September 24, 2017

Consumer Spending and Income Rose a Faint 0.1% in July

After rising 0.3 percent in June, income was held back in part by steep government spending cuts that reduced federal workers’ salaries. Overall wages and salaries tumbled $21.8 billion from June, with a third of the decline coming from forced furloughs of federal workers.

Consumers cut their spending on long-lasting manufactured goods, like cars and appliances. Overall spending had risen 0.6 percent in June.

The tepid gains suggested economic growth was off to a weak start for the quarter.

A measure of consumer confidence slipped this month from a six-year high in July, as Americans expressed less optimism about the coming months. Americans said they were less confident that the job market would improve, but more confident that their income would rise.

Consumer spending drives roughly 70 percent of economic activity. So the weak spending report led some economists to sound a more pessimistic note on growth in the current quarter.

“This is a disappointing report on a number of levels,” said James Marple, senior economist at TD Economics. “Prospects for a pickup in economic growth in the third quarter hinge on a broad-based acceleration in spending by households and business to offset the ongoing drag from government. The data for the first month of the quarter are not following this script.”

Several analysts said that economic growth was unlikely to match the 2.5 percent annual rate reported Thursday for the April-June quarter. That was more than twice the growth rate in the first quarter and far above an initial estimate of a 1.7 percent rate for April through June.

The Federal Reserve will consider the latest data at its September meeting, when it decides whether to begin pulling back on its stimulus efforts. The most critical factor the Fed will weigh is the August employment report, due out next Friday.

Another concern is that rising interest rates could dampen consumer spending, particularly on homes and cars. Mortgage rates have already risen more than a full percentage point since May.

The small rise in spending was driven by a 0.9 percent gain in purchases of nondurable goods, like clothing. Purchases of durable goods like cars fell 0.2 percent, while money spent on services like utilities and doctor’s visits was unchanged in July.

A price gauge tied to consumer spending was up 0.1 percent in July compared to June. Prices excluding volatile food and energy are up just 1.4 percent compared to a year ago, significantly below the Federal Reserve’s 2 percent target for inflation.

Article source: http://www.nytimes.com/2013/08/31/business/economy/consumer-spending-and-income-rose-a-faint-0-1-in-july.html?partner=rss&emc=rss

Aid to Greece Weighs on German Campaign

“There’s nothing new,” Steffen Seibert, Ms. Merkel’s spokesman, said a day after Wolfgang Schäuble, the German finance minister, created a political firestorm by suggesting that a third aid package for Greece was inevitable.

The brouhaha coincided with a visit to Athens on Wednesday by Jörg Asmussen, a member of the executive board of the European Central Bank and former top aide to Mr. Schäuble. Speaking after talks with Yannis Stournaras, the Greek finance minister, Mr. Asmussen said a third rescue package for Greece was “not discussed” and would not be until spring at the earliest.

Despite protests by representatives for Mr. Schäuble that he had previously signaled that Greece would need more aid, his comment on Tuesday aggravated the already fraught relationship between Greece and Germany and provided ammunition for opponents of Ms. Merkel desperate for a way to dent her solid lead in the polls.

Peer Steinbrück, chancellor candidate for the opposition Social Democrats, accused Ms. Merkel of concealing the true cost of Greek aid from German voters until after national elections on Sept. 22. Gerhard Schröder, a former chancellor unseated by Ms. Merkel, accused her of “a big lie.”

The episode also provided Greek political fodder. Newspapers in Greece, where Germany is blamed for severe cuts in government spending, reacted with sarcastic headlines, including “Schäuble threatens new aid.”

Mr. Asmussen told reporters on Wednesday that his trip to Athens had been long planned, but the timing helped feed the controversy stirred by Mr. Schäuble’s remarks about the need for another aid package.

Mr. Schäuble, a stalwart of Ms. Merkel’s conservative Christian Democrats, had said on several occasions in recent months that another aid package for Greece was possible and even likely. But observers thought they detected a shift in tone when, while campaigning Tuesday near Hamburg, Mr. Schäuble said that “there will have to be another program for Greece,” according to German news reports.

Greece and the cost of saving it remains a sore point for German voters and a potential weakness for Ms. Merkel. While her party is almost certain to finish first in national parliamentary elections in September, she is unlikely to win an absolute majority and will need to form a governing coalition, perhaps with the Social Democrats. Any loss of votes could weaken her bargaining position.

