December 5, 2023

Food and Gas Drove Wholesale Prices Up in May

In addition, the Labor Department reported that a rise in food and gas costs drove a measure of wholesale prices up sharply in May. But outside those volatile categories, inflation was mild.

The department also said on Friday that the producer price index rose 0.5 percent in May from April. Gas prices rose 1.5 percent last month, and food costs increased 0.6 percent.

Confidence in the economy has fallen in June to a lower level than economists estimated, according to the Thomson Reuters/University of Michigan survey.

Scott King, senior fiduciary investment adviser at Unified Trust in Lexington, Ky., said that investors were disappointed on Friday by the decline in consumer confidence. He described the economy as “plodding along.”

“Wage growth continues to be pretty meager, and unemployment continues to be lackluster,” Mr. King said.

The Federal Reserve said on Friday that factory production rose just 0.1 percent in May from April, a sign that manufacturing was providing little support for the economy. Output fell 0.4 percent in April and 0.3 percent in March.

Factories produced more autos, computers and wood products last month, offsetting declines in the production of furniture and primary metals.

Manufacturing output has risen 1.7 percent in the last 12 months.

“Manufacturers are still struggling to cope with the ongoing weakness of global demand,” said Paul Dales, senior U.S. economist at Capital Economics.

In wholesale prices, the increase last month came after a 0.7 percent decline in April and a 0.6 percent drop in March, both of which were driven by steep declines in gas prices.

Core prices, which exclude food and energy, rose 0.1 percent in May. That matches the April increase. The index measures price changes before they reach the consumer.

“There really is not much inflationary pressure in the economy,” Mr. Dales said in a note to clients.

Aside from sharp swings in gas prices, consumer and wholesale inflation has increased very slowly in the last year. Both the overall and core indexes have risen just 1.7 percent in the 12 months ending in May. That is less than the Federal Reserve’s 2 percent inflation target, allowing the Fed more latitude to pursue its aggressive policies to spur greater economic growth.

The combination of modest economic growth and high unemployment has kept wages from rising quickly, making it harder for retailers and other businesses to raise prices.

Most of the May increase in food costs stemmed from a 41.6 percent rise in the cost of eggs, the biggest on record. The increase reflected soaring demand in the United States and overseas. The Memorial Day and Mother’s Day holidays, popular occasions for brunch, spurred more demand in the United States, a department spokesman said. And Mexico imported more eggs from the United States in response to a bird flu epidemic.

Nearly two-thirds of the 0.1 percent increase in core prices was caused by a 0.4 percent rise in the wholesale cost of pickup trucks. The housing recovery has created more business for landscapers and contractors, who have bought more trucks.

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Political Economy: The Quest for a More Perfect Union

When Mario Draghi was appointed president of the European Central Bank, the German tabloid Bild gave him a Prussian helmet because it admired his Teutonic anti-inflation credentials. The Sun, Bild’s British equivalent, should give him keys to the City of London because of his pro-market credentials.

Mr. Draghi likes London. The Italian still has an apartment in the city, kept from his time as a Goldman Sachs banker. He is a man with a natural affinity for the markets.

Last week Mr. Draghi was in London, the scene of his July 2012 promise to “do whatever it takes to preserve the euro.” His message this time was that Europe needs a more European Britain as much as Britain needs a more British Europe.

He was careful not to wade directly into the British political swamp and say, for example, that Britain would be crazy to quit the European Union. He confined himself to listing the ways in which Britain’s economy, and the City in particular, are entwined with the euro zone. But it seems clear that he would prefer Britain to get stuck into Europe than stay on the sidelines — where it has been since Britain decided not to join the euro — let alone quit entirely.

Mr. Draghi didn’t say what he meant by a more British Europe. But it is interesting to speculate what the euro zone would be like if Britain had decided to join the single currency. For a start, the zone’s monetary policy would probably have been less German-dominated — and, hence, less obsessed with fighting inflation to the exclusion of other economic objectives.

The E.C.B. has, of course, still managed to innovate — in particular, with a bond-buying plan that has taken some of the sting out of the crisis. But it always has to watch its back, given criticism from Germany’s central bank and challenges in that country’s constitutional court.

