payroll tax

Fed to Consider Publishing a Forecast on Rates

December 12, 2011 by NewsMaker Leave a Comment

Predicting its own future actions was a new step, an experiment in a time of crisis that the Fed has since repeated several times, most recently in August, when it said that it planned to keep interest rates near zero until at least the summer of 2013.

Now the technique looks increasingly likely to become a permanent method for influencing economic growth. When the Fed’s policy-making committee convenes on Tuesday, it will consider the idea of publishing a regular forecast of its future decisions on interest rates. Any such plan would most likely be announced no sooner than its next meeting, in January, when it is already scheduled to publish economic projections.

Forecasting policy is part of a broader set of changes that the Fed is considering to improve public understanding of its methods and goals. The Fed’s chairman, Ben S. Bernanke, and other officials say that improved communications could deliver a modest boost to the economy with relatively little risk. None of their other options for additional action are nearly so appealing.

“We are actively considering methods that we could use to provide greater clarity,” Janet L. Yellen, the Fed’s vice chairwoman, said after a recent speech in San Francisco. “Is it a game-changer? I feel that it could have some favorable impact. I don’t want to exaggerate how large that is.”

The meeting of the Fed’s policy-making committee on Tuesday comes at a moment of unusual uncertainty about the plans of other economic policy makers.

Congress is debating the extension of a payroll tax cut and unemployment benefits, which some forecasters estimate could lift economic growth next year by more than one percentage point. Europe is convulsing, and Mr. Bernanke is among the economists who have warned that the United States could slip back into recession if the euro collapsed.

Recent federal data suggest that the United States economy is improving somewhat, reducing the pressure on the Fed to expand its aid programs. Even though unemployment remains at a level that Fed officials regard as unacceptable, most analysts who follow the central bank say they do not expect major changes in policy at this meeting.

Another round of asset purchases remains a possibility — including a specific investment in mortgage-backed securities — but officials are concerned that the benefits diminish with each new round, while the risks, both economic and political, have increased.

Monetary economists had long agreed that central banks should avoid making predictions or commitments. They worried that deviations from the predicted path would create costly turbulence in financial markets as investors corrected their misconceptions.

In recent years, however, more policy makers have concluded that the power to shape expectations should be embraced. Some central banks have come to regard speaking about the future as a primary policy tool. For example, the central banks of Britain, Canada and Australia, among others, have adopted explicit goals for inflation and the rate of increase in prices and wages. The central banks of Sweden and Norway publish forecasts of the level of interest rates. New Zealand announces goals and forecasts.

Mr. Bernanke is a longtime advocate of setting an inflation objective. But Congress has given the Fed a dual mandate to manage inflation and unemployment, and past proposals to formalize an inflation goal have foundered on the question of how to communicate an equal concern about the health of the labor market. This remains the subject of lively debate within the Fed.

Predicting the future is less controversial. The minutes of the committee’s most recent meeting, in November, said that “participants generally expressed interest in providing additional information to the public about the likely future path of the target federal funds rate.”

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Filed Under: Business News Tagged With: forecasters, improved communications, payroll tax

Consumer Confidence Rises and Trade Deficit Falls

December 11, 2011 by NewsMaker Leave a Comment

The Thomson Reuters/University of Michigan preliminary December reading on consumer confidence climbed Friday for a fourth consecutive month, to 67.7 from 64.1 in November.

“U.S. consumers appear to be ending the year in a better mood,” said Paul Dales, an economist at Capital Economics in London.

Improved confidence could lead Americans to spend more readily, which would add to the recent momentum from strong retail sales and factory output.

The narrowing in the trade deficit showed that more goods and services bought by businesses and consumers had been produced within the country.

Employment has also made gains in recent months, although some economists expect that the pace of improvement will be too slow for consumers to increase spending for long.

“Although the recent increase may provide that little bit of support to spending in the malls in the coming weeks, it won’t lead to a long and lasting acceleration in consumption growth,” Mr. Dales said.

