June 24, 2017

In Surprise, Fed Decides Not to Curtail Stimulus Effort

As Congressional Republicans and the White House hurtle toward another showdown over federal spending, the Fed said it was concerned that fiscal policy once again “is restraining economic growth,” threatening to undermine what the Fed had described just months ago as a recovery gaining strength.

Stock markets jumped after the 2 p.m. announcement, with the Standard Poor’s 500-stock index touching a record high and the Dow Jones industrial average ahead more than 150 points.

The Fed’s decision also may reflect the consequences of yet another premature retreat from its own policies. Mortgage rates have climbed and other financial conditions have tightened since the Fed signaled in June that it intended to reduce its asset purchases by the end of the year, the Fed noted Wednesday.

“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market,” it said in a statement released after a regular two-day meeting of its policy-making committee.

The decision, an apparent victory for the Fed’s chairman, Ben S. Bernanke, and his allies who have argued for the benefits of asset purchases, was supported by all but one member of the Federal Open Market Committee. Esther George, president of the Federal Reserve Bank of Kansas City, dissented as she has at each previous meeting this year, citing concerns about inflation and financial stability.

The Fed may still begin to reduce asset purchases by the end of the year, consistent with its previous statements. The Fed also refrained from any change in its stated intention to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent.

The statement said the committee sees recent economic data “as consistent with growing underlying strength in the broader economy.” However, the statement continued, “The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

In their economic forecasts, also published Wednesday, Fed officials once again retreated from overly optimistic predictions about the pace of growth over the next several years.

The aggregation of forecasts by the 17 officials who participate in policy-making showed that Fed officials expect growth to remain sluggish for years to come, with persistent unemployment and little inflation, suggesting that the dismantling of the Fed’s stimulus campaign will remain slow and cautious.

The middle of the forecast range for economic growth this year was 2 percent to 2.3 percent, down from June predictions of growth between 2.3 percent and 2.6 percent. For 2013, Fed officials forecast growth between 2.9 percent and 3.1 percent, down from a range of 3 percent to 3.5 percent in June.

The Fed unrolled an aggressive combination of new policies last year in an effort to increase the pace of job creation. It started adding $85 billion a month to its holdings of Treasuries and mortgage bonds, and said it planned to keep buying until the outlook for the labor market improved substantially. The Fed also said that it would keep short-term rates near zero for even longer – at least as long as the unemployment rate remained above 6.5 percent.

Half a year later, in June, Mr. Bernanke, surprised many investors by announcing that the Fed intended to cut back on those asset purchases by the end of the year, an intention the Fed affirmed in July.

Critics had warned that the Fed would be pulling back too soon if it acted Wednesday. Economic growth remains sluggish and job creation is barely outpacing population growth. Roughly half the decline in the unemployment rate over the last year is because fewer people are looking for work, not because more are finding jobs.

Jack Ewing contributed reporting from Frankfurt.

Article source: http://www.nytimes.com/2013/09/19/business/economy/fed-in-surprise-move-postpones-retreat-from-stimulus-campaign.html?partner=rss&emc=rss

Economix Blog: A Chat With Eric Rosengren of the Boston Fed

Eric S. Rosengren, president of the Federal Reserve Bank of Boston.Federal Reserve Bank of Boston Eric S. Rosengren, president of the Federal Reserve Bank of Boston.

Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said in an interview that he wanted to see the economy adding at least 200,000 jobs a month in addition to a declining unemployment rate before he would be ready to consider scaling back the Fed’s efforts to stimulate the economy.

Other Fed officials have made similar statements in recent weeks, reflecting concern that the unemployment rate is declining because fewer people are looking for work, and not because faster growth is creating opportunities.

But Mr. Rosengren also expressed optimism that the economic recovery was gaining strength, and that growth could reach 3 percent this year.

We spoke during a Boston Fed conference focused on the Fed’s commitment to reducing unemployment. The transcript is edited for clarity.

Do you believe in spring swoons? Are we swooning now?

I wouldn’t put too much weight on any one data point. February, things seemed unusually strong. The unemployment report and some of the things we’ve gotten this week have been a little bit weaker. We’ll have to see which of those two ends up being a more accurate projection of what’s going to be happening.

It’s been a little bit of a surprise that it looks like we’re going to get roughly 3 percent G.D.P. growth in the first quarter. That’s certainly stronger than I think most people were expecting. It looks like we are going to be getting a little bit of a weakening in the second quarter. I’m expecting closer to 1.5 [percent growth]. Average those two and you get 2.25 [percent growth over the first half of the year]. I do think there’s enough underlying strength in the economy that as we get into the second half of the year we’re going to get much closer to 3 percent.

We do have to get through this period where fiscal policy is removing some of the accommodation that we’re trying to put into the market. Assuming we don’t get any negative shocks, I think there’s enough underlying strength that this won’t look like a spring swoon. It will look like a little bit of a lull. I hope that I’m right.

Consumer spending has been strong despite the higher payroll taxes that took effect in January. Do you think the predicted impacts were overstated? It is possible that the impact of the sequestration cuts also will fall short of expectations?

I think it was a little surprising how strong consumption was in the first quarter. I do think it had some impact. If you talk to retailers, people that have restaurants, particularly that were more focused on low- and medium-income customers, they were seeing an impact from the payroll tax. But there was stronger underlying strength in the economy at that time. In the absence of fiscal austerity we would have seen some pretty good momentum in the first half of the year. Some things also don’t happen immediately; people sometimes take time to respond. I’m reasonably confident that despite what’s happening with government spending, we’re getting modest growth. Otherwise, we’d be getting strong growth.