German government officials stressed that they remain opposed to any further debt relief for Greece and insisted that Mr. Schäuble was not signaling any change in German government policy. “The minister has repeatedly indicated that Greece’s problems cannot be solved overnight,” his office said in a statement Tuesday.

Still, Greece was the central topic at the government’s regular news conference in Berlin on Wednesday after a meeting of Ms. Merkel’s cabinet. Mr. Seibert, her spokesman, said Greece was not discussed at the meeting “because there was no occasion to.”

Martin Kotthaus, Mr. Schäuble’s spokesman, said, “It has always been clearly communicated that, if after 2014 the Greeks have further needs, we’ll see what can be done.”

Mr. Asmussen, the highest-ranking German in the E.C.B. and a formerly close confidant of Mr. Schäuble, said in Athens that further support for Greece was possible if the country lived up to promises it made in return for aid and if it met spending targets.

Greece “must continue the reforms it has started,” Mr. Asmussen said. In talks with Greek leaders, he said, “we focused on making the current program a success.”

Article source: http://www.nytimes.com/2013/08/22/business/global/aid-to-greece-weighs-on-german-campaign.html?partner=rss&emc=rss

U.S. Economy Grew at 1.7% Rate in 2nd Quarter, Faster Than Expected

The gross domestic product grew at an annual rate of 1.7 percent, hardly indicative of an economic boom, let alone enough to bring down elevated levels of unemployment soon. It is also the third quarter in a row in which growth failed to top 2 percent, the average since the recession ended in 2009.

Still, the increase was an acceleration from growth in the first quarter of 2013, which was revised downward to 1.1 percent from an earlier estimate of 1.8 percent by the Bureau of Economic Analysis.

“It was a reasonable performance,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “In the long run, it’s not enough, but I’ll take growth wherever I can get it.”

The economy’s trajectory is being closely watched by the Federal Reserve as it determines whether to ease its huge stimulus efforts. Fed policy makers will conclude a two-day meeting on Wednesday and issue their latest statement on the economy early Wednesday afternoon.

On Wall Street, stocks rose modestly as traders readied for the Fed announcement, watching closely for any change in the language of the statement that might indicate the central bank’s course.

Many economists had anticipated growth of below 1 percent in the second quarter, as automatic spending cuts imposed by Congress and higher taxes that went into effect this year began to bite.

Federal spending did decline by 1.5 percent in the second quarter, but the drop was not as severe as the falloff in government spending in earlier quarters. Exports rose 5.4 percent, reversing a decline in the first quarter.

Most experts predict growth will pick up in the second half of 2013 as the drag from the federal spending cuts and higher taxes begins to fade.

“On balance it was a positive report showing a healthier economy than previously believed,” said Michelle Meyer, senior United States economist at Bank of America Merrill Lynch. “But growth has slowed in the past few quarters, reflecting fiscal tightening in Washington.”

The chairman of the Federal Reserve, Ben S. Bernanke, has hinted the Fed will soon begin winding down part of its extensive bond purchases aimed at stimulating the economy, but the timing is uncertain.

On Wall Street, analysts and traders are speculating that the Fed could start tapering as early as September if the economy enjoys healthier growth and the job situation improves, or it could be delayed to December or beyond on evidence of weakness.

While the Federal Reserve is not expected to announce a change in policy later in the day Wednesday, the economic data in the second quarter paints a more vigorous picture than anticipated and may increase the odds that the Fed will taper sooner rather than later.

Indeed, there were pockets of strength in Wednesday’s data from the Bureau of Economic Analysis. For example, residential fixed investment increased by 13.4 percent, a sign the housing sector continues to recover. Personal consumption rose 1.8 percent, as consumers showed some resiliency, especially given the increase in payroll taxes at the beginning of 2013.

The reason government spending stabilized last quarter, rather than falling sharply, was that military spending flattened out, said Steve Blitz, an economist with ITG.

After falling 21.6 percent in the final quarter of 2012, and another 11.2 percent in the first quarter of 2013, military spending last quarter barely budged, sinking just 0.5 percent. One factor that makes Mr. Blitz more optimistic about growth in 2014 “is the presumption that most of the military wind-down will have been completed.”

