January 21, 2021

U.S. Economy Speeds Up, but Less Than Forecast

The American economy sped up in the first quarter of this year, with output expanding at an annual pace of 2.5 percent, according to a Commerce Department report released Friday. The number was lower than the 3 percent forecasters had been expecting.

While faster growth of any kind is welcome, much of the acceleration in gross domestic product was probably a result of unusually slow growth at the end of 2012, when the economy grew at an annual pace of just 0.4 percent. Growth in the fourth quarter had been dragged down by reduced restocking of businesses’ inventories, for example, and in the first quarter businesses made up for this by adding much more to their shelves.

Consumer spending was up too, despite fears that the lapse of the temporary payroll tax holiday at the start of the year would hold back how much consumers were willing to spend. It’s unclear whether consumers will continue to spend as freely in the months ahead, once they start to feel the pinch of this effective tax hike, particularly if wages continue to stagnate.

Exports, residential investment (housing, essentially) and business spending on equipment and software also rose.

Economists have expressed concern that the pace of growth may have started out strong in 2013 but slowed by the end of the first quarter, given recent disappointing reports about economic indicators in March. Employment slowed dramatically in March, for example, and orders for durable goods like aircrafts fell more than analysts had expected.

Additionally, across-the-board federal spending cuts, enacted as part of Congress’s so-called sequester, are likely to weigh on growth going forward. In the first quarter of this year, government spending fell at an annual rate of 8.4 percent, after a decrease of 14.8 percent in the fourth quarter of 2012.

“With fiscal tightening weighing on the spring and summer quarters, we expect weaker growth ahead,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisers, said in a note to clients said before the report. “We have seen good quarters before, but what counts is sustainability, and on that score we are deeply unconvinced.”

Article source: http://www.nytimes.com/2013/04/27/business/economy/us-economy-grew-at-2-5-rate-in-first-quarter.html?partner=rss&emc=rss

Reports Show Weaker Hiring and Service Sector Growth

WASHINGTON (AP) — Two reports showed Wednesday that American service companies grew more slowly in March and private employers pulled back on hiring. The declines suggest businesses may have grown more cautious last month after federal spending cuts took effect.

The Institute for Supply Management said that its index of nonmanufacturing activity fell to 54.4 last month. That is down from 56 in February and the lowest in seven months. Any reading above 50 signals expansion.

Slower hiring and a steep drop in new orders drove the index down. A gauge of hiring fell 3.9 points to 53.3, the lowest since November.

The group’s report covers companies that employ roughly 90 percent of the work force, including the retailing, construction, health care and financial services industries.

A separate report from the payroll processor ADP also pointed to slightly weaker hiring in March. ADP said private employers added 158,000 jobs in March, down from 237,000 the previous month. Construction companies did not add any jobs after three months of solid gains.

Economists were not overly concerned with the weaker reports. Several noted that ADP’s figures were less reliable than the government’s more comprehensive employment report, which comes out on Friday.

Still, many say the pace of hiring has probably dropped off from the previous four months, when employers added an average of 200,000 net jobs a month. And a few reduced their forecasts for March job growth after seeing the two reports.

Jim O’Sullivan, chief United States economist at High Frequency Economics, now expects just 160,000 net jobs in the March employment report, instead of 215,000. Jennifer Lee, an economist at BMO Capital Markets, said her group had lowered its forecast to 155,000, from 220,000.

Ms. Lee said businesses might have temporarily suspended hiring because they wanted to see the impact of $85 billion in government spending cuts, which began on March 1.

Still, most economists say any slowdown is likely to be temporary. Most say growth accelerated in the January-to-March quarter to a 3 percent annual rate, buoyed by a resilient consumer and a steady rebound in housing.

And even if growth slows in the April-to-June period to roughly 2 percent, as some predict, that would still leave the economy expanding at a solid pace in the first half of the year.

Article source: http://www.nytimes.com/2013/04/04/business/economy/survey-shows-158000-new-jobs-in-march.html?partner=rss&emc=rss

New York State Bonds Include Warning on Climate Change

The warning, which is now appearing in the state’s bond offerings, comes as Mr. Cuomo, a Democrat, continues to urge that public officials come to grips with the frequency of extreme weather and to declare that climate change is a reality.