A more British Europe might also now find it easier to adopt a sensible “macroprudential” policy for managing the flow of credit around the financial system. One of the zone’s little-noticed potential design flaws is a Germanic insistence on Chinese Walls between bank supervision and the conduct of monetary policy, even though both will come under the E.C.B.’s aegis.

While such separation makes sense insofar as the supervision of individual banks is concerned, it could be problematic for macroprudential supervision. Take the current situation. With inflation low, the E.C.B. should be pushing interest rates into negative territory or buying government bonds. The snag is that, while such a monetary policy would be right for the euro zone on average, it would be too loose for Germany.

The sensible approach would be to counterbalance such one-size-fits-all monetary policy with tight credit policy focused on Germany, implemented via extra-high bank capital requirements there. Maybe the E.C.B. will eventually get around to such a rational policy mix. But it would be easier if it could operate like the Bank of England, which doesn’t have Chinese Walls.

The zone’s banking system would also, arguably, be in a better shape if it was more British. This is not to deny Britain’s massive banking crisis. The point, rather, is that Britain has done a fairly good job of cleaning up the mess, while the zone has tended to sweep problems under the carpet — which has debilitated parts of the European economy.

The E.C.B. does have a chance to remedy this error. It has already insisted on a rigorous review of bank loan books and a stress test of their solvency before it takes responsibility for supervising them next year. It now needs to get governments to agree to wind down or recapitalize any banks that fail the test.

Another area where a more British Europe might have been beneficial would have been in shooting down the planned Financial Transactions Tax — which will gum up the markets, in the process disrupting the E.C.B.’s monetary policy. Maybe the tax will prove stillborn, anyway, given the lukewarm support from Germany. But this is not guaranteed.

The same goes for the management of the Cyprus crisis, where the somewhat anti-market European Commission insisted on imposing capital controls against the E.C.B.’s advice. Again, it may not be too late to mitigate the damage. The controls could, and should, be lifted when the resolution of the country’s two big banks is finished. But it would have been better not to have imposed them in the first place.

To some extent, such speculations are academic. Britain hasn’t joined the euro and won’t for a long time, if ever. But there are still two main ways in which a more engaged Britain could advance not only its economic interests in Europe, but Europe’s too.

First, the push by the British prime minister, David Cameron, for more competitive markets — principally by extending the single market to services and by signing free-trade agreements with the United States and Japan — could play a role in solving the euro crisis.

Second, Britain could campaign for an enhanced role for London’s capital markets in Europe. The European Union’s “bankcentricity” — under which finance is mostly routed through a semibroken banking system rather than the markets — will be a drag on growth.

Mr. Cameron and Mr. Draghi should make common cause on such an agenda. That’s a practical way to make Britain more European and Europe more British.

Hugo Dixon is editor at large of Reuters News.

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Economic View: Why Home Prices Change (or Don’t)

WHAT prices will today’s home buyers get if they sell a decade from now?

Most people live in their home for many years. They don’t need to view it as an investment at all, but if they do, they surely need a long forecasting horizon.

The problem is that modern economics has a poor understanding of past movements in home prices. And that makes the task of predicting the state of the market in 2023 challenging, at the very least. Still, we can learn something by analyzing the factors that affect home prices in general.

There has been some good news lately: home prices have risen over the last year, and with those gains there has been a renewed sense of optimism. But do these price increases mean that homes are now good investments for the long haul?

Unfortunately, no. We do know one thing from economic research: one-year home price increases, after correcting for inflation, have had almost no statistical relationship to increases 10 years down the road. Thus, the upturn last year is irrelevant to long-run forecasting. Booms are typically followed by busts, usually in far less than 10 years. In a decade, an entire housing boom, if there is one in inflation-corrected terms, is likely to have been reversed and completely washed away.

Inflation has a major impact on long-term home prices. So do the costs of construction. We’ll examine these factors now, and turn to other important influences like speculative pressures and cultural and demographic trends in subsequent columns.

Home prices look remarkably stable when corrected for inflation. Over the 100 years ending in 1990 — before the recent housing boom — real home prices rose only 0.2 percent a year, on average. The smallness of that increase seems best explained by rising productivity in construction, which offset increasing costs of land and labor.

