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Economic Growth Remain Subpar but Resilient

March 28, 2013 by Leave a Comment

WASHINGTON (AP) — The American economy grew at a faster rate at the end of last year than previously estimated, providing evidence that growth might have accelerated in early 2013 despite higher taxes and cuts in government spending.

The nation’s gross domestic product grew at an annual rate of 0.4 percent in the October-December quarter, the Commerce Department said on Thursday, slightly better than the previous growth estimate of 0.1 percent. The revision reflected stronger business investment and export sales.

Analysts say they think the economy is growing at a rate of around 2.5 percent in the current January-March quarter, which ends this week.

Steady hiring has kept consumers spending this year. A rebound in company stockpiling, further gains in housing and more business spending also likely drove faster growth in the first quarter.

The 0.4 percent growth rate for the gross domestic product, the economy’s total output of goods and services, was the weakest quarterly performance in almost two years and followed a much faster 3.1 percent increase in the third quarter. The fourth quarter was hurt by the sharpest fall in military spending in 40 years.

For all of 2012, the economy grew 2.2 percent, after a 1.8 percent increase in 2011 and a 2.4 percent gain in 2010. Since the recession ended in mid-2009, the economy has expanded at subpar rates as a string of problems including higher gas prices and Europe’s debt crisis has acted as a drag on the United States economy.

Growth appears to be strengthening this year even after taxes increased on Jan. 1 and automatic government spending cuts totaling $85 billion started to take effect on March 1. The Congressional Budget Office has estimated that the combination of tax increases and spending cuts could trim economic growth this year by about 1.5 percentage points. The office is predicting just 1.5 percent growth for 2013.

But the economy is showing signs of holding its own against the fiscal drag.

Employers have added an average of 200,000 jobs a month since November. That helped reduce the unemployment rate in February to 7.7 percent, a four-year low.

The number of Americans seeking unemployment benefits did rise by 16,000 last week, the second straight weekly increase. But the longer-term trend in layoffs remained consistent with an improved job market.

Applications rose to a seasonally adjusted 357,000 for the week ending March 23, the Labor Department said Thursday. That is an increase from 341,000 the previous week, which was revised slightly higher.

The four-week average, a less volatile measure, rose 2,250 to 343,000. Even with the gain, the average is only slightly higher than the five-year low of 340,750 attained the previous week. Economists pay closer attention to the four-week average because it smooths out week-to-week fluctuations.

The total number of people receiving some kind of unemployment aid is also down sharply. Nearly 5.5 million people were receiving unemployment aid as of the week ended March 9, the latest data available. That figure is up roughly 87,000 from the previous week but still well below the 7.2 million of a year earlier.

The government will release its initial look at first-quarter growth on April 26.

Article source: http://www.nytimes.com/2013/03/29/business/economy/unexpectedly-jobless-claims-inch-up.html?partner=rss&emc=rss

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Economy Contracted Unexpectedly in Fourth Quarter

January 30, 2013 by Leave a Comment

The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses. Anxieties about the fiscal impasse in Washington also contributed to the slowdown, one reason stockpiles grew more slowly.

Despite the overall contraction, there was underlying data in the report suggesting the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 percent, a sign that the housing sector continues to recover, for one. Similarly, investment in equipment and software by businesses rose 12.4 percent, an indicator that companies are still spending. Although economists expected output to decline substantially from the 3.1 percent annual growth rate recorded in the third quarter, the negative number still caught Wall Street off-guard. It was the weakest economic report since the second quarter of 2009.

“I’m a little surprised,” said Michael Feroli, chief United States economist at JPMorgan. “It grabs your attention when you have a negative number across everyone’s screens.”

Stocks were down only slightly in early trading on Wall Street, as some traders shrugged off the unexpected drop.

Mr. Feroli had been expecting growth to come in at 0.4 percent, which was well below the 1.1 percent consensus among economists on Wall Street. Like some other observers, Mr. Feroli said there were hints the economy was performing slightly better than the headline number suggested.

The 22.2 percent drop in military spending – the sharpest quarterly drop in more than four decades – along with the drop in inventories and exports overwhelmed more positive indicators in the private sector, he said.

For example, final sales to private domestic purchasers, which strips out government spending as well as trade and inventories, rose by 2.8 percent. “Consumers and businesses kept spending at a pretty steady pace,” Mr. Feroli said. “There was a lot of noise that moved the headline around.” For the entire year, the economy grew by 2.2 percent, a slight improvement from the 1.8 percent annual rate in 2011.

But with unemployment stubbornly high at 7.8 percent and growth expected to remain slow in the first quarter, the poor report Wednesday was likely to set off more finger-pointing in Washington.

The compromise between President Obama and Congress earlier this month allowed a temporary cut in Social Security taxes to expire, which is expected to crimp growth in the first quarter. The change will cost a worker earning $50,000 a year an extra $1,000 annually.