Economic growth in the United States appears to be accelerating, even as the global economy slows. The euro zone, for example, is widely believed to be slipping into recession as it struggles to contain a sovereign debt crisis.

That crisis, as well as the possibility that the United States will not renew extended unemployment benefits and a payroll tax cut next year, are dark clouds looming over the economy.

With signs of accelerating growth coming up against big risks to the outlook, the Federal Reserve is expected to hold monetary policy steady at a meeting on Tuesday.

Despite the improvement, the consumer sentiment gauge remains well below its historical average, underscoring the fragility of household budgets as many struggle with a weak jobs market.

“There’s still a long way to go before consumer confidence that would be compatible with strong consumer spending,” said Vassili Serebriakov, a currency strategist at Wells Fargo in New York.

Separately, the Commerce Department said that the United States trade deficit narrowed in October to its lowest point in 10 months.

The economy expanded at a 2 percent annual rate during the third quarter. JPMorgan Chase said the trade report meant growth during the fourth quarter could exceed its 3 percent forecast.

The trade gap was $43.5 billion, in line with a consensus estimate from analysts before the report.

While a shrinking trade gap bodes well for fourth-quarter economic output, exports and imports both declined, a sign of some softening in domestic and overseas demand.

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Filed Under: Economy News Tagged With: dark clouds, payroll tax, recession

Republicans Unveil Plan for Payroll Tax

December 9, 2011 by NewsMaker Leave a Comment

In a sharp answer to several failed bills produced by Senate Democrats that would cut an employee’s share of the payroll tax and impose a new surcharge on income over $1 million, the House Republican bill would pay for the extension through a mix of changes to entitlement programs and a pay freeze for federal workers.

The House is expected to vote next week on the Republican bill, which includes a provision to speed construction of the Keystone XL pipeline from Alberta, Canada, to the Gulf Coast — a project the White House has sought to delay.

It would also include a measure passed this year in the House that would roll back Environmental Protection Agency rules limiting toxic air pollutants from commercial and industrial boilers, and ban the agency from proposing a new standard in the near future. While both ideas enjoy some support from Democrats, they would have a hard time gaining broad support in the Senate.

Republicans see the added elements as a way of both attracting party support for a tax break that many Republicans oppose, and forcing Democrats to accept provisions they do not like.

But Mr. Obama has threatened to veto any payroll tax measure that would ease approval of the pipeline, and he reiterated that position in an impromptu news conference on Thursday morning.

“Rather than trying to figure out what can they extract politically from me in order to get this thing done, what they need to do is be focused on what’s good for the economy, what’s good for jobs and what’s good for the American people,” said Mr. Obama, who added that he would not leave for a planned vacation in Hawaii until the legislative fight was resolved.

The Senate on Thursday rejected two competing bills to prevent an increase in the payroll tax. Fifty senators voted to take up the Democrats’ latest bill — far short of the 60 needed — and 48 senators voted no. Republicans had even less support for their proposal, as 22 senators voted to take it up and 76 voted no.

More than half of the Republicans voted against the bill drafted by their own leaders. The results were similar to votes on similar legislation last week.

By Thursday afternoon, as members of both chambers raced for the airport to spend their last weekend home before a final stretch of year-end legislative maneuvering, it was difficult to see how the impasse would be resolved. A bill that could please enough conservative Republicans in the House and the Senate would probably repel Senate Democrats, and the expiration of the payroll tax break, while helping to reduce the deficit, could prove a political headache for both parties.

Senator Susan Collins, Republican of Maine, who has supported a modified version of the surtax on high earners to finance extension of the payroll tax cut, said she found it difficult to puzzle out how a bill could appeal to enough members to pass. But, she said, that outcome is “absolutely necessary.”

“It’s going to be pointless if the House sends over bills that the Senate cannot or will not pass,” Ms. Collins said, adding that she assumed leaders in both chambers were negotiating behind the scenes.

