January 27, 2023

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

European Turmoil Could Slow U.S. Recovery

Although American financial institutions have taken steps to protect themselves from Europe’s long-simmering problems, the likely slowdown in Europe could damage consumer and business confidence in America and strengthen the dollar, making United States exports less competitive.

“Financial contagion can lead to the very rapid global spread of recession,” said Chris Varvares, senior managing director for Macroeconomic Advisers, a forecasting company. “If trouble intensifies and spills over to equities and other U.S. risk assets, we could see a soft patch.”

Economists say Europe’s troubles would need to worsen significantly before putting the United States economy, which has been strengthening lately, at risk of a new recession.

The European Union and United States economies are the two biggest in the world and their financial institutions are deeply intertwined. They have the single largest bilateral trade relationship, together accounting for nearly a third of global trade flows.

On Thursday, the European Commission announced that it foresaw little or no growth in the European Union in the fourth quarter of the year, and a slight 0.1 percent contraction for the euro zone, the 17 countries using the euro currency. It forecast a scant 0.5 percent annual growth in 2012 for the union and warned that the Continent might be slipping into a “deep and prolonged” recession. As recently as this spring, the commission forecast that Europe would grow 1.75 percent for 2012.

Speaking on Thursday at the Asia-Pacific Economic Cooperation summit meeting in Hawaii, the Treasury secretary, Timothy F. Geithner, said: “The crisis in Europe remains the central challenge to global growth. It is crucial that Europe move quickly to put in place a strong plan to restore financial stability.”

He added, “We are all directly affected by the crisis in Europe.”

United States financial institutions have tried to inoculate themselves by drastically cutting risk to the euro zone debt markets, partly in response to urging from policy makers. For instance, prime money-market funds — a common and higher-yielding alternative to bank deposits, and the site of a freeze in the financial markets in October 2008 — have reduced their exposure to euro zone banks by more than half since May, according to a JPMorgan analysis released this week. “Most prime fund managers are allowing existing euro zone exposures to run off,” the analysts wrote.

But these measures may not be enough in the event of a bank failure or bond market panic, which could have broad and unpredictable effects on global markets.

“I don’t think we’d be able to escape the consequences of a blow-up in Europe,” Ben S. Bernanke, the chairman of the Federal Reserve, said Thursday in Texas while answering questions after a speech.

Even with the recent moves, the United States financial system still has billions at risk to European institutions.

In an extensive report to lawmakers in September, the Congressional Research Service estimated that the exposure of banks to Greece, Ireland, Italy, Portugal, and Spain — some of the most heavily indebted euro zone economies — amounted to $641 billion. It added, “a collapse of a major European bank could produce similar problems in U.S. institutions.”

It further estimated American banks’ exposure to German and French banks at in “excess of” $1.2 trillion, equivalent to about 10 percent of total commercial banking assets in the United States. Similarly, the Bank for International Settlements reports that at midyear banks in the United States had $757 billion in derivatives contracts and $650 billion in credit commitments from European banks.

“Europe is very clearly in a Bear Stearns environment,” said Stephen Wood, chief market strategist at Russell Investments, referring to the investment bank that collapsed in early 2008 without setting off broader financial panic.

“The question is: ‘Do they get to a Lehman environment?’ They’re not there yet, but the dark clouds are beginning to gather. Right now, we’re seeing the U.S. dollar and U.S. markets benefiting, relatively, as safe havens,” Mr. Wood said. “But that wild card, that sword of Damocles, is going to be what the capital market implications are if there is a major credit event in Europe.”

Because Europe’s troubles have been developing for more than two years, financial firms have had more time to prepare than they did for the 2008 crisis, when the collapse of Lehman Brothers almost caused credit markets to freeze. This preparation could prevent a repeat of the 2008 global crisis, even if the European troubles deepen.

Still, the woes in the euro zone will probably weigh on the broader American economy, economists say. Consumer confidence has nearly returned to its lows during the worst of the recession and financial crisis, in late 2008 and early 2009.

Article source: http://www.nytimes.com/2011/11/12/business/global/european-turmoil-could-slow-us-recovery.html?partner=rss&emc=rss

Economic Scene: As Economy Sputters, a Timid Fed

Whenever officials at the Federal Reserve confront a big decision, they have to weigh two competing risks. Are they doing too much to speed up economic growth and touching off inflation? Or are they doing too little and allowing unemployment to stay high?