A spokesman for Mr. Cuomo said he believed New York was the first state to caution investors about climate change. The caution, which cites Hurricane Sandy and Tropical Storms Irene and Lee, is included alongside warnings about other risks like potential cuts in federal spending, unresolved labor negotiations and litigation against the state.

“The state determined that observed effects of climate change, such as rising sea levels, and potential effects of climate change, such as the frequency and intensity of storms, presented economic and financial risks to the state,” the spokesman, Richard Azzopardi, said on Tuesday.

Mr. Azzopardi added, “The extreme weather events of the last two years highlighted real and potential costs from extreme weather events, including the need to harden the state’s infrastructure and improve disaster preparedness, both of which have been a priority of the governor.”

Last fall, Mr. Cuomo was quick to draw a connection between climate change and the severity of Hurricane Sandy, complaining that he seemed to spend much of his time as governor responding to extreme weather events. He has frequently spoken about climate change since then, saying in his State of the State address in January that New York needed “to learn to accept the fact — and I believe it is a fact — that climate change is real.”

“There is a 100-year flood every two years now,” Mr. Cuomo said at the time. “It’s inarguable that the sea is warmer and that there is a changing weather pattern, and the time to act is now.”

Experts in public finance said they had not heard of any other state that included an explicit warning about climate change in bond offerings.

But David Hitchcock, a senior director in the public finance practice at Standard Poor’s, said climate change was not a criterion in evaluating state finances. “I have a hard time finding a direct relationship for climate change on New York State’s economy at this point,” he said, adding, “It’s not something that’s really on our radar screen right now.”

Emily Raimes, a vice president at Moody’s Investors Service, said “more disclosure is always a good thing.” But she added that most of the risk for local and state governments from powerful storms was mitigated by the presence of the Federal Emergency Management Agency, which provides disaster aid to assist states and local governments.

“One of the reasons they can get to ratings as high as they do, particularly in storm-prone areas, is because of the existence of FEMA,” Ms. Raimes said. “After Hurricane Sandy, after big natural disaster events, FEMA picks up most of the cost of the immediate cleanup and rebuilding of public infrastructure.”

She noted that Moody’s had downgraded only a small number of local governments that were in areas hit hard by Hurricane Sandy, and that those governments had financial problems even before the storm hit.

The warning about climate change first appeared in the fine print of Mr. Cuomo’s budget proposal in January, and was reported on Tuesday by Bloomberg News. It notes that recent storms “have demonstrated vulnerabilities in the state’s infrastructure, including mass transit systems, power transmission and distribution systems, and other critical lifelines.”

The warning adds, “Significant long-term planning and investment by the federal government, state and municipalities will be needed to adapt existing infrastructure to the risks posed by climate change.”

Mr. Cuomo is taking a number of steps to prepare the state for storms; for example, his administration is developing a program to offer home buyouts to residents in flood-prone areas in a bid to begin reshaping how New York develops its coastline. The state budget that lawmakers are expected to approve this week also includes a provision requiring some gas stations to be wired to accept generators that could be used in the event of a power failure.

Article source: http://www.nytimes.com/2013/03/27/nyregion/new-york-state-bonds-include-warning-on-climate-change.html?partner=rss&emc=rss

In Survey, Fed Finds Economic Growth Is Widespread

The survey noted that 10 of the Fed’s 12 banking districts reported moderate growth, while the Boston and Chicago districts reported slow growth. The survey, called the beige book, provided anecdotal information on economic conditions through Feb. 22.

The information will be discussed along with other economic data during the Fed’s next policy meeting on March 19 and 20Consumer spending increased in most regions, but much of the gains were driven by auto sales.

Many districts said consumers spent slightly less after taxes rose and gas prices increased. Some districts also expressed concern about federal spending cuts that started March 1.

Housing markets showed increased strength in nearly all of the country. Manufacturing grew modestly in most districts after struggling through most of 2012. Many districts reported improvement in individual job markets.

Analysts said the survey was slightly more upbeat than the previous one by the Fed, noting the modest rebound in manufacturing in the last two months. Jennifer Lee, senior economist at BMO Capital Markets, said the latest survey was “more encouraging news on the U.S. economy.”