Unemployment remains higher than you’d like –

That’s an understatement.

So why aren’t you advocating for the Fed to do even more?

I think ideally it would actually come from the fiscal side. My own forecast is we’ll get to roughly 7.25 percent unemployment by the end of the year. I would continue our program and if we get to 7.25 and we’re starting to see payroll growth that is north of 200,000, and it looks like we’re getting a real self-sustaining recovery then I think you can make an argument [that it’s time to curtail asset purchases].

I think we need to be careful about what kind of side effects we’re having. My own sense is that the economy is picking up, the unemployment rate will be coming down. This is a fairly significant degree of accommodation. Long-term rates are quite low. We are seeing an impact from our policies. I think we’re pushing the interest-sensitive sector about as far as we’re going to be able to push it at this time.

The sectors that we can’t control — federal, state and local spending — have been a drag on the economy. We’ve been having fiscal austerity, we have more now than we had before, so monetary policy is trying to offset some of the fiscal austerity.

Are you concerned that the Fed’s efforts to drive down borrowing costs, and to increase risk-taking, are reinflating speculative bubbles?

I talked about this in a recent speech. If you look at prices, we’re nowhere close to where we were at the peak. I think we’re getting the economy more quickly to where it should be. I don’t think in any way that the actions we’ve taken to date are creating the kind of financial instability that would offset the advantages of trying to push the unemployment rate down a little more quickly.

If the unemployment rate falls to 6.5 percent, but only – or mostly — because fewer people are looking for work, is that good enough, or at least as good as it gets? Would the Fed declare victory and start to raise short-term interest rates?

We do not want to get to 6.5 percent just by having people pull out of the labor force. We want to get to 6.5 because employment is expanding and we’re adding jobs faster than labor force growth. If we end up at 6.5 percent and it was only because people pulled out of the labor force, that would not be substantial improvement in labor markets, that would mean that I would not be seeing the evidence that I would want to be seeing that we should be moving short-term rates.

You spoke Friday about the importance of the Fed’s dual mandate. But the Fed historically has behaved pretty much like every other major central bank. It seeks to control inflation and then it seeks to stimulate growth as much as possible, so long as inflation remains low. Where’s the evidence that the dual mandate matters?

Look at the March statement. You would not see that kind of statement out of the Bank of England, the Riksbank or the European Central Bank because they do have only a single mandate. It’s hard enough to explain monetary policy, but fairly unsophisticated people can understand that we’re going to keep interest rates low until unemployment hits 6.5 percent. In terms of a communication device, that’s a very clear difference. It’s observable, it’s credible, it’s easy to see whether we’re doing it or not doing it.

And you see the difference when you’re tracking closer to 2 percent inflation and still willing to take accommodative policy. We haven’t been near 2 percent in the last few years, but our willingness to maintain a pretty accommodative policy will be in some sense the test that we’re actually putting weight on how high the unemployment rate is.

Are you concerned about increased income inequality? Is there anything the Fed can do to address what appear to be increasingly entrenched inequalities?

One of the biggest things that causes your wealth to go down is a spell of unemployment. You go through a spell of unemployment, it dramatically affects a variety of things: your earnings not only immediately but over the next 10 years. And the longer the duration of the unemployment, the bigger the effect. So I think the most direct way we can have a difference is to try to bring the unemployment rate down as quickly as we can.

(Mr. Rosengren also noted that the Boston Fed is sponsoring a grant competition, the Working Cities Challenge, to improve economic conditions in the former factory towns that dot Massachusetts. The grants build on Boston Fed research showing that “industry mix, demographic makeup, and geographic location made less difference to success than the presence of a community leader and collaboration around a vision for the future.”)

Article source: http://economix.blogs.nytimes.com/2013/04/15/a-chat-with-the-boston-feds-chief/?partner=rss&emc=rss

Today’s Economist: Simon Johnson: The Flaw in Obama’s Budget Approach

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Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

From the White House, we need a clearer articulation of what the federal government does and why this makes sense. Instead, the president has allowed the debate to become dominated by excessive paranoia about deficits and by extremist demands to shrink government in a radical and inappropriate manner.

Today’s Economist

Perspectives from expert contributors.

This tension reflects the three ways to think about medium-term fiscal policy — the relationship between government spending and revenue over the next decade or two. You can figure out the budget deficit that it is possible to finance by selling government bonds, and use this as your basic constraint. Or you can stipulate the maximum acceptable level of government revenue as a percentage of gross domestic product, and work out the implications of that. Or you can define what government should do, and figure out how to finance these activities in a responsible manner.

The first way of thinking becomes paramount when countries have any form of serious fiscal crisis. For example, in some parts of Europe today — what is called the euro zone periphery — the market appetite for government debt is very limited. As a result, the governments have to think hard about the deficits that they can finance through any combination of assistance from other governments — either directly or through an indirect mechanism, such as the International Monetary Fund — and through the market.

All countries need to pay some attention to the sustainable level of government deficit (this is a flow, best thought of as the difference between government spending and revenue in a year). This is what adds up to government debt (a stock of outstanding obligations at any point in time, for example at the end of the year). But countries also differ considerably in the extent to which market pressures force them to make bringing down the budget deficit a priority.