Higher inventories, always a volatile component of economic reports, added 0.41 percentage point to overall growth. But analysts cautioned that inventory estimates were often adjusted as more data came in, raising the possibility that second-quarter growth could be revised downward in the future.

More clues about the economy’s performance will come on Friday when the Labor Department reports on monthly job creation and the unemployment rate. Economists estimate the economy created 185,000 jobs in July, according to a Bloomberg survey, a bit below the 195,000 level in June, with the unemployment rate falling to 7.5 percent, from 7.6 percent.

The latest data come as the government performed its first comprehensive revision in how the economy is measured since July 2009.

As a result, the estimated growth in 2012 was actually healthier than originally thought. Last year’s annual rate of growth in economic output was revised upward to 2.8 percent, from 2.2 percent. The government also slightly adjusted the estimate of the severity of the recession from 2007-9, saying that the economy contracted at an annual rate of 2.9 percent, instead of 3.2 percent.

In a separate report on Wednesday, Automatic Data Processing reported that private sector employers added 200,000 jobs in July, a bit stronger than analysts had been expected. While the A.D.P. report doesn’t always align with the broader figures released by the Labor Department, the figure was interpreted as another positive sign.

ADP also increased its original estimate of the number of private sector jobs added in June to 198,000 from 188,000.

One puzzle for economists is why job creation has been healthier than economic growth would indicate. For example, the economy added an average of 183,000 jobs a month last year, a figure more consistent with 2.5 to 3 percent growth. But Maury Harris, chief United States economist at UBS, noted that the 2012 G.D.P. figures were revised upward, helping to explain the higher job creation numbers.

Article source: http://www.nytimes.com/2013/08/01/business/economy/us-economy-grew-by-1-7-in-2nd-quarter-faster-than-expected.html?partner=rss&emc=rss

For Ireland, a Setback on the Road to Recovery

As Ireland prepares to become the first European country to exit its international bailout, politicians across the Continent have promoted it as a model for how austerity can help a country emerge stronger from the crisis.

“A shining example,” Chancellor Angela Merkel of Germany declared recently.

But Ireland’s economy is disappointing its fans — again.

The country slid into its second recession in three years during the first quarter, the government reported on Thursday. Consumers and businesses, still reeling from steep tax increases, government spending cuts and a long stretch of sluggish economic activity, have sharply curbed spending.

“Everything is not hunky-dory in the Irish economy,” said Constantin Gurdgiev, a professor at Trinity College in Dublin. “But there is a group of people who refuse to listen to that, because they see it as convenient to promote Ireland as a success story to support policies promoted by the troika,” he said, referring to the country’s bailout creditors, the International Monetary Fund, the European Central Bank and the European Commission.

Gross domestic product shrank 0.6 percent in the first quarter from a year earlier and was revised to show contraction of 0.2 percent in the fourth quarter of 2012, the government said. Its economy had already shrunk 1 percent in the preceding quarter.

Consumer spending slumped 3 percent in the first quarter from a year earlier, the steepest decline in four years. And exports of goods and services declined 3.2 percent, the deepest contraction since Ireland fell into its crisis in 2009, the government reported.

The backsliding reverses the momentum Ireland seemed to have gained since it joined Greece in 2010 as an emergency bailout recipient. In exchange for its 67.5 billion euro ($88 billion) bailout, Dublin agreed to an austerity program aimed at rapidly improving the country’s tattered balance sheets.

But gross investment in the economy has continued to shrink, with construction activity and the retailing sector.

“Everything domestic is still contracting,” Mr. Gurdgiev noted.

On the other hand, austerity measures in Britain may be having an effect. The Office of National Statistics reported on Thursday that the British economy grew by 0.3 percent in the first quarter, a 1.2 percent annualized rate.

That was a revision up from the previous estimate. Contrary to earlier readings, the British economy did not slip into a double-dip recession the last quarter of 2011 and the first quarter of 2012, the office said.

On the Continent, France’s official accounting agency warned on Thursday that France would need a severe dose of austerity in the form of spending cuts, saying the country could no longer rely on tax increases to fix its finances.

The state’s Court of Auditors noted that public finances had been held in check for several years through higher taxes and spending control. But it said the policy had reached its limits.