Otherwise, she added, “I think we’ll be here Christmas Eve.”

The House Republican plan, among other things, would increase premiums for affluent Medicare beneficiaries, end food stamps and unemployment insurance benefits for millionaires, sell some federal assets, freeze the pay of federal employees, including members of Congress, and reduce the number of federal workers by about 10 percent through attrition.

In addition, House Republicans said their bill would gradually reduce the maximum duration of jobless benefits, to 59 weeks from the 99 weeks now available in some states. If Congress does nothing, benefits for the long-term unemployed will begin to expire early next year, and two million people could lose benefits by mid-February.

House Republicans said their bill would protect doctors from a 27 percent cut in their Medicare fees scheduled to occur on Jan. 1. The measure would solve this problem for two years, giving doctors a 1 percent increase in their fees rather than a deep cut. To help offset the cost, lawmakers said, the bill would take some money provided in the new health care law for preventive and public health services.

The package was met with enthusiasm from House Republicans who last week gave Speaker John A. Boehner an earful about attempts to continue the cut in Social Security payroll taxes for another year.

“It’s a solid plan,” said Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee. “I like the unemployment reforms quite a bit.”

Representative Jim Jordan of Ohio, a leader of conservative Republicans in the House, also welcomed the proposals. “The fact that the president doesn’t like it makes me like it even more,” Mr. Jordan said. But Senate Democrats were not impressed.

“They have turned this into a Christmas tree,” said Senator Charles E. Schumer of New York, the No. 3 Senate Democrat, “because their rank and file are fundamentally opposed to a tax cut for the middle class.”

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Filed Under: Economy News Tagged With: hard time, obama, payroll tax

The Caucus: White House Would Cut Tax Breaks to Pay for Jobs Plan

September 13, 2011 by NewsMaker Leave a Comment

Philip Scott Andrews/The New York TimesPresident Obama announced that he would send his proposed jobs legislation to Congress on Monday.

2:24 p.m. | Updated The White House said on Monday that it would cover most of the cost of his payroll tax cut and other job initiatives by limiting the deductions that can be claimed on the tax returns of wealthier taxpayers.

President Obama, repeating what is clearly going to be the mantra for his stump speeches this fall, called on lawmakers Monday to “pass this bill” — his $447 billion jobs package.

At the White House, his budget director described how the administration would propose to pay for the plan, as the president has promised to do.

Jack Lew, the director of the White House Office of Management and Budget, said the bulk of the plan –- $400 billion over 10 years — would be raised by limiting the itemized deductions, such as those for charitable contributions and other expenditures, that may be taken by individuals making more than $200,000 a year and families making over $250,000 a year. The rest would come from provisions affecting oil and gas companies, hedge funds, and the owners of corporate jets.

Mr. Lew said that the Congressional panel charged with finding at least $1.2 trillion in savings this fall as part of the agreement to raise the debt ceiling will have the option of accepting the payment proposals submitted by Mr. Obama, or proposing new ones of their own.

Republicans were quick to signal their continuing opposition to the tax increases that Mr. Lew described, which have been suggested by the administration before.

Brendan Buck, spokesman for House Speaker John A. Boehner of Ohio, said the White House plan was not showing a “bipartisan spirit.”

Representative Eric Cantor of Virginia, the House majority leader, said, “I sure hope that the president is not suggesting that we pay for his proposals with a massive tax increase at the end of 2012 on job creators.” If Mr. Obama’s bill resembled the 2009 stimulus plan, he said, “I don’t believe that our members are going to be interested in pursuing that; I certainly am not.”

Like that stimulus plan, Mr. Obama’s jobs bill is made up largely of tax cuts, such as the expanded reductions of the payroll taxes that finance Social Security. The White House wants to cut both employee and employer contributions in half next year, putting more money in the pockets of all wage earners and on the bottom line of most smaller companies.