Greece and Portugal have a fiscal crisis. They need to cut spending or raise revenue in a hurry. (Of course, if their euro zone neighbors are willing to be more generous, that will make their fiscal adjustments less painful.)

The United States does not need to take any such actions on a precipitate basis. The demand for its government debt around the world remains high. Despite the extreme assertions — or wishful thinking — from apocalyptic commentators, reports of the death of United States Treasury obligations have been greatly exaggerated.

Chinese officials like to announce that their country intends to develop its currency, the renminbi, as a reserve asset available to investors in a way that will rival the United States dollar. No doubt this is their intention, but achieving this goal is not so easy.

First China needs to reform its financial sector, then it must increase the protections afforded to overseas investors. When the going gets tough, who will get the rainy-day cash you stashed in China – you or the Chinese authorities?

The second view of budgets holds that it is of paramount importance to cap the size of the federal government budget relative to the economy. Republicans on Capitol Hill discuss a potential cap of around 17 or 18 percent of G.D.P. — and a significant number of them would like to enshrine this limit in a constitutional amendment.

A major problem with this approach is that the United States population is aging. As this demographic shift occurs, if we maintain social insurance — Social Security and Medicare, primarily — at or close to current levels, there is a natural tendency for government transfers to increase relative to the size of the economy.

This is not because of any sinister plot, but rather some simple mathematics. We insure each other, fairly modestly, against outliving our assets or our families’ ability to support us. As we expect to live longer today than did people in the past, we each expect to receive more benefits (this is a statement about probabilities; of course, we do not know which of us will live to be 95 or require what kind of medical attention when we reach 85).

This is an insurance policy, mediated by the government, the value of which has increased — and we should pay higher premiums.

If we pay more in and receive more when we retire, this will increase government revenue and increase government spending. But if you cap government revenue at 17 or 18 percent of G.D.P., that cannot happen. If that cap really binds, the value of social insurance per person must shrink over time.

The recent budget prepared by Paul Ryan, Republican of Wisconsin and chairman of the House Budget Committee, would make drastic cuts in Medicaid, Medicare and other programs in order to reduce the budget deficit to zero by 2023 without increasing taxes. This budget merges insistence on immediately eliminating the budget deficit — as if this were Greece — with a strong desire to shrink the size of government.

The third approach is to figure out what you want government to do — in terms of defense, social insurance, infrastructure investments, assistance for poor children and anything else. Once you know that, you know how much revenue you need — and you should also figure out the least distorting way to raise revenue. (Or you can increase taxes on activities that you want to discourage, like smoking, for example, because of how that affects people’s health and drives up health care costs for everyone.)

When there is a budget deficit — as in the United States today — this can be brought under control in a responsible and measured manner. Limiting government spending while ensuring a broad tax base is entirely consistent with achieving robust economic growth over the coming decades.

But who talks about the budget in those terms? The recent Senate budget proposal contained some elements of this alternative approach, but it’s hard to say that this framing of the budget issues came through loud and clear.

Unfortunately, President Obama, in his budget proposal unveiled on Wednesday, did not reinforce the need to think first and foremost about what we want government to do. Rather than laying out any kind of vision for what the government should do over the next decade or two, the president put forward what he asserts is a viable compromise with the Republicans — some tax increases and some cuts to Social Security (by changing how cost-of-living adjustments are calculated, the real value of future pensions would be reduced).

I sincerely doubt that such a compromise is possible — Congressional Republicans have dug in too deeply against higher taxes, in terms of higher rates and any package of measures that would produce a net increase in federal government revenues relative to the size of the economy.

People who don’t like social insurance — or perhaps just dislike any role for government — have been preparing for this moment for a long time. They have spent many years trying to convince people that there is an immediate fiscal crisis and that government must shrink.

Social insurance is under severe political pressure. The House Republicans want to phase it out for many people — and President Obama appears willing to acquiesce.

The White House should instead focus on explaining to people how social insurance works – and why it offers irreplaceable value. There was no affordable private health insurance for 85-year-old Americans before Medicare was created. And there will be none when Medicare is swept away.

Article source: http://economix.blogs.nytimes.com/2013/04/11/the-flaw-in-obamas-budget-approach/?partner=rss&emc=rss

Economix Blog: Simon Johnson: The Flaw in Obama’s Budget Approach

DESCRIPTION

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

From the White House, we need a clearer articulation of what the federal government does and why this makes sense. Instead, the president has allowed the debate to become dominated by excessive paranoia about deficits and by extremist demands to shrink government in a radical and inappropriate manner.

Today’s Economist

Perspectives from expert contributors.

This tension reflects the three ways to think about medium-term fiscal policy — the relationship between government spending and revenue over the next decade or two. You can figure out the budget deficit that it is possible to finance by selling government bonds, and use this as your basic constraint. Or you can stipulate the maximum acceptable level of government revenue as a percentage of gross domestic product, and work out the implications of that. Or you can define what government should do, and figure out how to finance these activities in a responsible manner.

The first way of thinking becomes paramount when countries have any form of serious fiscal crisis. For example, in some parts of Europe today — what is called the euro zone periphery — the market appetite for government debt is very limited. As a result, the governments have to think hard about the deficits that they can finance through any combination of assistance from other governments — either directly or through an indirect mechanism, such as the International Monetary Fund — and through the market.