If the country’s budget deficit is to reach 3 percent of gross domestic product — the European Union target — by 2015, structural spending cuts “on the order of” 13 billion euros ($17 billion) will be needed in 2014, along with 15 billion euros of cuts in 2015, the report said.

The challenge is to rein in public spending in a country with generous welfare and pension benefits and a bloated public sector. France’s social spending last year was among the highest in the world, at more than 30 percent of gross domestic product, according to Philippe d’Arvisenet, global chief economist at BNP Paribas. “It’s getting more difficult to afford this type of generosity,” he said.

Public spending made up 56.6 percent of gross domestic product last year, the auditors found, up from 55.9 percent in 2011 and just below the record high of 56.8 percent set in 2009. Tax receipts, meanwhile, rose to a record 45 percent of G.D.P. in 2012.

“Everyone agrees this is where the next effort has to come from,” Gilles Moëc, an economist at Deutsche Bank in London, said. Cuts on the scale suggested by the auditors are “doable,” he said, at just over 1 percent of G.D.P.

The government has essentially conceded the point in recent months, he said, but it has not provided any details about how it intends to go about doing it.

France’s problems partly result from the economic downturn. The French economy contracted by 0.2 percent in both the first quarter of this year and the last quarter of 2012. Insee, the national statistics institute, predicted last week that it would shrink by 0.1 percent this year.

The government’s forecasts are still more optimistic than some private forecasts. Standard Poor’s estimated Thursday that the French economy would shrink by 0.3 percent this year, before returning to growth with a 0.6 percent expansion in 2014.

Article source: http://www.nytimes.com/2013/06/28/business/global/for-ireland-a-setback-on-the-road-to-recovery.html?partner=rss&emc=rss

Federal Reserve to Continue Stimulus Efforts

The Fed, which has struck a more balanced tone in recent weeks as strong growth during the winter months has been followed once again by a disappointing spring, emphasized that it was ready to increase or decrease its efforts in a statement released after a two-day meeting of its policy-making committee.

It was the first time that the Fed has explicitly referenced the possibility of doing more in a policy statement, although officials including the Fed’s chairman, Ben S. Bernanke, have made the point repeatedly in their public remarks.

Analysts disagreed about the meaning. Some saw a signal that the Fed’s next move could be an expansion of its stimulus campaign. Others, however, said the Fed was simply underscoring that it did not plan to reduce its asset purchases. It is buying $85 billion a month in Treasury and mortgage-backed securities.

“I don’t think there’s much chance of them stepping it up,” said Jim O’Sullivan, chief United States economist at High Frequency Economics in New York. “But this is certainly their way of saying there’s no bias toward scaling down.”

The Fed has struck a more balanced tone in recent weeks as strong growth during the winter months has been followed once again by a disappointing spring. Is statement on Wednesday said that the economy was expanding at a “moderate pace” and that the labor market had shown “some improvement.”

It added, however, that government spending cuts were “restraining economic growth,” an implicit criticism of the rest of the federal government for impeding a faster recovery.

The statement also noted that the pace of inflation had slackened, a potential sign of economic weakness, but it showed little concern about that trend.

The Fed said that it would continue to add $85 billion a month to its holdings of mortgage-backed and Treasury securities. It gave no indication of how much longer those purchases would continue, beyond its standard formulation that it wanted to see evidence that the labor market outlook had “improved substantially.”

The statement won support from 11 of the committee’s 12 members. Esther George, the president of the Federal Reserve Bank of Kansas City, cast the sole dissenting vote, as she has at each meeting this year, citing concerns that the stimulus campaign could cause “economic and financial imbalances” and inflation.

The pace of economic growth appeared to slow in the weeks before the meeting. Inflation slackened in March to the slowest pace in two years, while employers added the fewest jobs in any month since last summer. And economists say that the pain of federal spending cuts is just starting to be felt.

Inflation was just 1.1 percent in the 12 months that ended in March, according to the most recent data from the Fed’s preferred inflation gauge, the Commerce Department’s index of personal consumption expenditures. That is well below the 2 percent annual pace that the Fed considers healthy.

Moreover, the share of Americans with jobs has not increased since the recession.