It’s clear which way the Fed has erred recently. It has done too little. It stopped trying to bring down long-term interest rates early last year under the wishful assumption that a recovery had taken hold, only to be forced to reverse course by the end of year.

Given this recent history, you might think Fed officials would now be doing everything possible to ensure a solid recovery. But they’re not. Once again, many of them are worried that the Fed is doing too much. And once again, the odds are rising that it’s doing too little.

Higher oil prices, government layoffs, Japan’s devastation and Europe’s debt woes are all working against the recovery. Already, a prominent research firm founded by a former Fed governor, Macroeconomic Advisers, has downgraded its estimate of economic growth in the current quarter to a paltry 2.3 percent, from 4 percent. The Fed’s own forecasts, notes that former governor, Laurence Meyer, “have been incredibly optimistic.”

Why is this happening? Above all, blame our unbalanced approach to monetary policy.

One group of Fed officials and watchers worries constantly about the prospect of rising inflation, no matter what the economy is doing. Some of them are haunted by the inflation of the 1970s and worry it may return at any time. Others spend much of their time with bank executives or big investors, who generally have more to lose from high inflation than from high unemployment.

There is no equivalent group — at least not one as influential — that obsesses over unemployment. Instead, the other side of the debate tends to be dominated by moderates, like Ben Bernanke, the Fed chairman, and Mr. Meyer, who sometimes worry about inflation and sometimes about unemployment.

The result is a bias that can distort the Fed’s decision-making. Just look at the last 18 months. Again and again, the inflation worriers, who are known as hawks, warned of an overheated economy. In one speech, a regional Fed president even raised the specter of Weimar Germany.

These warnings helped bring an end early last year to the Fed’s attempts to reduce long-term interest rates — even though the Fed’s own economic models said that it should be doing much more. We now know, of course, that the models were right and the hawks were wrong. Recoveries from financial crises are usually slow and uneven. Yet the hawks show no sign of grappling with their failed predictions.

It is true that the situation has become more complicated in the last couple of months. Some of the economic data has been encouraging, and inflation has picked up.

In particular, core inflation, which excludes volatile oil and food prices, has increased somewhat. (Overall inflation obviously matters more for household budgets, but core inflation matters more to the Fed, because it’s a better predictor of future inflation than inflation itself.) Over the last three months, the Fed’s preferred measure of core inflation has risen at annual rate of 1.4 percent, up from less than 1 percent last year.

Still, 1.4 percent remains low — considerably lower than the past decade’s average of 1.9 percent, the 1990s average of 2.2 percent or the 1980s average of 4.6 percent. Unemployment, on the other hand, remains high. By any standard, joblessness is a bigger problem than inflation.

There is also reason to think that inflation will fall in coming months. Rising oil prices alone aren’t enough to create an inflationary spiral. Workers also need to have enough leverage to demand substantial raises — which then forces companies to increase prices and, in turn, gives workers further reason to demand raises. In today’s economy, this chain of events is pretty hard to fathom.

Adam Posen, an American economist who’s now an official at the Bank of England, told The Guardian this week that he was so confident inflation in Britain would decline that he would resign if it did not. His analysis also applies to the United States. “Wages,” Mr. Posen said, “will be the dog that doesn’t bark.”

It’s still too soon to know what the Fed should do next. Its current plan is to let the program known as QE2 — for quantitative easing, round two — expire in June. The program started late last year, once the economy’s troubles were impossible to ignore, as an attempt to reduce long-term interest rates by buying Treasury bonds.

If the economic data improves and inflation does not drop, ending QE2 will be the right call. But if the economy continues to weaken, there will be a strong case for doing more. One option would be to buy both Treasury bonds and mortgage-backed bonds, as the Fed did during QE1, as a way to attack the double dip in the housing market.

The problem is that some Fed officials already seem to have made up their minds, regardless of the data. In their public remarks, officials continue to wring their hands about QE2 rather than prepare people for the possibility of QE3. Some hawks have gone so far as to suggest halting QE2 early.

Meanwhile, the recovery looks uncertain, and the job market remains weak. Even if job growth were to accelerate sharply in coming months, the economy would be years away from so-called full employment. But never mind that, the hawks say — rampant inflation is just around the corner.

E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

Article source: http://feeds.nytimes.com/click.phdo?i=fa50b7aed532e395de2e02130f50647c