All countries need to pay some attention to the sustainable level of government deficit (this is a flow, best thought of as the difference between government spending and revenue in a year). This is what adds up to government debt (a stock of outstanding obligations at any point in time, for example at the end of the year). But countries also differ considerably in the extent to which market pressures force them to make bringing down the budget deficit a priority.

Greece and Portugal have a fiscal crisis. They need to cut spending or raise revenue in a hurry. (Of course, if their euro zone neighbors are willing to be more generous, that will make their fiscal adjustments less painful.)

The United States does not need to take any such actions on a precipitate basis. The demand for its government debt around the world remains high. Despite the extreme assertions — or wishful thinking — from apocalyptic commentators, reports of the death of United States Treasury obligations have been greatly exaggerated.

Chinese officials like to announce that their country intends to develop its currency, the renminbi, as a reserve asset available to investors in a way that will rival the United States dollar. No doubt this is their intention, but achieving this goal is not so easy.

First China needs to reform its financial sector, then it must increase the protections afforded to overseas investors. When the going gets tough, who will get the rainy-day cash you stashed in China – you or the Chinese authorities?

The second view of budgets holds that it is of paramount importance to cap the size of the federal government budget relative to the economy. Republicans on Capitol Hill discuss a potential cap of around 17 or 18 percent of G.D.P. — and a significant number of them would like to enshrine this limit in a constitutional amendment.

A major problem with this approach is that the United States population is aging. As this demographic shift occurs, if we maintain social insurance — Social Security and Medicare, primarily — at or close to current levels, there is a natural tendency for government transfers to increase relative to the size of the economy.

This is not because of any sinister plot, but rather some simple mathematics. We insure each other, fairly modestly, against outliving our assets or our families’ ability to support us. As we expect to live longer today than did people in the past, we each expect to receive more benefits (this is a statement about probabilities; of course, we do not know which of us will live to be 95 or require what kind of medical attention when we reach 85).

This is an insurance policy, mediated by the government, the value of which has increased — and we should pay higher premiums.

If we pay more in and receive more when we retire, this will increase government revenue and increase government spending. But if you cap government revenue at 17 or 18 percent of G.D.P., that cannot happen. If that cap really binds, the value of social insurance per person must shrink over time.

The recent budget prepared by Paul Ryan, Republican of Wisconsin and chairman of the House Budget Committee, would make drastic cuts in Medicaid, Medicare and other programs in order to reduce the budget deficit to zero by 2023 without increasing taxes. This budget merges insistence on immediately eliminating the budget deficit — as if this were Greece — with a strong desire to shrink the size of government.

The third approach is to figure out what you want government to do — in terms of defense, social insurance, infrastructure investments, assistance for poor children and anything else. Once you know that, you know how much revenue you need — and you should also figure out the least distorting way to raise revenue. (Or you can increase taxes on activities that you want to discourage, like smoking, for example, because of how that affects people’s health and drives up health care costs for everyone.)

When there is a budget deficit — as in the United States today — this can be brought under control in a responsible and measured manner. Limiting government spending while ensuring a broad tax base is entirely consistent with achieving robust economic growth over the coming decades.

But who talks about the budget in those terms? The recent Senate budget proposal contained some elements of this alternative approach, but it’s hard to say that this framing of the budget issues came through loud and clear.

Unfortunately, President Obama, in his budget proposal unveiled on Wednesday, did not reinforce the need to think first and foremost about what we want government to do. Rather than laying out any kind of vision for what the government should do over the next decade or two, the president put forward what he asserts is a viable compromise with the Republicans — some tax increases and some cuts to Social Security (by changing how cost-of-living adjustments are calculated, the real value of future pensions would be reduced).

I sincerely doubt that such a compromise is possible — Congressional Republicans have dug in too deeply against higher taxes, in terms of higher rates and any package of measures that would produce a net increase in federal government revenues relative to the size of the economy.

People who don’t like social insurance — or perhaps just dislike any role for government — have been preparing for this moment for a long time. They have spent many years trying to convince people that there is an immediate fiscal crisis and that government must shrink.

Social insurance is under severe political pressure. The House Republicans want to phase it out for many people — and President Obama appears willing to acquiesce.

The White House should instead focus on explaining to people how social insurance works – and why it offers irreplaceable value. There was no affordable private health insurance for 85-year-old Americans before Medicare was created. And there will be none when Medicare is swept away.

Article source: http://economix.blogs.nytimes.com/2013/04/11/the-flaw-in-obamas-budget-approach/?partner=rss&emc=rss

Reports Show Income Is Up, and So Is Spending

Data reported on Friday also showed a rebound in income growth, putting the economy in a better shape to deal with tighter fiscal policy, particularly $85 billion in across-the-board federal government spending cuts known as the sequester.

“The economy is in a good place now in terms of momentum and strength, and it will need it as the government spending cuts will take something off growth as the year progresses,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Consumer spending increased 0.7 percent last month after a 0.4 percent rise in January, the Commerce Department said.

Part of the increase in spending, which accounts for about 70 percent of United States economic activity, was because of higher gasoline prices. But Americans also bought long-lasting goods like automobiles and spent more on services. The price of gas rose 35 cents a gallon last month.

After adjusting for inflation, spending was up 0.3 percent after rising by the same margin in January. Economists said it was headed toward its fastest growth pace since 2010.

“It appears that consumer spending actually accelerated in the first quarter despite the tax hikes implemented at the start of the year,” said Daniel Silver, an economist at JPMorgan in New York.