The central bank is modestly expanding its stimulus campaign each month as it expands its bond portfolio. But the Fed’s most recent economic projections, published in March, showed that most officials expected persistently low inflation and persistently high unemployment for years to come.

Officials, however, are reluctant to do more. They see modest benefits and uncertain costs in buying more bonds. The volume of the Fed’s first-quarter purchases already roughly equaled the volume of new mortgage bond issuance and about 72 percent of the volume of new issuance of long-term federal debt.

And the Fed already has tied the duration of low interest rates to the unemployment rate, announcing in December that it intended to hold its benchmark short-term interest rate near zero at least as long as the unemployment rate remained above 6.5 percent, provided that inflation remained under control.

Still, the Fed changed the language of its statement to emphasize that it was willing to adjust the pace of its asset purchases. “The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes,” it said.

Analysts described the change as a response to the signs of economic weakness, although they noted the Fed did not change its relatively sunny description of the economic outlook, suggesting that no policy shift was imminent.

Michael Gapen, director of United States economic research at Barclays Capital, described the change as “a fairly obvious nod to some of the recent softness in economic activity, labor markets and inflation.” He said that it reinforced his view that the Fed would maintain its $85 billion-a-month pace through the end of the year.

The Fed also could increase the impact of its current campaign simply by telling investors how long it will run – either in terms of a calendar date or an economic target. But officials say it has been impossible to reach a consensus.

Article source: http://www.nytimes.com/2013/05/02/business/economy/federal-reserve-to-continue-stimulus-efforts.html?partner=rss&emc=rss

Fed Sees Boost From Housing Rebound and Auto Sales

WASHINGTON (AP) — A strengthening housing recovery and robust auto sales contributed to moderate economic growth across the United States in late February and March, according to a Federal Reserve survey released Wednesday.

Growth was moderate or modest in all of the Fed’s 12 banking districts, and it accelerated in two — New York and Dallas — from January and early February.

The survey suggested that the economy performed better in March than some government data on hiring and consumer spending had indicated. That could mean the economic weakness might have been temporary.

The Fed survey, which is based on anecdotal reports, found that hiring was unchanged or improved slightly compared with the previous report. And it noted that consumer spending — which drives most of the economy — grew modestly. But the report also said higher taxes and a spike in gas prices had slowed sales.

By contrast, the Labor Department said earlier this month that job growth slowed sharply in March. And retail sales declined in March by the most in nine months, a separate report said last week.

Dana Saporta, an economist at Credit Suisse, said the survey “is consistent with the larger picture of steady if unspectacular growth.”

“We get caught up in the monthly volatility of the data, and we need to step back,” she said.

Zach Pandl, an economist at Columbia Management, an investment firm, said the survey’s rosier tone is probably one reason that several Fed policymakers have recently expressed optimism despite sluggish economic data.

The Fed survey said the recovery in home construction is gaining momentum and creating more construction jobs. It’s also boosting factory output of housing-related goods, such as lumber.

The report did note some weak spots. Several districts said manufacturers of defense-related goods had cut jobs in response to government spending cuts that started taking effect March 1.

Still, it said that growth overall was moderate, an upgrade from the “modest to moderate” pace in the previous two reports.

The Fed report, called the Beige Book, provides an overview of economic conditions from Feb. 22 through April 5. The information will be discussed along with other economic data during the Fed’s next policy meeting April 30-May 1.

At that meeting, most analysts expect the Fed to maintain its low interest rate policies but take no new steps. The Fed is expected to stick with its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent. And it will likely continue buying $85 billion a month in Treasury and mortgage bonds to try to keep long-term rates low and encourage borrowing, spending and investing.

Debate has heated up among Fed policymakers about when to start curtailing the bond-buying program, which began last fall. At their last meeting March 19-20, a majority of Fed officials said they favored continuing the bond purchases at least through the middle of this year. But many members indicated that they want to start winding down the program before year’s end, as long as hiring and the economy continued to improve.

Since that meeting, some government reports had suggested that the economy weakened in March. Employers added only 88,000 jobs in March, a sharp slowdown from average gains of 220,000 in November through February. And consumers cut back on spending at retail stores and restaurants last month, a sign that higher Social Security taxes might have made more Americans cautious about spending.