Indeed, a consumer confidence survey released Tuesday by the Conference Board showed a sharp downturn in January, which economists attributed in part to financial anxiety arising from the reduction in take-home pay.

The consensus estimate for early 2013 is currently calling for output to rise at an annual rate of 1.5 percent, but that number may come down in the wake of Wednesday’s report.

This was the Commerce Department’s first estimate of fourth-quarter growth; revisions are due in February and March, so the final figure could go up or down significantly.

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

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Economic Scene: The Deficit, Real vs. Imagined

June 22, 2011 by Leave a Comment

But there is a little problem with discretionary spending.

According to the government’s official forecasts, discretionary spending is already slated to shrink significantly. Military spending will fall by 25 percent, as a share of the economy, over the next decade. Domestic programs will shrink even more, and by 2021 they will account for their smallest share of the economy since the 1950s.

I’m guessing you haven’t heard of these plans, however. That’s probably because plans is a bit of an exaggeration. Assumptions is a better word: per Congress’s orders, the baseline budget numbers unrealistically assume that future discretionary spending will grow only with inflation, rather than with population growth and economic growth, too.

As a result, Vice President Joe Biden, Republican leaders and the other deficit negotiators not only have to cut discretionary spending to make progress. They have to cut it even more than the Congressional Budget Office, the keeper of the official numbers, already assumes that spending will be cut.

And the scale of the cuts could do real damage. They could jeopardize food safety, highway quality and F.B.I. investigations. They could hurt the poor at a time when unemployment remains near a three-decade high. They could undermine education and scientific research, the best hopes for future prosperity.

The goal of deficit reduction can’t simply be arithmetic. It has to be philosophical, as well. In what ways is the private sector incapable of planting the seeds of future economic growth — and what, therefore, must the government do? What’s the least amount of spending needed to ensure a decent life for even the most vulnerable citizens? Who is in the best position to pay that money?

By many accounts, the debt ceiling negotiators, starting with Mr. Biden and Eric Cantor, the second-ranking House Republican, have made progress. They could potentially get to their goal — $200 billion in average annual deficit reduction over the next decade — with a combination of discretionary cuts and tweaks to Medicaid, Medicare and maybe Social Security. President Obama’s intention to withdraw troops from Afghanistan will help.

But even if the negotiators reach their short-term goal, they won’t be close to getting the deficit under control. That would require closer to $500 billion in annual deficit cuts over the next decade.

Eventually, the country will have to confront the deficit we have, rather than the deficit we imagine. The one we imagine is a deficit caused by waste, fraud, abuse, foreign aid, oil industry subsidies and vague out-of-control spending. The one we have is caused by the world’s highest health costs (by far), the world’s largest military (by far), a Social Security program built when most people died by 70 — and to pay for it all, the lowest tax rates in decades.

To put it in budgetary terms, the deficit we imagine comes largely from discretionary spending. The one we have comes partly from discretionary spending but mostly from everything else: tax rates, Medicare, Medicaid and Social Security.

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Taxes may be the toughest issue politically, but the mechanics of raising taxes are not all that difficult. As the 1990s demonstrated, the economy can grow rapidly even after a modest tax increase. As the last decade showed, a big tax cut doesn’t necessarily prevent mediocre growth.

Bruce Bartlett, a former Treasury Department official, has pointed out on The New York Times’s Economix blog that average federal tax rates are “lower for most taxpayers than they have been since the 1960s.” The government could raise about $60 billion a year by letting the high-end Bush tax cuts lapse and tens of billions more by reducing tax breaks for companies and individuals.

On Social Security and Medicare, Washington could start by reducing benefits for the affluent — that is, the people who have received the biggest pay raises and tax cuts in recent years and whose life expectancy has risen the most. When conservatives like Mitch Daniels, Glenn Hubbard and Greg Mankiw talk about means-testing benefits, they’re talking about exactly this: making the programs more progressive.

Beyond means testing, the most promising strategy on health costs is probably a combination of conservative and liberal ideas.

Medicare could get more serious about refusing to pay for health care that doesn’t make people healthier, as the Obama administration has urged. The program could also introduce more incentives for people to choose cost-effective care, as Republicans prefer. Medicare’s problems are large enough that every plausible idea deserves a chance.

Discretionary spending, as more than one-third of the federal government, obviously must be part of the solution. In particular, bipartisan budget groups have called for annual military cuts of about $100 billion, or about one-seventh of the total budget, which would begin to reverse the post-9/11 spending bulge. Social programs — which often fail to achieve their fundamental goals — could also stand some rigorous scrutiny.

But the problem with the current debate is just how much of the budgetary burden falls on a relatively small part of the government. It isn’t just any part of the government, either. It is the part that has the best record of turning today’s spending into tomorrow’s economic growth.