Some economists bumped up their first-quarter economic growth estimates.

Barclays raised its gross domestic product forecast by 0.7 percentage point, to 3.3 percent. Macroeconomic Advisers lifted its estimate by three-tenths of a point to 3.5 percent. The economy grew a 0.4 percent annual pace in the fourth quarter.

A separate report showed that households this month seemed to shrug off the deep government spending cuts. The Thomson Reuters/University of Michigan index of consumer sentiment rose to a reading of 78.6, from 77.6 in February.

“Consumers have discounted the administration’s warning that economic catastrophe would follow the reductions in federal spending, and consumers have renewed their expectation that gains in employment will accelerate through the rest of 2013,” said the survey’s director, Richard Curtin.

And they have reason to be optimistic. With steady improvement in the labor market, income increased a healthy 1.1 percent after tumbling 3.7 percent in January.

Employment growth gained steam in February, factory activity touched a one-and-a-half-year high and first-time filings for jobless benefits have increased just modestly so far in March.

Last month, the income at the disposal of households after inflation and taxes increased 0.7 percent, after dropping 4 percent in January.

With income growth outpacing spending, the saving rate — the percentage of disposable income that households save — rose to 2.6 percent, from 2.2 percent in January.

The higher gasoline prices pushed up inflation, with a price index for consumer spending rising 0.4 percent after being flat for two straight months. February’s increase in the PCE index was the largest since August.

But a core reading that strips out food and energy costs rose only 0.1 percent after increasing 0.2 percent in January, showing no sign of underlying inflation pressures. Core prices were up 1.3 percent, well below the Federal Reserve’s 2 percent target.

The benign inflation picture should give the Fed room to continue with its monetary stimulus as it seeks to bolster job growth.

Article source: http://www.nytimes.com/2013/03/30/business/economy/reports-show-income-is-up-and-so-is-spending.html?partner=rss&emc=rss

Stocks Open Lower on Wall Street

Stocks lost ground Monday on Wall Street after a disappointing report on factory orders.

The early downturn came after the Dow Jones industrial average rose above 14,000 points last week and the benchmark Standard Poor’s 500-stock index moved within 60 points of its all-time intraday high of 1,576.09.

In afternoon trading on Monday, the S.P. 500 fell 1 percent, the Dow was off 0.95 percent and the Nasdaq composite was down 1.2 percent.

“We are coming off an economic data hangover from Friday and the market was on a bullish spree,” said Andre Bakhos, director of market analytics at Lek Securities in New York. “This is an opportunity for investors to take advantage of the bull run.”

The Dow’s march above 14,000 was the highest since October 2007. The S.P. 500 is up more than 6 percent for the year, with nearly half of the gains coming in the session after Congress successfully sidestepped the so-called “fiscal cliff” of tax increases and spending cuts that threatened to derail the economic recovery.

“With an early year run of better than 6 percent, investors are already behind in performance and pullbacks should be shallow and well contained, giving the underweighted investors the opportunity to move into equities,” Mr. Bakhos said.

The Commerce Department reported Monday morning that overall factory orders rose 1.8 percent in December, compared with a median forecast of 2.2 percent by analysts polled by Reuters. But the data included a revised estimate for capital goods orders outside of the defense and aircraft industries, showing they edged 0.3 percent lower. The decline was a possible sign that companies were losing confidence in the economy’s strength because of fears over tighter fiscal policy.

Economic data has pointed to a modest United States recovery, but the data has not been strong enough to upset investor expectations that the Federal Reserve will continue its stimulus policy that has buoyed stocks.

Earnings are due from a number of companies Monday, including Yum! Brands, the owner of fast-food chains.

Chevron shares dipped 1.1 percent to $115.23 after UBS cut its rating to neutral, while Wal-Mart shed 1.7 percent to $69.26 after JP Morgan lowered its rating on the retailer.

Oracle shares lost 3 percent to $35.09 after the company agreed to buy the network gear maker Acme Packet for about $1.9 billion. Acme Packet shares surged 22.2 percent to $29.24.

According to Thomson Reuters data, of the 239 companies in the S.P. 500 that have reported earnings through Friday, 68 percent have reported earnings above analyst expectations, compared with the 62 percent average since 1994 and the 65 percent average over the past four quarters.

S.P. 500 fourth-quarter earnings are expected to rise 3.8 percent, according to the data. That estimate is above the 1.9 percent forecast at the start of earnings season, but well below the 9.9 percent fourth-quarter earnings forecast on Oct. 1.

European shares closed sharply lower as a near-term risk of a technical sell-off and political uncertainty in the euro zone prompted a bout of profit-taking. The FTSE 100 in London closed was off 1.58 percent, the DAX in Frankfurt was down 2.49 percent, and the CAC 40 in Paris declined 3 percent.

Asian shares climbed to 18-month highs after United States data showed some promise of a credible recovery, while momentum also gained on firmer manufacturing data from Europe and China.

Japan Airlines said it would talk to Boeing about compensation for the grounding of the 787 Dreamliner, adding that the idling of its jets would cost it nearly $8 million from its earnings through the end of March.

Article source: http://www.nytimes.com/2013/02/05/business/daily-stock-market-activity.html?partner=rss&emc=rss

Amid Pressure, House Passes Fiscal Deal

The measure, brought to the House floor less than 24 hours after its passage in the Senate, was approved 257 to 167, with 85 Republicans joining 172 Democrats in voting to allow income taxes to rise for the first time in two decades, in this case for the highest-earning Americans. Voting no were 151 Republicans and 16 Democrats.