Still, reports on housing and autos continue to signal strength. In March, builders broke the 1 million mark on homes started for the first time since June 2008. The increase in the seasonally adjusted annual rate for March was fueled by a surge in apartment construction.

And U.S. auto sales rose to 1.45 million in March, their highest level since August 2007. Car sales fell slightly from last March, but pickup sales jumped 14 percent.

Economists forecast that the economy grew at a 3 percent annual rate in the January-March quarter, a healthy rebound from a scant 0.4 percent increase in the fourth quarter. But most now think growth will slow sharply to about 1.5 percent in the April-June quarter.

Article source: http://www.nytimes.com/aponline/2013/04/17/us/politics/ap-us-beige-book.html?partner=rss&emc=rss

Euro Zone Crisis Has Increased I.M.F.’s Power

One was Chancellor Angela Merkel. The other, who delivered the keynote speech, was Christine Lagarde, the managing director of the International Monetary Fund.

Ms. Lagarde’s presence reflected her close, longtime friendship with Mr. Schäuble. But it also was a confirmation of the enormous stature that Ms. Lagarde and the I.M.F. have acquired in Europe as a result of the euro crisis.

The I.M.F. has more say over crisis management than many euro zone members, and Ms. Lagarde has become a quasi head of state, whose views carry more weight than those of many elected leaders. Without the I.M.F.’s money and advice, the euro zone might have fallen apart by now.

Because she has Mr. Schäuble’s ear and respect, Ms. Lagarde has also played an important role overcoming German reluctance to accept proposals designed to strengthen the euro zone, like a centralized bank supervisor.

Recently, there have been signs that Ms. Lagarde could be nudging Mr. Schäuble and the German leadership to moderate their views on an issue that is central to the crisis: the degree of austerity that should be imposed on countries like Greece and Portugal. For most of the past three years, the I.M.F. and Germany have insisted that aid recipients must cut government spending and raise taxes. But lately Ms. Lagarde has been arguing that too much austerity could be counterproductive.

A shift by the I.M.F. would transform the debate in Europe. But the fact that the organization is so tangled in European affairs is controversial both inside and outside the Continent, and could be a source of discord as the I.M.F. and World Bank hold their spring meetings in Washington. The policy-making bodies of both organizations meet on Saturday, while related conferences and other events began on Monday and continue through Sunday.

Poorer nations that contribute to the I.M.F.’s funding have grumbled about having to prop up rich Europe. More than half of the I.M.F.’s lending goes to the euro zone, from virtually nothing a few years ago. The I.M.F. has contributed about a third of the money used to rescue countries like Portugal, Ireland and Greece, with the rest coming from other euro zone countries.

“Historically, Europe took no I.M.F. lending,” said Guntram Wolff, the deputy director of Bruegel, a research organization in Brussels. “Now lending has increased since the beginning of the crisis dramatically. Is it appropriate? That is a very big question.”

Leaders and citizens of countries like Greece, Portugal and Ireland have complained bitterly about the terms that the I.M.F. has imposed in return for loans. In addition to budget cuts and tax increases, governments have been pressured to roll back rules that protect some workers from dismissal and impose other unpopular changes. Even if the I.M.F. is rethinking its stance on austerity, it will continue to demand strict conditions because that is the only leverage the organization has to get its money back.

Ms. Lagarde, the former finance minister of France, is perceived as less doctrinaire than the Germans, but she was at the table last month when leaders negotiated an ill-fated plan to make ordinary bank depositors help pay for a bailout in Cyprus. Although the I.M.F. had reservations about imposing a levy on insured depositors in Cyprus, Ms. Lagarde went along with the accord. After an outcry, the plan was revised to put the burden on large depositors.

But even those who have doubts about the I.M.F.’s role in Europe see no alternative. The organization will inevitably be a force in Europe for years to come, because of the money that it has lent and because of its traditional role as watchdog over the economic and budget policies of its members.

“If the I.M.F. wasn’t participating at all, the crisis would have been worse,” said Morris Goldstein, a former deputy director of research at the I.M.F. who is now a senior fellow at the Peterson Institute for International Economics, a research organization in Washington.

Besides the money the I.M.F. has provided, which comes from members including the United States and Japan as well as those in Europe, the organization has played the role of outside expert, aloof from national politics. In the absence of a strong federal government in Europe, Ms. Lagarde helps impose order on quarreling national leaders.