Many economists believe the Fed will maintain its low-interest-rate policies at current levels, taking no new steps at the March meeting.

In January, the Fed stood behind aggressive steps it introduced in December to try to lower unemployment. It repeated its intention to keep its key short-term interest rate at a record low at least until unemployment falls below 6.5 percent. The Fed also said it would keep buying Treasuries and mortgage bonds to help lower borrowing costs and encourage spending.

When the Fed last met in January, the unemployment rate was 7.9 percent. The government will report on February’s unemployment figures on Friday, and some economists are forecasting that the jobless rate will decline to 7.8 percent, with the economy adding 152,000 jobs.

The payroll processor A.D.P. said Wednesday that American businesses added 198,000 jobs in February. The private survey also revised January’s hiring figures to show that companies added 215,000 jobs that month, 23,000 more than what had initially been reported.

That suggests the government’s February unemployment report could come in above economists’ forecasts.

In another positive economic sign, orders for machinery and other factory goods that signal business investment surged in January.

Orders for so-called core capital goods, which also include equipment and computers, rose 7.2 percent from December, the Commerce Department reported Wednesday. It was the largest gain in more than a year and higher than the initial 6.3 percent increase estimated by the government last week.

Total factory orders fell 2 percent in January compared with December. But the decline was mostly a result of a steep drop in aircraft and military orders.

Demand for durable goods, items expected to last at least three years, dropped 4.9 percent. Demand for nondurable goods, such as chemicals and paper, rose 0.6 percent.

Article source: http://www.nytimes.com/2013/03/07/business/economy/in-survey-fed-finds-economic-growth-is-widespread.html?partner=rss&emc=rss

Hard Budget Realities as Agencies Prepare to Detail Reductions

“Sequestration,” that arcane budget term consuming Washington in recent weeks, is about to move from political abstraction to objective reality for tens of millions of Americans. Barring an extremely unlikely last-minute deal, about $85 billion is set to be cut from military, domestic and certain health care programs beginning Friday.

Much of the government will be immune, only magnifying the cuts for the rest. If they are not reversed, federal spending at the discretion of Congress will eventually fall to a new five-decade low. Cuts of even larger size are scheduled to take effect every year over the next 10, signaling an era of government austerity.

By the end of this week, federal agencies will notify governors, private contractors, grant recipients and other stakeholders of the dollars they would be about to lose. As of March 1, the Treasury Department will immediately trim subsidies for clean energy projects, school construction, state and local infrastructure projects and some small-business health insurance subsidies.

Nearly two million people who have been out of work for more than six months could see unemployment payments drop by 11 percent in checks that arrive in late March or the first days of April, according to the White House budget office, an average of $132 a month. Doctors who treat Medicare patients will see cuts to their reimbursements.

If the stalemate in Washington continues, furloughs and layoffs will probably begin in April, starting largely in the 800,000-member civilian work force of the Defense Department and then rippling across the country, from meat inspectors in Iowa to teachers in rural New Mexico.

“If they hit me with a $3 million cut in March, I’m not sure what I’m going to do,” said Raymond R. Arsenault, the superintendent of the Gallup-McKinley County Schools, a district that serves primarily Navajo students on the Arizona-New Mexico border.

Mr. Arsenault’s school system would be hit much harder than most because 35 percent of his $100 million annual budget comes from federal education “impact aid” to offset the large tracts of land that are owned by Washington and therefore not subject to taxation. Of that, $3 million may be about to disappear.

The sequester involves trimming $85 billion from a $3.6 trillion annual federal budget, or about 2.4 percent. But the cuts will not affect Social Security or Medicaid, and the Medicare cuts total only about $11 billion in the 2013 fiscal year, which ends Sept. 30, according to calculations by the Bipartisan Policy Center.

Thus, entitlement spending, which poses the biggest long-term challenge to the federal budget, accounts for only a sliver of the cuts. That leaves more than $70 billion in cuts to be applied over the next seven months to the roughly two-fifths of the budget that is devoted to discretionary spending, including the military, education and dozens of other categories.

In a matter of weeks the cuts would cascade through the government, delaying snow removal on the Tioga Pass in Yosemite National Park, for example, and keeping an aircraft carrier battle group docked in Norfolk, Va., rather than steaming through the Persian Gulf.