Mr. Obama, speaking in the Rose Garden, held up a copy of the American Jobs Act, which will be sent to Congress on Monday evening. Flanked by people from across the country who he said would be helped by the law if it passes, the president struck tones similar to those of his big jobs speech on Thursday.

“On Thursday I told Congress that I’ll be sending them a bill called the American Jobs Act,” Mr. Obama said, holding up a folder. “Well, here it is.”

Mr. Obama said the jobs act was “based on ideas from both Democrats and Republicans.” Americans, he said, cannot afford to wait 14 months until the next election for lawmakers to act, particularly given the dire economic straits and the high unemployment rate.

“We’ve got a world economy that’s full of uncertainty right now,” Mr. Obama said. “Some events are beyond our control.” By contrast, he said, his jobs bill is “something we can control.”

Mr. Obama is heading to Ohio and North Carolina this week to push his jobs plan. On Tuesday, in Columbus, Ohio, Mr. Boehner’s home state, he will argue once again that Congress should act; he will be making a similar pitch in the Raleigh-Durham area of North Carolina on Wednesday. While the president won both states in 2008, they are expected to be highly competitive in next year’s election.

This post has been revised to reflect the following correction:

Correction: September 12, 2011

An earlier version of this post incorrectly identified House Speaker John A. Boehner’s home state. He is from Ohio, not Iowa.

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Filed Under: Business News Tagged With: congressional panel, obama, payroll tax

DealBook: The Fallacy Behind Tax Holidays

September 6, 2011 by NewsMaker Leave a Comment

Charles Dharapak/Associated PressIn a letter to President Obama, Tom Donohue, president of the U.S. Chamber of Commerce, said tax breaks would create new jobs. The president spoke to Mr. Donohue’s organization in February.

As President Obama confronts the nation’s dismal unemployment problem — stubbornly stuck at 9.1 percent with, shockingly, zero net jobs created in August — Wall Street and corporate America are working behind the scenes in Washington to push for a series of temporary tax breaks, which they insist will help create jobs.

Of course, businesses want an overhaul of the corporate tax code that would reduce rates for the long term. But for now they are seeking a series of tax holidays, including a payroll tax break for employers, not just employees, and a tax break to let companies repatriate about $1 trillion that is sitting overseas. In turn, they say, they will spend it on new recruits, perhaps as many as 2.9 million of them, according to a letter the United States Chamber of Commerce sent to the president on Monday.

Consider it a form of horse trading — tax cuts for jobs. There is only one small problem with this strategy: temporary tax cuts rarely result in new jobs and always result in less tax revenue.

“Tax policy is not a great lever for adjusting short-term growth,” explained Howard Gleckman, a resident fellow at the Tax Policy Center , who has reviewed dozens of studies on the subject. Most temporary tax holidays “reward people for what they are going to do anyway,” he said, adding that “the bang for the buck is very low — you’re subsidizing companies that were already going to hire.”

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A seminal study by John H. Bishop and Mark Montgomery that looked at the Targeted Jobs Tax Credit bill from 1977, which was aimed at temporarily giving employers an incentive to hire disadvantaged workers, showed that “at least 70 percent of the tax credits were claimed for hiring workers who would have been hired even in the absence of the tax credit.” Companies claimed more than $4.5 billion in credits as a result.

That is not to suggest that tax policy cannot help with long-term growth — virtually every academic study says it absolutely can — but that tax policy is a lousy way to stimulate the economy on a temporary basis.

Let’s be honest, even if it is an uncomfortable truth: The jobs crisis is not really a function of tax policy; it is a function of economics. Right now, there is too little demand for products.

R. David McLean, a visiting assistant professor of finance at the MIT Sloan School of Management, published a new study last week that showed companies were sitting on trillion-dollar piles of cash, not because they are hoarders or greedy, but because they are worried about the economy and that their businesses might not be as strong as they hope in the future.