Tax cuts don’t deliver nearly the economic oomph that their advocates claim. Medicaid, Medicare and Social Security, central to a decent society as they may be, certainly don’t do much to plant the seeds of future prosperity. Discretionary spending really can.

Discretionary spending let the Defense Department build the Internet. It let the National Institutes of Health finance life-saving research. It has helped make possible the semiconductor, the broadband network, the highway system and airports.

If we’re smart, we won’t just avoid damaging cuts. We will even find a way to increase forms of discretionary spending. As history has shown, economic growth remains the best deficit-reduction strategy of all.

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

Article source: http://feeds.nytimes.com/click.phdo?i=9991058dc6da7269237f01badc13cca4

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Bernanke Defends Fed’s Role in Running Economy

April 27, 2011 by Leave a Comment

Mr. Bernanke said he remained convinced that recent increases in oil prices would subside, and he saw little evidence of broader price increases in the foreseeable future.

“While it is very, very important to help the economy create jobs and help to support the recovery, I  think every central banker understands that keeping inflation low is absolutely essential to a successful economy and we will do what we can to make sure that happens,” he said.

Mr. Bernanke spoke after the Fed lowered its projections for domestic economic growth in 2011, predicting expansion of 3.1 percent to 3.3 percent. In January, the Fed had predicted growth of 3.4 percent to 3.9 percent, but Mr. Bernanke said that exports, construction spending and military spending have all been lower than expected.

The Fed’s policy-making committee voted unanimously Wednesday to maintain several policies intended to stimulate growth, including holding short-term interest rates near zero and maintaining the Fed’s investment portfolio at its current level, about $2 trillion. The Fed will complete a plan to purchase $600 billion in Treasury securities by the end of June.

Mr. Bernanke said that the recovery had become self-sustaining, meaning that growth would continue even without extraordinary government support, although he added that he still wanted to see a faster pace of growth and more job creation.

But Mr. Bernanke cautioned that if the economy did falter, it could prove difficult for the Fed to take additional stimulative steps because of growing inflationary pressures.

“The trade-offs are getting harder at this point,” Mr. Bernanke said. “Inflation is getting higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risks and in my view we can’t achieve a sustainable recovery without keeping inflation under control.”

Mr. Bernanke spoke at an unprecedented news conference, answering questions from reporters in a break with the Fed’s long tradition of providing nothing more than its statement to describe the decisions made by the Federal Open Markets Committee.

He is seeking to build public understanding and support for the central bank’s controversial programs. His remarks may also create a reference point for investors confused by the cacophony of contradictory speeches given by other members of the policy-making committee in the wake of each meeting.

The decisions by the Fed’s policy-making board, announced Wednesday at the conclusion of a two-day meeting, reflected the central bank’s judgment that the economy still needed help and that providing assistance was unlikely to ignite inflation.

“Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the committee met in March,” the committee said in a statement. “Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.” 

The Fed’s statements after recent meetings have suggested a gradual increase in its confidence in the health of the economy. The most recent statement, issued Wednesday described the recovery as “proceeding at a moderate pace.”

“Household spending and business investment in equipment and software continue to expand,” the statement said.  “However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed.”

It also said that the labor market conditions “are improving gradually.” After its March meeting, the committee said conditions “appear to be improving gradually.”

The government’s official unemployment rate — the share of the labor force actively seeking jobs — remains at very high levels, although it fell to 8.8 percent in March  from a peak of 10.1 percent in late 2009. Moreover, the unemployment rate would be more than twice as high if the government chose to include the large numbers of Americans who have stopped looking for work or accepted part-time jobs.

The Fed said Wednesday that it would maintain short-term rates near zero “for an extended period.”

Moreover, while the Fed will conclude its program of asset purchases in June, the central bank said that it would continue to maintain its investment portfolio at its current size, well over $2 trillion, by reinvesting any principal payments.

“Increases in the prices of energy and other commodities have pushed up inflation in recent months.  The committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations,” the statement said.

Critics of the Fed’s position on inflation argue that higher commodity prices will push up the price of other goods and services. But Mr. Bernanke and his allies consider it more likely that the higher prices will force Americans to reduce consumption, because wages are not rising and therefore Americans do not have more money to spend. As demand drops, they say, the price of food, oil and other commodities will also fall.

Fed officials emphasize that they are concerned about the price of food and oil. But they say that best way to keep those prices stable over the long term is to ignore short-term fluctuations, just as drivers are taught to steer straight by looking down the road.

The Fed finds evidence for its position in measures of “core inflation,” which track the movement of goods that change prices more slowly. Those measures generally show moderate price increases, which the Fed regards as healthy.

The decision was once again unanimous, despite public speeches by some members expressing misgivings that the Fed is underestimating the risks of inflation. So far, however, the most vocal critics — Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard W. Fisher, president of the Federal Reserve Bank of Dallas — have not registered their concerns in the form of dissenting votes.