Article source: http://www.nytimes.com/2013/04/18/business/global/euro-zone-crisis-has-increased-imfs-power.html?partner=rss&emc=rss

As Budget Cuts Loom, Austerity Kills Off Government Jobs

And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years.

The cuts may be felt more deeply because state and local governments — which expanded rapidly during earlier rounds of federal reductions in the 1970s and the 1990s, offsetting much of the impact — have also been cutting back.

Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.

Total government spending continues to increase, but those broader figures include benefit programs like Social Security. Government purchases and investments expand the nation’s economy, just as private sector transactions do, while benefit programs move money from one group of people to another without directly expanding economic activity.

The Federal Reserve and other economic forecasters say that the latest round of government austerity is not likely to return the economy to recession, thanks to stronger private sector growth. But the spending cutbacks and actions to raise taxes could reduce growth by roughly 1.5 percentage points this year, according to the Congressional Budget Office, leaving the sluggish economy operating well below capacity.

In testimony to lawmakers on Tuesday, the Fed chairman, Ben S. Bernanke, urged Congress and the Obama administration to replace the scheduled budget cuts with a plan to reduce federal deficits more gradually.

“Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health,” Mr. Bernanke said. He warned that the combination of previous spending cuts and the looming mandatory reductions “could create a significant headwind for the economic recovery.”

The shrinking government is a normal response to an extraordinary situation. Government spending generally rises during recessions and falls as the economy recovers. Spending always declines at the end of one war, let alone two. And three years after a recession, the American economy typically is restored to full bloom.

But this time is different. Growth has remained sluggish and millions remain unemployed even as the federal government, riven by partisan differences, has largely turned its attention to deficit reduction.

Mr. Bernanke, like many critics of sequestration, said the government could not ignore the need to reduce its annual deficits and curtail the growth of its debt. But he said short-term cuts would worsen those problems by slowing the economy. Moreover, sequestration mostly spares Medicare and Medicaid, the health care programs that are the primary reason federal spending is projected to increase.

Congress and the administration, he said, should “introduce these cuts more gradually and compensate with larger and more sustained cuts in the future.”

Others, however, say that it makes no sense to postpone inevitable cuts. They note that government cutbacks may cause short-term pain, but also tend to provide long-term benefits by making resources available to the private sector.

“People focus on the upfront cost and they don’t think through the whole timeline,” said Tyler Cowen, an economist at George Mason University and an occasional contributor to the Sunday Business section of The New York Times. “You have to cut spending within the next 10 years anyway. It may be time to take some lumps.”

The current round of austerity does not yet approach the depth or the duration of the earlier round of cutbacks. Between 1969 and 1974, as spending on the Vietnam War declined, the government reduced consumption and investment by 24 percent after adjusting for inflation. Between 1991 and 1999, the government reduced consumption and investment by an inflation-adjusted 14 percent.

Article source: http://www.nytimes.com/2013/02/27/business/as-budget-cuts-loom-austerity-kills-off-government-jobs.html?partner=rss&emc=rss

Growth in Consumer Spending Slows

WASHINGTON — American consumers increased their spending in December at a slower pace, while their income grew by the largest amount in eight years, the Commerce Department said Thursday. Income surged because companies rushed to pay dividends and bonuses before tax increases.

The 0.2 percent rise in consumer spending last month was slightly slower than the 0.4 percent increase in November.

Income jumped 2.6 percent in December from November, the biggest gain since December 2004.

Economists expect consumer spending, which accounts for about 70 percent of economic activity, to slow this year. That’s because consumers are receiving less take-home pay starting this month.

Congress and the White House reached a deal on Jan. 1 to prevent income taxes from rising on all but the wealthiest Americans. But they allowed a temporary reduction in Social Security taxes to expire this year. That means a person earning $50,000 a year will have about $1,000 less to spend in 2013. A household with two high-paid workers will have up to $4,500 less.

The diminished pay could slow consumer spending and economic growth at a precarious moment.

The economy unexpectedly shrank in the October-December period at an annual rate of 0.1 percent, the government said Wednesday. The dip was a reminder of the economy’s vulnerability as automatic cuts in government spending loom.