“The cut is so big and over such a short period of time that there’s no way to avoid all the operational and program harms,” said Daniel I. Werfel, controller of the White House budget office.

These cuts would probably not be confined to 2013. Even if President Obama manages to persuade Congress to raise new revenue, he has said he would replace only half of the spending cuts with tax increases, in essence accepting a half-trillion dollars in cuts over 10 years. That would be on top of more than $1 trillion in cuts already enacted by the Budget Control Act, which created the sequester in 2011 as part of a deal to raise the country’s statutory borrowing limit.

A comprehensive deficit-reduction deal, which is currently moribund but is still both Congress and the White House’s stated goal, might mitigate the impact by including fast-growing programs like Medicare and Medicaid in the cuts. But belt-tightening, for now, appears to be the new normal.

Article source: http://www.nytimes.com/2013/02/24/us/politics/hard-budget-realities-as-agencies-prepare-to-detail-reductions.html?partner=rss&emc=rss

As Growth Lags, Some Press the Fed to Do Still More

The Labor Department said on Friday that the jobless rate rose to 7.9 percent last month, up from 7.8 percent in December, in the latest evidence that the economy still is not growing fast enough to repair the damage of a recession that ended in 2009.

Some economists found the disappointing data an indication the Fed had reached the limit of its powers, or at least of prudent action. But there is evidence that the Fed is not trying as hard as it could to stimulate growth: it is allowing inflation to fall well below the 2 percent pace it considers most healthy.

Inflation, unlike job creation, is something the Fed can control with some precision. Higher inflation could accelerate economic growth and job creation by encouraging people to spend more and make riskier investments.

Yet annualized inflation fell to 1.3 percent in December, and asset prices reflect an expectation that the pace will remain well below 2 percent in the next decade.

“By their own framework, they’re not doing enough,” said Justin Wolfers, an economist at the University of Michigan. “They said that they were going to expand the economy and keep inflation around 2 percent, and they just haven’t done it.”

The rest of the government is making that task more difficult. Federal spending cuts, tax increases and the prospect of further cuts March 1 are hurting growth. The Fed chairman, Ben S. Bernanke, has warned repeatedly that monetary policy cannot offset such fiscal austerity.

And it is likely that the latest economic data does not reflect the full impact of the Fed’s efforts. Despite the rise in unemployment, job creation has increased in recent months, consumer spending has strengthened and the housing market is healing. Partly because monetary policy is slow-acting, most forecasters expect modest growth this year.

But the Fed also is acting with a clear measure of restraint. Mr. Bernanke and other officials have made clear that they believe the central bank could do more to increase the pace of inflation and bolster growth and job creation. They simply are not persuaded that the benefits outweigh the potential costs — in particular, the risk that their efforts will distort asset prices and seed future financial crises.

The Fed is constrained in part because it already has done so much. The central bank has held short-term interest rates near zero since December 2008, and it has accumulated almost $3 trillion in Treasury securities and mortgage-backed securities to push down long-term rates and encourage riskier investments.

Under its newest effort, announced in September and extended in December, it will increase its holdings of Treasuries and mortgage bonds by $85 billion a month until the job market improves. The Fed also said that it planned to hold short-term rates near zero even longer, at least until the unemployment rate fell below 6.5 percent.

In normal times, the Fed would respond to flagging inflation and growth by cutting interest rates. At present, it could still increase the scale of its asset purchases. The two policies work in a similar way, stimulating economic activity by reducing borrowing costs and encouraging risk-taking. But asset purchases are a less direct method to reduce rates, and the available evidence suggests that the effect is less powerful.

The Fed’s holdings of mortgage bonds and Treasuries also are growing so large that it could begin to distort pricing in those markets, and some transactions could be disrupted by a dearth of safe assets. Some Fed officials are concerned that asset prices for farmland, junk bonds and other risky assets are being pushed to unsustainable levels. As a result, Mr. Bernanke has said, the Fed is doing less than it otherwise would.

“We have to pay very close attention to the costs and the risks and the efficacy of these nonstandard policies as well as the potential economic benefits,” Mr. Bernanke said last month, in response to a question about the low pace of inflation. “Economics tells you when something is more costly, you do a little bit less of it.”