Of course, home prices are likely to be much higher in 2023 when measured in nominal dollars — those that aren’t inflation-adjusted. Inflation is the deliberate policy of the Federal Reserve, with a target rate now of 2 percent a year as measured by the personal consumption expenditure deflator, or about 2.4 percent on the Consumer Price Index. At those rates, nominal prices will be roughly 25 percent higher, over all, in a decade.

All else equal, the current Fed policy would have this effect: a home selling for $200,000 today will sell for around $250,000 in 2023, though the real price — corrected for inflation — would be unchanged. But because people often forget to correct for inflation, they may have the illusion that the market is improving.

In an ideal world, steady and uniform inflation would have no effect on rational decision-making because it affects incomes as well as prices. But in the real world, inflation does affect our psychology. People feel more optimistic when their nominal pay rises or when a neighbor’s house sold for more than they paid for theirs. But in thinking about investments for the long term, we should focus on fundamentals — on real, inflation-corrected values and on the economics behind them.

Here is a harsh truth about homeownership: Over the long haul, it’s hard for homes to compete with the stock market in real appreciation. That’s because companies whose shares are traded on a stock exchange retain a good share of their earnings to plow back into the business. The business should grow and its real stock price should also grow through time — unless the company makes poor decisions, as some certainly do.

By contrast, real home prices should decline with time, except to the extent that households shell out some money and plow back some of their incomes into maintenance and improvements, because homes wear out and go out of style.

Housing is an ambiguous investment to evaluate, because a good part of its real return typically comes in its providing a place to live, not in providing dividends paid in cash. For example, a homeowner may gradually realize that she doesn’t need all of the space in her house, but may not be emotionally prepared to start recapturing some of its economic value. The owner may not want to take in roomers, to use the old phrase, just as a modern renter may not want to live in a room in someone else’s home (though new markets like are aiming to change that mind-set).

Next week, a look at real estate bubbles. Robert J. Shiller is the Sterling Professor of Economics at Yale.

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Economix Blog: Median Household Income Down 7.3% Since Start of Recession



Dollars to doughnuts.

For the first time in over a year, median annual income fell by a statistically significant amount from the previous month, according to a report from Sentier Research.

Median annual household income in February 2013 was $51,404, about 1.1 percent (or $590) lower than the January 2013 level of $51,994. The numbers are all pretax, and are adjusted for both inflation and seasonal changes.

Source: Sentier Research analysis of Labor Department data. Note that vertical axis does not start at zero to better show the change. Source: Sentier Research analysis of Labor Department data. Note that vertical axis does not start at zero to better show the change.

The analysts at Sentier Research (a company that provides demographic and income analysis, run by former Census Bureau officials) note that median income has been depressed recently by inflation. While inflation is still quite low, income growth has been so weak that even very little inflation is enough to wipe out whatever gains households are seeing in their paychecks.

The longer-run trends are even more depressing.

February’s median annual household income was 5.6 percent lower than it was in June 2009, the month the recovery technically began; 7.3 percent lower than in December 2007, when the most recent recession officially started; and 8.4 percent lower than in January 2000, the earliest date that this statistical series became available.

Why are incomes stagnating, even falling? David Leonhardt presented some possible theories last fall.

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Economic View: Budget Sequestration: How to Do It Right

But I believe that it can turn out to be a very good thing — and that most of these cuts should proceed on schedule, though with some restructuring along the way.

One common argument against letting this process run its course is a Keynesian claim — namely, that cuts or slowdowns in government spending can throw an economy into recession by lowering total demand for goods and services. Nonetheless, spending cuts of the right kind can help an economy.

Half of the sequestration would apply to the military budget, an area where most cuts would probably enhance rather than damage future growth. Reducing the defense budget by about $55 billion a year, the sum at stake, would most likely mean fewer engineers and scientists inventing weaponry and more of them producing for consumers.

In the short run, lower military spending would lower gross domestic product, because the workers and resources in those areas wouldn’t be immediately re-employed. Still, that wouldn’t mean lower living standards for ordinary Americans, because most military spending does not provide us with direct private consumption.

To be sure, lower military spending might bring future problems, like an erosion of the nation’s long-term global influence. But then we are back to standard foreign policy questions about how much to spend on the military — and the Keynesian argument is effectively off the table.

