on gains in stocks to increase spending on cars and home repairs.

That blew past the median estimate for a 1.8 percent annual increase and was the fastest gain since a 5.3 percent rise in the year to February 2004.

Such a big increase in spending is unlikely to be sustainable, and there are worries that wages have been slow to improve.

Economists have also warned in the past that the sample size for household spending is small and easily swayed by big ticket purchases.

Still, they expect consumer spending will continue to expand at a more reasonable pace as individual investors cash in on stock gains.

The seasonally adjusted unemployment rate fell to 4.1 percent in March, the lowest since 4.0 percent in November 2008, figures from the Internal Affairs ministry showed. That compared with economists’ median forecast of 4.3 percent,

The jobs-to-applicants ratio was at 0.86, which matched the level seen in August 2008, separate data from the labor ministry showed.

One worrying sign was the slow uptick in industrial production, which rose a less-than-expected 0.2 percent in March, according to data from the Ministry of Economy, Trade and Industry.

Manufacturers surveyed by the ministry expect output to rise 0.8 percent in April and fall 0.3 percent in May, the data showed.

Japanese retail sales fell 0.3 percent in March from a year earlier, according to a separate release from the Ministry of Economy, Trade and Industry.

That was counter to the median estimate for a 0.6 percent annual increase, but economists say the data may not accurately reflect consumption, because it does not include spending on services.

Overall, policymakers will be encouraged by the improving mood among consumers. Data earlier this month showed Japanese consumer confidence rose in March to the highest level in almost six years, an important signal as Abe’s policies rely heavily on expectations for future growth and prices.

Household spending is a crucial leg in reigniting growth, and in this respect Tuesday’s data should come as a relief to BOJ Governor Haruhiko Kuroda as he aims to get the economy to generate 2 percent inflation in roughly two years.

Kuroda wants to raise inflation expectations in order to boost consumer spending and encourage capital consumption, leading to a virtuous circle that pushes consumer prices higher.

(Editing by Shri Navaratnam)

Article source: http://www.nytimes.com/reuters/2013/04/30/business/30reuters-japan-economy.html?partner=rss&emc=rss