The Fed to some extent may be a prisoner of its own success in persuading investors over the last three decades that it was determined to keep inflation below 2 percent. It said in December that it would let expected inflation in the next two to three years rise as high as 2.5 percent. But expectations have not budged.

The Federal Reserve Bank of Cleveland calculated in a January report that average expected inflation over the next decade was just 1.48 percent per year.

Fed officials themselves generally expect somewhat higher inflation, but their most recent predictions, published in January, still show that none of the 19 policy makers expected inflation to exceed 2 percent over the next two years.

Article source: http://www.nytimes.com/2013/02/02/business/economy/as-growth-lags-some-press-the-fed-to-do-still-more.html?partner=rss&emc=rss

U.S. Adds 157,000 Jobs; Jobless Rate Edges Up to 7.9%

Retail, construction, health care and the wholesale trade sector added positions, while the government again shed jobs. Government payrolls have been shrinking almost every month over the last four years.

The monthly jobs numbers were close to what economists had forecast, although many had hoped for an upside surprise. Recent weeks have brought a slew of gloomy economic data, showing that the nation’s output unexpectedly shrank at the end of 2012 and that consumers were becoming increasingly pessimistic about their finances and job prospects.

Dysfunction in Washington over the budget and higher tax rates that kicked in last month could further dampen consumer confidence and hiring early this year.

“The combination of eliminating the payroll-tax forgiveness along with continued stagnation in wages, I think, could be a real hit in terms of jobs,” said Christine Owens, executive director at the National Employment Law Project, a labor advocacy and research group.  “If you add in sequestration” — the across-the-board cuts to federal spending currently scheduled for March 1 — “that paints a pretty bleak picture.”

Job growth has been steady but uninspiring in the last year, trudging along just barely fast enough to keep up with population growth but not nearly quickly enough to put a major dent in unemployment. A backlog of 12.3 million idle workers remains.

“I have been working for 40 years and I have looked for jobs many times in the past, including in bad economies, and I’ve never experienced anything like this,” said Mary Livingston, a human resources professional in Wayland, Mass. She was laid off two years ago Friday.

She said she believes employers are reluctant to hire her because of her age — she’s 63 — and the fact that she hasn’t held a permanent job in so long. But she said they seem unwilling to hire anyone at all.

“I’ve seen positions posted two years ago that still have not been filled,” she said. “There seems to be this tremendous fear of making a decision. A lot of my colleagues will go for 15, 20, 23 interviews with the same company.”

Uncertainty over fiscal policy and the fragility of the economy still seem to be holding back employers, despite a number of underlying sources of growth in places like the housing market and auto sales. Economists are forecasting job growth of around 170,000 a month for the rest of 2013, comparable to what employers have been adding over the last year.

Exactly what this pace of job growth means for the unemployment rate depends on whether many of the workers sitting on the sidelines decide to join, or rejoin, the labor force. Right now, labor force participation rates — that is, the share of people of working age who are either working or looking for jobs — is hovering around 30-year lows.

Only those who are actively looking for work are counted as unemployed, so if the labor force participation stays low, even modest job growth can cause the unemployment rate to fall quite a bit.

“The decline in the labor force participation rate brought the unemployment rate down much faster than anyone would have thought, given the jobs numbers,” said John Ryding, chief economist at RDQ Economics. “The aging of America accounts for a little bit of it, but you’d still expect that job searches would go up and participation would rise as opportunities are opening up.”

For the long-term unemployed — who now represent 40 percent of all jobless workers — the opportunities still seem few and far between. Millions have exhausted their unemployment benefits and many more will roll off the government’s system in the coming months with no viable options in sight.

“Who are these people who are getting jobs? Where are they? I don’t know them,” said Karen Duckett, 51, who was laid off from her job as director of housekeeping at a retirement community in late 2011. She recently received a letter saying that her benefits would end in two weeks because the unemployment rate in Maryland, where she lives, has fallen below 7 percent and so the state no longer qualifies for the third tier of federal emergency benefits.

“I am just so angry right now,” said Ms. Duckett, who has been invited for only two interviews despite submitting dozens of applications. “How do you expect for me to find a job in two weeks if I haven’t been able to find one in a year and a half?”