The bill was expected to be signed quickly by Mr. Obama, who won re-election on a promise to increase taxes on the wealthy.

Mr. Obama strode into the White House briefing room shortly after the vote, less to hail the end of the fiscal crisis than to lay out a marker for the next one. “The one thing that I think, hopefully, the new year will focus on,” he said, “is seeing if we can put a package like this together with a little bit less drama, a little less brinkmanship, and not scare the heck out of folks quite as much.”

In approving the measure after days of legislative intrigue, Congress concluded its final and most pitched fight over fiscal policy, the culmination of two years of battles over taxes, the federal debt, spending and what to do to slow the growth in popular social programs like Medicare.

The decision by Republican leaders to allow the vote came despite widespread scorn among House Republicans for the bill, passed overwhelmingly by the Senate in the early hours of New Year’s Day. They were unhappy that it did not include significant spending cuts in health and other social programs, which they say are essential to any long-term solution to the nation’s debt.

Democrats, while hardly placated by the compromise, celebrated Mr. Obama’s nominal victory in his final showdown with House Republicans in the 112th Congress, who began their term emboldened by scores of new, conservative members whose reach to the right ultimately tipped them over.

“The American people are the real winners tonight,” Representative Bill Pascrell Jr., Democrat of New Jersey, said on the House floor, “not anyone who navigates these halls.”

Not a single leader among House Republicans came to the floor to speak in favor of the bill, though Speaker John A. Boehner, who rarely takes part in roll calls, voted in favor. Representative Eric Cantor of Virginia, the majority leader, and Representative Kevin McCarthy of California, the No. 3 Republican, voted no. Representative Paul D. Ryan, the budget chairman who was the Republican vice-presidential candidate, supported the bill.

Despite the party divisions, many Republicans in their remarks characterized the measure, which allows taxes to go up on household income over $400,000 for individuals and $450,000 for couples but makes permanent tax cuts for income below that level, as a victory of sorts, even as so many of them declined to vote for it.

“After more than a decade of criticizing these tax cuts,” said Representative Dave Camp of Michigan, “Democrats are finally joining Republicans in making them permanent. Republicans and the American people are getting something really important, permanent tax relief.”

The dynamic with the House was a near replay of a fight at the end of 2011 over a payroll tax break extension. In that showdown, Senate Democrats and Republicans passed legislation, and while House Republicans fulminated, they were eventually forced to swallow it.

On Tuesday, as they got a detailed look at the Senate’s fiscal legislation, House Republicans ranging from Midwest pragmatists to Tea Party-blessed conservatives voiced serious reservations about the measure, emerging from a lunchtime New Year’s Day meeting with their leaders, eyes flashing and faces grim, insisting they would not accept a bill without substantial savings from cuts.

The unrest reached to the highest levels as Mr. Cantor told members in a closed-door meeting in the basement of the Capitol that he could not support the legislation in its current form.

Mr. Boehner, who faces a re-election vote on his post on Thursday when the 113th Congress convenes, had grave concerns as well, but he had pledged to allow the House to consider any legislation that cleared the Senate. And he was not eager to have such a major piece of legislation pass with mainly opposition votes, and the outcome could be seen as undermining his authority.

Robert Pear and Peter Baker contributed reporting.

Article source: http://www.nytimes.com/2013/01/02/us/politics/house-takes-on-fiscal-cliff.html?partner=rss&emc=rss

Fiscal Deal Heads for Vote in House as Pressure Rises

The measure, brought to the House floor less than 24 hours after its passage in the Senate, was approved 257 to 167, with 85 Republicans joining 172 Democrats in voting to allow income taxes to rise for the first time in two decades, in this case for the highest-earning Americans. Voting no were 151 Republicans and 16 Democrats.

The bill was expected to be signed quickly by Mr. Obama, who won re-election on a promise to increase taxes on the wealthy.

Mr. Obama strode into the White House briefing room shortly after the vote, less to hail the end of the fiscal crisis than to lay out a marker for the next one. “The one thing that I think, hopefully, the new year will focus on,” he said, “is seeing if we can put a package like this together with a little bit less drama, a little less brinkmanship, and not scare the heck out of folks quite as much.”

In approving the measure after days of legislative intrigue, Congress concluded its final and most pitched fight over fiscal policy, the culmination of two years of battles over taxes, the federal debt, spending and what to do to slow the growth in popular social programs like Medicare.

The decision by Republican leaders to allow the vote came despite widespread scorn among House Republicans for the bill, passed overwhelmingly by the Senate in the early hours of New Year’s Day. They were unhappy that it did not include significant spending cuts in health and other social programs, which they say are essential to any long-term solution to the nation’s debt.

Democrats, while hardly placated by the compromise, celebrated Mr. Obama’s nominal victory in his final showdown with House Republicans in the 112th Congress, who began their term emboldened by scores of new, conservative members whose reach to the right ultimately tipped them over.

“The American people are the real winners tonight,” Representative Bill Pascrell Jr., Democrat of New Jersey, said on the House floor, “not anyone who navigates these halls.”

Not a single leader among House Republicans came to the floor to speak in favor of the bill, though Speaker John A. Boehner, who rarely takes part in roll calls, voted in favor. Representative Eric Cantor of Virginia, the majority leader, and Representative Kevin McCarthy of California, the No. 3 Republican, voted no. Representative Paul D. Ryan, the budget chairman who was the Republican vice-presidential candidate, supported the bill.