On a practical note, the military cuts would have to be defined relative to a baseline, which already specifies spending increases. So the “cuts” in the sequestration would still lead to higher nominal military spending and roughly flat inflation-adjusted spending across the next 10 years. That is hardly unilateral disarmament, given that the United States accounts for about half of global military spending. And in a time when some belt-tightening will undoubtedly be required, that seems a manageable degree of restraint.

The other half of sequestration would apply to domestic discretionary spending, where the Keynesian argument against spending cuts has more force.

But here, too, much of the affected spending should be cut anyhow. Farm support programs would be a major target, and most economists agree that those payments should be abolished or pared back significantly. Regulatory agencies would also lose funds, but instead of across-the-board cuts, we could give these agencies the choice of cutting their least valuable programs — or, for that matter, we could cut farm subsidies even further.

Of course, much discretionary spending goes toward useful projects — building or repairing roads, for example, or research toward medical innovation. Limiting these investments would bring the Keynesian argument into play, and perhaps harm productivity, too. So we should look to substitute some areas for others — and turn to Keynesian macroeconomics for guidance.

THE Keynesian argument suggests that spending cuts do the least harm in economic sectors where demand is high relative to supply. Thus, the obvious candidate for the domestic economy is health care, and the sequestration would cut many Medicare reimbursement rates by 2 percent. We could go ahead with those cuts or even deepen them, because America has had significant health care cost inflation for decades.

We already have huge demand in our health care system, along with a corresponding shortage of doctors. And the coverage extension in the Affordable Care Act will add to the strain. In this setting, cutting Medicare reimbursement rates wouldn’t result in fewer health care services over all. Yes, doctors might be less keen to serve Medicare patients but might be more available for others, including the poor and the young. In the long run, the improved access for those groups would yield much return on investment, and would move the health care system closer to many of the European models.

In any case, these Medicare cuts would be unlikely to bring a macroeconomic debacle, and would ease long-term fiscal pressures. We could address the shortage of doctors by removing some barriers to entry into the profession, and, in possible new legislation for immigration, easing the way for more medical professionals to come to the United States.

Most generally, there is an issue of global investor perceptions. As the credit rating agencies have noted, some investors wonder whether spending cuts of any kind are possible in the nation’s current political environment. And even if the economic recovery is causing budget deficits to shrink, there are plenty of negative signals about our political ability to address longer-term fiscal concerns, which will become more severe as the population ages.

Simply accepting the automatic spending cuts of the sequestration, without modification, could look like more dysfunctional politics, too. Though many of the reductions have merit, others need orderly renegotiation so the resulting cuts aren’t just necessary acts of fiscal restraint, but also net pluses for the economy.

Tyler Cowen is a professor of economics at George Mason University.

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Federal Reserve Transcripts Open Window on 2007 Housing Crisis

Officials decided not to cut interest rates. The Fed did not even mention housing in a statement announcing its decision. The economy was growing, and a transcript of the meeting that the Fed published on Friday shows officials were deeply skeptical that problems rooted in housing foreclosures could cause a broader crisis.

“My own bet is the financial market upset is not going to change fundamentally what’s going on in the real economy,” William Poole, president of the Federal Reserve Bank of St. Louis, told his colleagues at the meeting.

That was on a Tuesday. By Thursday, the European Central Bank was offering emergency loans to continental banks, the Fed was following suit, and an alarmed Mr. Poole had persuaded the board of the St. Louis Fed to support a reduction in the interest rate on such loans. The somnolent Fed was lurching into action.

“The market is not operating in a normal way,” the Fed chairman, Ben S. Bernanke, told colleagues on a hastily convened conference call the next morning. Mr. Bernanke, a former college professor and a student of financial crises, was typically understated as he explained that the Fed was pumping money into the financial system because private investors were fleeing. “It’s a question of market functioning, not a question of bailing anybody out,” he said. “That’s really where we are right now.”

More than five years later, the Fed continues to prop up the financial system, and the transcripts of the 2007 meetings, released after a standard five-year delay, provide fresh insight into the decisions made at the outset of its great intervention.

They show that Mr. Bernanke and his colleagues continued to wrestle with misgivings about the need for action, because at the time there was little evidence of a broader economic downturn. Several officials worried that the economy would instead overheat, causing inflation to rise. By December, as the Fed began to act with consistent force, the economy was already in recession.