Article source: http://www.nytimes.com/2013/02/02/business/economy/us-adds-157000-jobs-unemployment-rate-edges-up-to-7-9.html?partner=rss&emc=rss

Economic Scene: Behind Tax Loopholes, Some Worthy Goals

If there is one idea that everybody seems to agree on while peering over the fiscal cliff, it is that we should close the loopholes that riddle the tax code. It is offered as a painless way to raise money, like fixing a leak or ending some unfair privilege.

But there is a problem with this consensus. Many of the things the government promotes with loopholes are truly valuable to lots of Americans. Tax credits and deductions may be murky and convoluted, and perhaps are not the best way to achieve government objectives. But that doesn’t mean they serve no purpose at all.

Consider education. The federal government has helped Americans pay for college since World War II. Lyndon Johnson’s War on Poverty featured the Higher Education Act, which included grants and loans for low-income families. Jimmy Carter’s Middle Income Student Assistance Act vastly increased federal aid by granting access to the middle class.

Right after winning re-election to a second term, Bill Clinton set out to surpass these efforts and provide access to at least two years of higher education to all Americans. Rather than offering federal spending as the Democrats who preceded him did, President Clinton mainly offered tax breaks for higher education: $40 billion worth of them over five years, tucked into the 1997 Taxpayer Relief Act.

It was a strategy for the times. Three years earlier, Republicans had taken control of both chambers of Congress for the first time since the 1950s. “Republicans would vote for any tax reduction that came along without questioning it much,” said Michael Graetz, an expert on taxation at Columbia Law School who worked in the administration of George H. W. Bush. “Democrats found that the only way they could get the kind of spending they wanted was in the form of tax benefits.”

Through the hall of mirrors that is government budgeting, President Clinton’s tax breaks for higher education accomplished two conflicting goals. They amounted to the biggest expansion in federal money for higher education since the G.I. bill. At the same time, they made the government look smaller.

Today, the political tide has turned decidedly against tax breaks. Last week, House Speaker John A. Boehner may have put President Clinton’s higher-education benefits on the chopping block. In exchange for less spending on federal entitlements, he said Republicans could drop their vow of “no new revenues” and let the government raise $800 billion over 10 years by cutting or paring tax breaks.

Though the offer to raise money by closing loopholes has a bipartisan pedigree — based on a plan proposed last year by the Democrat Erskine Bowles and the Republican Alan Simpson, the chairmen of President Obama’s deficit commission — it relies on rhetorical sleight of hand. If tax breaks are equivalent to government spending, eliminating them is equivalent to spending cuts. Mr. Boehner’s offer to do away with tax breaks in exchange for cutting entitlements raises no new revenue. It amounts to cutting spending twice.

Loopholes make up a huge chunk of our government. Known as tax expenditures in the arcane lexicon of budget experts, they have grown a lot since the early 1990s — a consequence of our increasing demand for government programs coupled with our resistance to raising taxes. Last year they added up to more than 7 percent of the nation’s economic output, a sizable figure considering that all federal taxes took some 15 percent of the economy.

Many breaks do the same job as taxing and spending. One of them, for instance, allows employers to pay for employees’ health insurance tax-free. As an alternative, the government might collect the revenue and offer health plans to workers. Rather than offer a mortgage interest deduction, the government could offer grants to help Americans buy homes. A subsidy for the poor could replace the earned-income tax credit.

According to Eric Toder and Donald Marron of the nonpartisan Tax Policy Center, including all the spendinglike exclusions as regular items in the budget increases the size of the federal government by about 4 percent of our gross domestic product. That’s about $600 billion in “hidden” spending through the tax code last year alone.

We may want to trim or eliminate certain tax breaks for specific reasons — because they are poorly targeted or inefficient. The exclusion for employer-provided health insurance — which will cost the government $1 trillion over the next five years, according to the Tax Policy Center — is pretty inefficient as a tool to deliver health care.

It leaves out not only the unemployed, but also 42 percent of working Americans, whose companies don’t provide coverage despite the subsidy. By encouraging unlimited spending on health by high earners, the tax break contributes to making the United States one of the most costly health care systems in the world.

Most federal tax breaks benefit primarily higher-income Americans, who face higher tax rates and therefore get a bigger break from deductions. Rather than strengthen middle-class homeownership, the deduction for mortgage interest mainly helps the affluent buy bigger homes than they otherwise would, leading to higher home prices. Critics argue that the tax break for charitable donations is often merely a subsidy for church donations and college football stadiums.