Despite the party divisions, many Republicans in their remarks characterized the measure, which allows taxes to go up on household income over $400,000 for individuals and $450,000 for couples but makes permanent tax cuts for income below that level, as a victory of sorts, even as so many of them declined to vote for it.

“After more than a decade of criticizing these tax cuts,” said Representative Dave Camp of Michigan, “Democrats are finally joining Republicans in making them permanent. Republicans and the American people are getting something really important, permanent tax relief.”

The dynamic with the House was a near replay of a fight at the end of 2011 over a payroll tax break extension. In that showdown, Senate Democrats and Republicans passed legislation, and while House Republicans fulminated, they were eventually forced to swallow it.

On Tuesday, as they got a detailed look at the Senate’s fiscal legislation, House Republicans ranging from Midwest pragmatists to Tea Party-blessed conservatives voiced serious reservations about the measure, emerging from a lunchtime New Year’s Day meeting with their leaders, eyes flashing and faces grim, insisting they would not accept a bill without substantial savings from cuts.

The unrest reached to the highest levels as Mr. Cantor told members in a closed-door meeting in the basement of the Capitol that he could not support the legislation in its current form.

Mr. Boehner, who faces a re-election vote on his post on Thursday when the 113th Congress convenes, had grave concerns as well, but he had pledged to allow the House to consider any legislation that cleared the Senate. And he was not eager to have such a major piece of legislation pass with mainly opposition votes, and the outcome could be seen as undermining his authority.

Robert Pear and Peter Baker contributed reporting.

Article source: http://www.nytimes.com/2013/01/02/us/politics/house-takes-on-fiscal-cliff.html?partner=rss&emc=rss

Economic Scene: Say Goodbye to the Government, Under Either Fiscal Plan

As President Obama and Speaker John Boehner negotiate to resolve the looming fiscal crisis, Americans might be forgiven for believing that the nation’s problems would be solved if they could only agree on whether to raise $1.2 trillion or $1 trillion in new taxes over the next 10 years, or whether they should cut $850 billion rather than $1.2 trillion more in government spending.

This is not, unfortunately, the case. The frenzied partisan horse-trading has glossed over what is arguably the central issue of any debate over long-term fiscal policy: the kind of role we expect the government to play in the nation’s future. Not only have our political leaders failed to lay out a vision of what they hope the budget will achieve, they are pulling the wool over Americans’ eyes about the kind of budget we are about to get.

The truth is that both the president and House Republicans have agreed to shrink a critical part of the government to its smallest in at least half a century. This is regardless of which trillion-dollar proposal gains the upper hand.

Consider the president’s budget, which by law must include projections of taxing and spending over the next decade. Loath to raise taxes on the middle class yet unwilling to cut deeply into the budgets for Social Security or Medicare, the president and his advisers proposed cutting the discretionary part of the budget devoted to everything except defense and other security agencies to 1.7 percent of economic output by 2022, down from 3.1 percent last year.

This is not irrelevant spending. It accounts for every government expenditure except entitlements, security and interest. It pays subsidies for higher education and housing assistance for the poor. It finances the National Institutes of Health and the Food and Drug Administration. It pays for the Federal Emergency Management Agency and training programs for unemployed workers. Without such spending, the government becomes little more than a heavily armed pension plan with a health insurer on the side.

House Republicans are equally if not more frugal. The House budget resolution, their last detailed proposal about taxes and spending, refers to discretionary spending except national defense, a broader category than that considered in the president’s budget. They too cut it to the bone: to about 2.1 percent of economic output in 2022, from 4.3 percent last year.

To put it in perspective, this would cut the government’s civilian discretionary budget to the smallest it has been as a share of the economy at least since the Eisenhower administration — when a quarter of the population lived under the poverty line, thousands of children still contracted polio each year and fewer than one in 12 Americans older than 25 had a college degree. According to estimates by the Congressional Budget Office, even going over the so-called fiscal cliff would not cut it as deeply.

“This is no way to run a $3.7 trillion enterprise,” said a Columbia University economist, Jeffrey Sachs, referring to the size of the federal government. “It is President Obama’s responsibility to put forward a plan and give us a comprehensive view of what is the strategy.”

The numbers for civilian discretionary spending shrink so much under both the president’s and the House Republicans’ budget proposals that even those who wrote them seem to have a hard time believing they will come true.

Rather than specify how all the required cuts would affect spending on specific programs, like housing assistance, Pell grants or the National Science Foundation, the budget writers put hundreds of billions of unspecified savings under a hazy budget line called “allowances” — which essentially means cuts to be determined later, in the course of the decade. They are what Richard Kogan, a tax expert at the Center on Budget and Policy Priorities, calls “the magic asterisk.”

President Obama’s budget has almost $200 billion worth of allowances. The House Republican proposal included almost $1 trillion. “In my personal opinion, the defense and nondefense spending caps won’t hold until 2021,” Mr. Kogan said. “At some point the deficit will look small enough and the pressure to provide services and benefits will appear large enough that Congress will find ways around them.”

Mr. Sachs’s critique comes from the president’s left, where there is widespread belief that the nation needs more tax revenue to avoid sacrificing important government programs. But economists to the president’s right share the concern over an opaque budgeting process that fails to address the central issue of our time.