Officials lacked clear information, relying on anecdotes like a reported conversation with a Wal-Mart executive who said Mexican immigrants were sending less money home. They were also limited by economic models that could not simulate the problems that seemed to be unfolding.

“This may be a situation in which you will have to resolve your ambivalence quickly,” Timothy F. Geithner, then president of the Federal Reserve Bank of New York, warned in September. “You may not be able to resolve it.”

They questioned, too, the Fed’s ability to stimulate the economy, an issue that is still at the center of the debate about its policies.

“There’s no guarantee whatsoever that this thing will do what we’re trying to do,” Donald Kohn, then the Fed’s vice chairman, said at a meeting later in August. As the Fed debated a strategy to encourage bank lending, he said, “I just think it’s worth giving it a try under the circumstances.”

But eventually, Mr. Bernanke and his colleagues concluded that they could see the future, that they did not like what they saw and that it was time to act.

“At the time of our last meeting, I held out hope that the financial turmoil would gradually ebb and the economy might escape without serious damage,” Janet L. Yellen, then president of the Federal Reserve Bank of San Francisco, said in December. “Subsequent developments have severely shaken that belief. The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real.”

The Fed’s eventual response, which it expanded significantly in 2008 and 2009, is now widely credited with preventing an even more catastrophic financial crisis and a deeper recession. It is not clear that quicker or stronger action in the fall of 2007 would have made a big difference. Critics focus instead on the Fed’s earlier failure to keep banks healthy and to prevent abusive mortgage lending, and on its later role in allowing the collapse of the investment bank Lehman Brothers.

“The outcome would have been different only if the Fed and others had reacted back in 2004, 2005, 2006” to curtail subprime mortgage lending, Mr. Poole, now a senior fellow at the libertarian Cato Institute, said on Friday in an interview on CNBC.

The transcripts show that the Fed entered 2007 still deeply complacent about the housing market. Officials knew that people were losing their homes. They knew that subprime lenders were blinking out of business with each passing week. But they did not understand the implications for the rest of the nation.

“The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained,” Mr. Bernanke said in March.

Officials said at the time that they took particular comfort in the health of the largest banks. Even as the housing market deteriorated, the Fed approved acquisitions by some of the banks with the largest exposure to subprime mortgages, like Citigroup, Bank of America and the Cleveland-based National City.

Annie Lowrey contributed reporting from Washington.

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High and Low Finance: Reading Pessimism in the Bond Market

Three decades ago, that was what some people said bonds really were. The interest the bond paid would not be enough, they said, to offset the declining value of dollars as inflation added up. The “real” — after-inflation — bond yield would be negative.

That was just as the great bull market in bonds began. Bonds were great investments, and the bond bears turned out to have been dead wrong.

Now we have come full circle. The government is selling bonds that are absolutely, positively guaranteed to not pay enough to offset inflation over the coming years. It is even possible that someone who bought a new Treasury security that will be issued on Monday will end up getting fewer dollars back than he or she invested — interest and principal combined — between now and when the bond matures in 2017.

The securities are inflation-protected Treasury notes. If inflation ticks up significantly over the coming years, investors will get back more dollars than originally invested. But not enough to come close to keeping up with inflation. If there is no inflation, they will get back less than they invested.

When those securities were auctioned last week, buyers agreed to accept a real yield of negative 1.496 percent. It takes a lot of pessimism — about the economy and the future of the United States — to think an investment certain to lose money is an investment worth making.

The great bear market in bonds, both corporates and governments, lasted 35 years, from 1946 to 1981. The bull market lasted about 30 years. A new bear market almost certainly has begun.

If that is true, those seeking a little income now by going out the yield curve will come to rue the decision. They will get the promised interest, but as market interest rates rise, the price of those bonds will decline and decline and decline.

On Oct. 26, 1981, which can be dated as the bottom of the great bond bear market, the yield on 30-year Treasury bonds rose to 15.21 percent. On that date, a Treasury bond issued in 1970 and scheduled to mature in 2000 was quoted at less than 56 percent of face value. It had a coupon of 7.875 percent, but that was not deemed enough to compensate investors for the risk.