And some breaks aimed carefully to help low-income and middle-income Americans — like the earned-income tax credit — can pack some unhelpful incentives too. Even President Clinton’s tax breaks for higher education fell short of the goal. They eased the financial burden of college, for sure, but participation was much smaller than the administration had anticipated. A report by the Congressional Research Service found that the program did very little to increase enrollment.

Just because some tax breaks are inefficient and misdirected does not necessarily mean that the goals they serve are unworthy, however. It only means that there may be more effective ways to achieve government objectives.

For instance, President Obama’s fiscal stimulus made some of President Clinton’s higher-education tax credits refundable, so they could help lower-income Americans who owed no income tax and could not benefit from a tax credit.

Ending the tax break for health insurance provided by employers could make sense, for example, when subsidies are available for everybody to be insured. Tax breaks for individual retirement account contributions could be rolled back in exchange for more generous Social Security benefits for the poor.

It makes sense to have an open debate about the purpose, efficacy and cost of our many tax loopholes. But that is not the same thing as simply looking for loopholes to close. It is a debate about the purpose of government and how best to achieve its goals.

E-mail: eporter@nytimes.com;

Twitter: @portereduardo

Article source: http://www.nytimes.com/2012/12/12/business/behind-tax-loopholes-some-worthy-goals.html?partner=rss&emc=rss

Third-Quarter G.D.P. Growth Is Revised Up to 2.7%

The economy grew at a substantially faster pace in the third quarter than first thought, powered by increases in business inventories and federal spending.

After initially saying output increased at an annual rate of 2 percent, the Commerce Department on Thursday revised its estimate to show growth at a 2.7 percent rate in the three months that ended Sept. 30.

While businesses have remained cautious amid fiscal uncertainty in Washington and weak growth overseas, consumer spending in the United States has moved along in recent months at a healthier pace.

In addition, a strengthening housing market in many regions, along with better employment figures, has reassured some analysts who feared the economy was close to stalling.

However, worries remain about growth in the current quarter, with many economists estimating output to increase at a more tepid annual rate of roughly 1 percent.

And with more than $600 billion in tax increases and spending cuts looming if Congress and the White House can’t agree on a deal to cut the deficit by Jan. 1, economists warn the economy remains vulnerable.

The newly estimated pace of growth represents a substantial increase in the level of expansion from the second quarter, when the economy grew at a rate of just 1.3 percent. It also marks the fastest rate of expansion since the fourth quarter of 2011, when the economy grew at a 4.1 percent annual pace.

This was the second of the government’s three estimates of quarterly growth. The final figure is scheduled for Dec. 20.

“The economy certainly hasn’t taken off, but it’s nowhere close to a stall,” said David Kelly, chief global strategist for JPMorgan Funds. “The economy is still underperforming its full potential, but once we get past the ‘fiscal cliff’ uncertainty, we could see stronger growth next year.”

He cautioned that the inventory buildup in the third quarter might cool growth in the fourth quarter.   “If you’re building inventory in the third quarter, then you don’t need to build it in the next quarter,” Mr. Kelly said.

In a separate report, the Labor Department said the number of people filing first-time claims for unemployment dropped by 23,000 to a seasonally adjusted level of 393,000 last week. Economists had been expecting the number to total 390,000.

Article source: http://www.nytimes.com/2012/11/30/business/economy/third-quarter-gdp-growth-is-revised-up-to-2-7.html?partner=rss&emc=rss

Mutual Funds Dragged Down by Global Economic Unease

Then, in the third quarter, the weight of many unanswered questions, mainly about the economic recovery’s staying power and the soundness of Europe’s financial system, dragged stocks sharply lower.

The 14.3 percent decline in the Standard Poor’s 500-stock index in the three months through September was the worst quarterly loss since 2008 and left the index down 10 percent since the start of 2011. Treasury bonds, often a haven in difficult times, went in the opposite direction, recording double-digit gains and pushing yields on 10-year instruments as low as 1.7 percent.