“Either we reform entitlements or we accept large tax increases or we crowd out everything else the government does,” noted R. Glen Hubbard, the dean of Columbia Business School, who advised the Republican nominee Mitt Romney during the last presidential campaign. “People need to have that discussion.”

We’ve had this debate several times before. President Franklin Roosevelt’s New Deal was based on the proposition that government should play a much bigger role to guarantee Americans’ economic security. In the 1960s, President Lyndon Johnson asserted the government’s responsibility to alleviate the plight of the poor and disenfranchised. Three decades ago, President Ronald Reagan changed course, ushering in an era of government retrenchment that persisted pretty much unabated until we were walloped by the Great Recession.

Today, our public finances are caught between these two appetites: our preference for lower taxes and our unwillingness to accept cuts to entitlements set up in our bygone Big Government era. The average federal income tax rate is at its lowest in more than 30 years. Still, nearly half of all Americans say their income taxes are too high. And most Americans do not want government to cut spending on Medicare or Social Security.

Unwilling to confront voters with the tension between these choices, it is perhaps natural that our leaders would take the ax to discretionary spending outside of defense, the easiest part of the budget to cut. It might also explain why they are so loath to tell us what they are doing. But this reticence does not make for a fruitful debate about the role of government in our future.

Mr. Sachs recalls confronting Gene Sperling, who heads President Obama’s National Economic Council, about how civilian discretionary spending shrinks in the president’s budget. Mr. Sperling’s reply suggests the president knows the cost-cutting is getting out of hand: “Jeff, we have a problem with that number, too.”

E-mail: eporter@nytimes.com; Twitter: @portereduardo

Article source: http://www.nytimes.com/2012/12/19/business/say-goodbye-to-the-government-under-either-fiscal-plan.html?partner=rss&emc=rss

House Republican Leaders Agree to Extend Tax Cut Temporarily

Under a deal reached between House and Senate leaders, the House will now approve as early as Friday the two-month extension of a payroll tax holiday and unemployment benefits approved by the Senate last Saturday, and the Senate will appoint members of a House-Senate conference committee to negotiate legislation to extend both benefits through 2012.

House Republicans — who rejected an almost identical deal on Tuesday — collapsed under the political rubble that has accumulated over the week, much of it from their own party, worried that the blockade would do serious damage to their appeal to voters.

The House speaker, John A. Boehner, determined to put the issue behind his party, announced the decision over the phone to members on Thursday, and did not permit the usual back and forth that is common on such calls, enraging many of them.

After his conversation with lawmakers, the speaker conceded to reporters that it might not have been “politically the smartest thing in the world” for House Republicans to put themselves between a tax cut and the 160 million American workers who would benefit from it, and to allow President Obama and Congressional Democrats to seize the momentum on the issue.

The agreement ended a partisan fight that threatened to keep Congress and Mr. Obama in town through Christmas and was just the latest of the bitter struggles over fiscal policy involving House conservatives, the president and the Democratic-controlled Senate.

Under the deal, the employee’s share of the Social Security payroll tax will stay at the current level, 4.2 percent of wages, through Feb. 29. In the absence of Congressional action, it would revert to the usual 6.2 percent next month. The government will also continue paying unemployment insurance benefits under current policy through February. Without Congressional action, many of the long-term unemployed would begin losing benefits next month.

In addition, under the agreement, Medicare will continue paying doctors at current rates for two months, averting a 27 percent cut that would otherwise occur on Jan. 1.

The new deal makes minor adjustments to make it easier for small businesses to cope with the tax changes and prevents manipulation of an employee’s pay should the tax cut extension fail to go beyond two months.

The House, which is in pro forma session, could seal the deal Friday unless a member raises an objection on the floor; the Senate would then do the same. If an objection occurs, Mr. Boehner will summon the full House back next week for a formal vote, he said.

Mr. Obama, who has reaped political benefits from the standoff, welcomed the outcome.

“This is good news, just in time for the holidays,” he said in a statement. “This is the right thing to do to strengthen our families, grow our economy, and create new jobs. This is real money that will make a real difference in people’s lives. ”

In the end, the agreement seemed a clear victory for Mr. Obama and the Democrats — at least for now. They managed to change the narrative from one about Mr. Obama making a concession — he agreed to a provision in the bill to speed the approval process for an oil pipeline — to one about stonewalling House Republicans, who have spent much of the year holding the upper hand of divided government.

Democrats have been quick to exploit the issue. The Democratic Congressional Campaign Committee this week unleashed automated phone calls, some of which were recorded by the Democratic strategist James Carville, in the districts of 20 targeted House Republicans.

The onslaught will continue. “This is a defining moment,” said the head of the committee, Representative Steve Israel, Democrat of New York. “This by itself doesn’t necessarily alter the political landscape, but the chronic chaos and repeated extremism will help us win back the House.”

The push to find a quick resolution was touched off Thursday by Senator Mitch McConnell of Kentucky, the Republican leader, who had negotiated the two-month extension. After a few days of silence, he called on the House to accept a temporary continuation of the tax cut, and to extend unemployment pay, as long as Senate Democrats committed to quickly opening negotiations over a yearlong agreement.

Robert Pear contributed reporting.

This article has been revised to reflect the following correction:

Correction: December 22, 2011

Because of an editing error, an earlier version of this article misstated the amount of the average tax break for a family making $50,000 a year. The break amounts to $40 each paycheck; not $40 a week.

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