At market extremes, it is often worth analyzing what has to be true for a given investment to be a good, or bad, value. Back in 1981, you had to assume that inflation would not only remain in double digits for decades, but that it would also continue to rise, for a newly issued Treasury bond to turn out to be a bad investment. Yet many investors assumed it would be. After all, a lot of people on Wall Street in 1981 could not remember a time when bonds were good investments.

A few weeks before rates peaked, Seth Glickenhaus, an experienced bond trader and head of Glickenhaus Company, an investment advisory firm, spoke the conventional wisdom when he said, “Anyone who buys a bond today to hold for more than five years is out of his mind.”

Michael Gavin, the head of United States asset allocation for Barclays, pointed out this month that over the past 30 years an investor who stayed invested in American, or British, 10-year government bonds would have earned more than 5 percent a year over inflation.

“It does not require advanced market math to understand that returns like these are no longer remotely plausible,” he wrote. “But they say that fish don’t know that they live in water — until they are removed from it — and we wonder if some of the many market participants whose entire professional experience has been conditioned by the financial backdrop created by the bond market rally might underestimate some consequences of its termination.”

Even if rates stay where they are for the next five years, and investors collect the interest coupons, he said, “bonds will be transformed from wealth creators into wealth destroyers.”

Or at least they will be unless there is severe deflation. For that is the only situation that will allow today’s new long-term bonds to turn into good investments.

Is that possible? To think it is likely, you pretty much have to assume that economic growth is a thing of the past in both the United States and Europe. It is not an optimistic outlook.

Floyd Norris comments on

finance and the economy at

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Consumer Prices Fall 0.3% on Lower Gas Costs

Gas prices fell 7.4 percent, the biggest drop in nearly four years, offsetting a 0.2 percent rise in food prices.

The seasonally adjusted Consumer Price Index dropped 0.3 percent in November from October, the department said.

In another report on Friday, the Federal Reserve said that factory output increased 1.1 percent in November from October as factories rebounded from Hurricane Sandy. But after factoring out the storm’s impact — output declined 1 percent in the previous month, a drop that was blamed on the hurricane — the broader trend in manufacturing remained weak.

Auto production jumped 4.5 percent last month, the first increase since July. Production of primary metals, wood products, electrical equipment and appliances all showed gains.

Total industrial output at factories, mines and utilities also rose 1.1 percent last month, after a 0.7 percent decline in October.

In the consumer price report, priced ticked up 0.1 percent in November, excluding the volatile food and gas categories. Core prices have risen 1.9 percent in the last year, below the Federal Reserve’s annual target of 2 percent. Higher rents, airline fares and new cars pushed up core prices last month. The cost of clothing and used cars fell.

“In simplest terms, inflation is not a problem,” Jim Baird, chief investment strategist at Plante Moran Financial Advisors, said. Lower inflation “is a real positive that should provide modest relief for households dealing with limited income growth.”

High unemployment and slow wage growth have made businesses reluctant to raise prices, for fear of driving away customers. That has helped keep inflation tame.

Gas prices have fallen sharply in the last two months after spiking in the late summer. A gallon of gas cost an average of $3.29 nationwide Friday. That’s 15 cents less than a month ago and 50 cents less than in mid-October.

The increase in food prices was smaller than many economists expected. This summer’s drought in the Midwest, which scorched corn and soybean crops, has pushed up food prices, but not sharply. Food costs have risen 1.8 percent in the past 12 months.

The cost of milk, cheese and other dairy products, however, have risen 0.8 percent in each of the last two months. That could reflect the higher cost of animal feed, which usually includes corn and soybeans. Cereals and baked goods rose 0.3 percent last month.

But prices for the broad category of meat, chicken, fish and eggs fell in November after a big gain the previous month.

Shoppers may face further increases soon. Wholesale food costs jumped 1.3 percent last month, according to a separate report Thursday, the most in nearly two years.

Beef prices jumped the most in four and a half years, and vegetable costs rose sharply. Grocery stores may pass on some of those costs in the coming mons.

With inflation in check, the Fed said on Wednesday that it now planned to keep the short-term interest rate at nearly zero until the jobless rate fell to at least 6.5 percent, as long as inflation was not expected to top 2.5 percent.

It was the clearest sign yet that the Fed will keep rates low even after unemployment falls further and the economy picks up.