The catalyst for both moves, an ironic one at that, appeared to be S. P.’s downgrade of Treasury debt in early August after a rancorous debate in Congress over federal spending left no clear path to long-term deficit reduction. The deterioration of Europe’s debt crisis added to the downward momentum, as a resolution of Greece’s problems remained elusive, raising fears of default.

Perhaps even more unsettling to investors was the prospect of contagion in Europe — a wider destabilization of treasuries and banks in the region resulting from anticipation of just such a calamity. In this picture, investors spooked by events in Greece would sell bonds elsewhere, driving up interest rates and adding to debtors’ stress.

The chance that these economic woes will derail an already fragile global economic recovery, spread alarm in the stock market. Yet there was more. Political stability in pockets of the Middle East and North Africa remained in doubt, as did China’s ability to maintain strong economic growth while controlling inflation. And supply-chain disruptions for manufacturers in certain industries, a remnant of the March tsunami in Japan, continued to cause concern.

“There are crisis situations all over the world,” said David Marcus, chief investment officer of Evermore Global Advisors. “Investors have been in panic mode, selling indiscriminately without regard to value. They want out at any price.”

When assets are sold at any price, they become cheap. And that has indeed happened to stocks, some investment advisers contend, which were trading at about 12 times earnings as the quarter ended, compared with a long-run average of closer to 15. Buying now may not make for a peaceful night’s sleep, but it could result in healthy gains for the long term, they say.

“There is an absolute fear of having money exposed to anything that can fluctuate in value,” said David Steinberg, managing partner of DLS Capital Management. Investors who take a chance now “are going to be rewarded once the dust clears,” he predicted. “There is a very high probability of high returns and a low probability of losing a lot on a long-term basis.”

In the short term, though, fund investors have lost a lot. The average domestic stock fund in Morningstar’s database fell 16.2 percent in the third quarter.

Funds focusing on cyclical industrial companies, financial services and natural resources were among the weakest performers. Those with concentrations in consumer-oriented companies and utilities lost ground, but less than average.

International stock funds, down 18.3 percent, fared worse than domestic ones and were dragged down by a 23.7 percent decline in Europe portfolios.

Taken as a whole, bond funds were little changed in the quarter, down 0.6 percent, but there were exceptions. The persistent appetite for the perceived safety of Treasury bonds sent long-term government bond funds to an average gain of 26.9 percent.

Conditions may improve for the long haul, but ponderous progress on major issues could bring more pain in the short run. Rick Rieder, chief investment officer for actively managed fixed-income portfolios at BlackRock, says, for example, that he foresees no immediate end to Europe’s crisis.

And as much as that might unnerve investors, however, it wouldn’t be such a bad thing, in Mr. Rieder’s view. Keeping Greece on the brink as a financial zombie could give governments, central banks and commercial banks time to arrange credit lines to keep financial systems going and institutions solvent.

“They might want to drag it out to give banks a chance to raise capital,” he said.

He distinguished between countries that have sound economies but potential trouble meeting obligations today, like Italy and Spain, and weaker ones like Greece, Ireland and Portugal that may never be able to pay their debts in full. If the bigger, stronger countries are given enough time, he predicted, “the markets will allow them to refinance themselves.”

Time is also a factor in the quandary over the federal deficit. The clock is ticking toward the November deadline for a bipartisan panel to find more than $1 trillion in spending cuts that Congress must approve; if it doesn’t do so, automatic cuts are to be imposed.

While investors would welcome a broad plan for deficit reduction, they would prefer that Congress approve some meaningful belt-tightening today and put it into effect tomorrow, especially now that Europe is taking a stab at fiscal prudence, said Iain Clark, international chief investment officer for Henderson Global Investors.

“If Europe and the U.S. both do it immediately,” Mr. Clark said, “they will be more likely to head into a recession than they already are.”

Time can be an ally to investors in another way. With valuations so low on stocks but uncertainty too great to push them higher, Mr. Rieder encouraged anyone who could commit capital for several years to consider buying stocks with high dividend yields. Then they could wait out the unsettling present until a brighter future emerged. “Nobody doubts that if you take a long-term perspective, they are attractive,” he said.

He advised bond investors to avoid Treasury securities in favor of “parts of the market that we still think make sense,” including longer-dated high-yield bonds, high-quality municipal bonds and investment-grade corporate issues.

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