Some analysts have estimated that the roughly $120 billion in higher Social Security taxes could subtract up to 0.7 percentage point from growth this year.

Separately, the Labor Department reported Thursday that the number of Americans seeking unemployment aid rose sharply last week but remained at a level consistent with moderate hiring.

Weekly applications for unemployment benefits leapt 38,000 to a seasonally adjusted 368,000, the government said. The increase comes after applications plummeted in the previous two weeks to five-year lows.

The volatility reflects the government’s difficulty adjusting the data to account for layoffs after the holiday shopping season. Job cuts typically increase in the second week in January as retailers dismiss temporary employees hired for the winter holidays. Layoffs then fall in the second half of the month.

The department attempts to adjust for such fluctuations but the January figures can still be volatile. The four-week average, a less volatile measure, ticked up to 352,000, just above a four-year low.

On Friday, the government is scheduled to issue its January jobs report. Analysts forecast that it will show employers added 155,000 jobs, the same as in December. The unemployment rate is expected to remain at 7.8 percent for the third straight month.

Article source: http://www.nytimes.com/2013/02/01/business/growth-in-consumer-spending-slows.html?partner=rss&emc=rss

U.S. Growth Halted as Federal Spending Fell in 4th Quarter

Disappointing data released Wednesday underscore how tighter fiscal policy may continue to weigh on growth in the future as government spending, which increased steadily in recent decades and expanded hugely during the recession, plays a diminished role in the United States economy.

Significant federal spending cuts are scheduled to take effect March 1, and most Americans are also now paying higher payroll taxes with the expiration of a temporary cut in early January.

The economy contracted at an annual rate of 0.1 percent in the last three months of 2012, the worst quarter since the economy crawled out of the last recession, hampered by the lower military spending, fewer exports and smaller business stockpiles, preliminary government figures indicated on Wednesday. The Fed, in a separate appraisal, said economic activity “paused in recent months.”

Still, economists said the seemingly bleak gross domestic product report was not a sign that another recession was looming. The preliminary data showed relatively strong spending by consumers and businesses, even as military spending posted its sharpest quarterly drop in 40 years.

Forecasters expect that growth this year will rebound to a still-anemic 1.5 percent, a little lower than the pace it has managed over the last three years.

“This is the tip of the iceberg on fiscal austerity from Washington,” said Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch. “It was exaggerated this quarter by the unusually large drop in defense spending, but that and higher taxes will start hurting” in the coming months.

The drop in American exports stemmed in part from a decline in economic growth in Europe, where governments have also been cutting spending in a bid to balance budgets. The parallel contractions are likely to provide fodder for economists who argue that austerity efforts have gone too far in many developed economies.

The surprisingly weak numbers could also force politicians to limit the cuts that are scheduled to take effect if Congress fails to produce a budget bargain in the coming weeks and strengthen the argument that deficit reduction is a lesser concern than job creation.

“Our economy is facing a major headwind, and that’s Republicans in Congress,” said the White House spokesman Jay Carney.

Republicans said the White House was not advancing concrete plans for creating new jobs and stimulating the economy.

“The bad GDP news makes it even more unbelievable that Obama has been ignoring job growth in his 2nd term agenda,” Reince Priebus, chairman of the Republican National Committee, posted on Twitter.

The Fed said Wednesday that it would continue its efforts to revive growth by holding short-term interest rates near zero and increasing its holdings of Treasury securities and mortgage-backed securities by $85 billion a month. Those policies aim to reduce borrowing costs for businesses and consumers.

“The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline,” the Fed said in a statement.

Unemployment has not declined since the Fed started its latest round of purchases in September. The rate was 7.8 percent in December, the same as three months earlier. The government will report the rate for January on Friday.

Although economists expected output to decline substantially from the 3.1 percent annual growth rate recorded in the third quarter, the negative G.D.P. number still caught Wall Street off-guard. It was the weakest economic report since the second quarter of 2009, although revisions in February and March could alter the figure.

“I’m a little surprised,” said Michael Feroli, chief United States economist at JPMorgan.

Like some other observers, Mr. Feroli said there were hints the economy was performing slightly better than the headline number suggested.

Article source: http://www.nytimes.com/2013/01/31/business/economy/us-economy-unexpectedly-contracted-in-fourth-quarter.html?partner=rss&emc=rss