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Big Deal: In Miami, Using the South American Playbook

OUTSIDE the United States, many real estate developers have less of an appetite for risk than their counterparts here.

In South America, for instance, developers typically ask buyers to pony up a big chunk of the total price of an apartment in a new development long before it’s finished.

So South Americans pay huge installments — often 50 percent or more of the cost of the unit by the time the building is completed. It’s a system that most Americans, accustomed to financing at least 80 percent of a property with a bank loan, would consider unworkable.

I remember being shocked to learn from the owner of the apartment I rented in São Paulo, Brazil, where I lived as a foreign correspondent, about the schedule of huge payments — totaling 57 percent — he had had to deliver to the developer as the condo building went up. It was all nonrefundable, he told me.

But what if something went wrong, I asked him, like the developer going bankrupt? Or if the economy suddenly exploded into crisis, which is certainly not unheard of in South America?

He just shrugged. That’s simply how things are done down south, where interest rates are much higher, and where historically high inflation made financing riskier and more expensive than in the United States. The practice is especially common in Brazil and Argentina, but also in smaller countries like Uruguay, where Donald Trump has a licensing agreement for a new residential tower in the beach resort of Punta del Este that will require down payments of 40 percent from buyers before construction begins.

That perspective offers a different lens on the risks that developers are taking in Miami’s recent condo boomlet.

The Miami of today is not the Miami of 2004, when property prices were still rising in large part on a wave of speculation, with buyers putting down, at most, 20 percent and then flipping properties before construction was done.

This is post-bubble Miami, where banks are still skittish about backing new condo projects.

So Miami developers have taken a page from the South American playbook — a handy strategy, given how many willing buyers are flocking to Miami from that continent. Developers of several condos downtown and at the beach are requiring initial deposits of 40 percent or more, and more as they get closer to completion. By the time the building is finished, buyers are forking over as much as 80 percent of the total price of their apartments.

“Essentially, the buyers are helping developers build their buildings,” said Ann Nortmann, senior project director for Palau at Sunset Harbor, a 50-unit development planned for South Beach that requires a total deposit of only 40 percent because the developer, SMG Management, expects more American buyers.

Jorge M. Pérez, chairman of the Related Group of Florida and a chief architect of the new strategy, defends it as necessary to get developments off the ground, and to prevent speculators from flocking back to Miami, hoping to flip apartments as they did in the old days.

“Financing died during the recession,” Mr. Pérez said. “We all were awakened by the things that happened. We said, ‘If we don’t have the buyers that will pay for the majority of the price in the building upfront, then we don’t want to take the chance of building these buildings.’ ”

Related has employed the financing strategy in three buildings now under construction in South Florida (Apogee Beach, MyBrickell and Millecento) and in three others where sales, but not construction, have started (Beachwalk, Icon Bay and One Ocean). A 3,200-square-foot penthouse at One Ocean is listed for $8.5 million.

For all six towers, Related is requiring buyers to pay 40 percent by the time construction begins, and even more during construction. By the time they move in, buyers will have paid 50 percent to 80 percent of the total apartment price.

The strategy isn’t exactly keeping buyers away. MyBrickell and Millecento, both in downtown Miami, have all their units under contract, while Apogee Beach has only two apartments out of 49 still available, according to a Related spokeswoman.

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Economix Blog: Record Corporate Profits



Dollars to doughnuts.

United States corporate profits reached a record high in the third quarter of this year, even adjusted for inflation, according to a report from the Bureau of Economic Analysis.

Source: Bureau of Economic Analysis via Haver Analytics. Source: Bureau of Economic Analysis via Haver Analytics.

The increase from the second quarter was entirely a result of stronger business at home. Profits received from American-owned businesses abroad fell slightly in the third quarter, which may not be surprising given the recession in Europe and the slowdown in China.

Additionally, all of the growth in domestic corporate profits was accounted for by the financial sector.

Domestic profits of financial corporations rose $71.3 billion in the third quarter, after falling $39.7 billion in the second. Domestic profits of nonfinancial corporations, on the other hand, decreased $1 billion in the third quarter, after rising $27.8 billion in the second quarter.

Source: Bureau of Economic Analysis, via Haver Analytics. Source: Bureau of Economic Analysis, via Haver Analytics.

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