The committee next meets June 21-22.

Article source: http://www.nytimes.com/2011/04/28/business/economy/28fed.html?partner=rss&emc=rss

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S.&P. Lowers Outlook for U.S., Sending Stocks Down

April 18, 2011 by Leave a Comment

“More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” a credit analyst with Standard Poor’s, Nikola G. Swann, said. At the same time, the firm affirmed the government’s AAA rating.

Both President Obama and Republican lawmakers have suggested plans to cut the federal deficit by at least $4 trillion over the next 10 to 12 years, but by different methods. And Mr. Obama plans to take his message on the road this week, traveling to the West Coast to promote his plan, which combines spending cuts and revenue increases.

The Republican blueprint written by Representative Paul D. Ryan, the Wisconsin Republican who leads the Budget Committee, includes cutting non-military spending, and a politically charged proposal to fundamentally reconfigure Medicare.

While the S.P. said the proposals were a good starting point for negotiations, “we see the path to agreement as challenging because the gap between the parties remains wide.”

“We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and presidential elections,” the statement said.

An assistant secretary for financial markets,  Mary Miller, said in a statement that Treasury officials “believe S.P.’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.”​

In late morning trading, the Dow Jones industrial average was 211 points, or 1.71 percent lower, while the broader Standard Poor’s 500-stock index declined 20.82 points, or 1.58 percent. The technology heavy Nasdaq lost 50.42 points, or 1.8 percent.

Bond prices were flat, and yields were 3.40 percent from 3.41 percent late Friday.

“This had been expected; they announced about two or three months ago they were considering it,” Stanley Nabi, chief strategist at Silvercrest Asset Management Group, said of the S.P. move. Still, he said that the downgrade could spur policy makers to act.

Policy makers and lawmakers should “realize there is a very serious problem, and you are going to see more consideration on how to rein in expenditures,” Mr. Nabi said.

 “If you take a look at the balance sheet of the United States it is not stellar,” he said.

Shares in Europe, which were already trading down, turned down even more after the S.P. statement. On the Continent, a nationalist political swing in Finland and speculation about a possible restructuring of Greek debt put pressure on euro-zone assets, as investors were reminded that the region’s sovereign crisis is not yet resolved.  

Yields climbed on the bonds issued by euro-zone governments perceived to have the weakest budgetary positions, especially Greece, Portugal and Ireland. Spain came under pressure as well and saw its borrowing costs rise at a treasury bill auction.

The euro slipped to $1.4297 from $1.4430 late Friday.

The main stock indexes in Europe down with the FTSE in London falling 2 percent, the DAX in Frankfurt down 2.3 percent and the CAC-40 in Paris declining 2.5 percent.

Investors were responding to an election on Sunday in which Finnish voters ousted their government and gave a lift to a nationalist party that is skeptical of the financial bailouts of Ireland, Greece and the agreement, reached this month, to aid Portugal.

Those results could complicate Europe’s plans to rescue Portugal, according to analysts.

Separately, news reports over the weekend suggested that the German government has been floating the possibility of a voluntary restructuring of Greece’s sovereign debt, something that most investors see as inevitable. The reports appeared to refer to extending the duration of debt issues over a longer timeframe.

The French economy minister, Christine Lagarde, however, played down any talk of restructuring for Greece, saying that such a move would be “catastrophic.”

“There is no question of speaking of a Greek debt restructuring.” she told LCI television Monday.

Adam Cole, head of foreign exchange strategy at RBC Capital Markets in London, said the euro was being undermined in the near term by the uncertainty of the Finnish vote.

The conservative National Coalition Party won the election, but by a narrow margin over the left-leaning Social Democrats. Just behind them came the True Finns, an anti-immigration party that does not believe that Finland should rescue its European partners.  

The Social Democrats have also called for changes to how those countries are financed.

The National Coalition, part of the outgoing center-right government and a strong advocate for European integration, will now have to invite others into coalition talks, raising questions about Finland’s support for rescue packages that need unanimous approval in the 17-member euro zone.

The election results are “likely to result in some noisy horse trading in the coming days,” Mr. Cole said in a research note.  However, he added that “ultimately, it is unlikely that Finland will derail the Portuguese bailout process and there is in any case a fairly large ‘window’ before Portugal faces heavy redemption pressure in mid-June.”

At a sale in Madrid, the Spanish government was forced to pay substantially more to issue 12- and 18-month Treasury bills on Monday compared with last month, Reuters reported,  amid concern over the Portuguese bailout and speculation about a Greek restructuring.

The benchmark Spanish 10-year issue yield rose by 13 basis points, pushing wider its spread over equivalent German bonds.

Article source: http://feeds.nytimes.com/click.phdo?i=44856bc341b1419274cb8aa3e6954b84

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