Mr. McLean said the volatility of cash flow had gone up over the last 30 years. For every dollar that companies have raised in recent years by issuing new shares, they have saved 60 cents, he said. “My study suggests that firms are saving more of their share issuance proceeds as cash because they have greater needs for precautionary cash savings than before,” he added.

To Mr. McLean, the lesson is that public policy toward business must be about creating as much certainty on regulations as possible, given that economic cycles will most likely create their own uncertainty. “If they know the rules of the game, it’s easier to play ball — even if you don’t like the rules,” he said.

Devising short-term tax incentives is the antithesis of creating long-term certainty — sticking to the rules of the game. Indeed, such holidays can create perverse incentives. The debate over a tax break for companies to repatriate cash from overseas, for example, has already created a new moral hazard of sorts. When Congress provided a one-time tax break in 2004 for this purpose, it said such a holiday should never be repeated.

“If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future,” Chuck Marr and Brian Highsmith of the Center on Budget and Policy Priorities recently wrote. “That will make corporations more inclined to shift income into tax havens and less likely to make investments in the United States.”

John T. Chambers, chief executive of Cisco Systems, has been a longtime proponent of such a tax holiday. “We believe that at least temporarily reducing the incremental tax rate on foreign-earned profits would encourage companies to invest in the U.S.,” he wrote on his blog last year. The company does not seem so interested in investing here at the moment; it is in the process of eliminating some 10,000 workers in the United States.

“They already have a lot of money now — they’re not going to start spending it because of a tax holiday,” Reuven S. Avi-Yonah, an international tax lawyer who teaches at the University of Michigan and has regularly testified in front of Congress, said of American companies pushing for the tax break.

One of the other ideas floating around is a temporary break on payroll taxes for employers — in addition to extending the current payroll tax holiday for employees past Jan. 1. The tax holiday for employees may make some sense: it provides extra cash directly to workers, who may put it back into the economy by spending it. A payroll tax holiday for employers is a different story. It would lower the 6.2 percent tax they pay on the wages of every worker they employ, in the hope that this would give them an incentive to hire workers.

But again, there is that little problem with demand. “Every C.E.O. and C.F.O. will tell you they will only hire when they are confident they can get sales,” Mr. Gleckman said. “They say to themselves, ‘How much can we sell with the workers we have?’ But there’s nothing a C.E.O. hates more than not being able to fill an order. Only then will they hire.”

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Filed Under: Business News Tagged With: payroll tax, tax breaks, united states chamber

For Obama, a Familiar Labor Day Theme

September 6, 2011 by NewsMaker Leave a Comment

Mr. Obama, speaking to a riverfront crowd estimated by the police to number 13,000, said he would propose “a new way forward on jobs” in his speech on Thursday to a joint session of Congress, which returns this week from its August recess.

Mr. Obama did not provide details — “Tune in on Thursday,” he teased — but he said millions of unemployed construction workers would be able “to get dirty” building roads, bridges and other public works under his infrastructure proposals.

Organized labor and business leaders are on board, Mr. Obama said. “We just need Congress to get on board,” he said, prompting cheers of “Four more years!” from an audience filled with members of unions for autoworkers, public employees, service industry workers and teachers.

It remains unclear what new ideas Mr. Obama will propose on Thursday. But he faces high expectations after recent evidence that job growth has stalled and because of his own buildup since announcing a month ago that he would lay out a short-term stimulus program after Labor Day.

Mr. Obama also faces skepticism because of persistent unemployment. Recent polls give him his lowest ratings to date for job approval and his handling of the economy, though the ratings of Congress, and especially Republicans, are even more negative.

Mr. Obama has indicated that besides infrastructure proposals, he will call for extending and expanding temporary tax cuts for businesses and individuals, including a payroll tax cut for which he won Republicans’ support in December after agreeing to extend the Bush-era tax cuts on high income. He is expected to propose that employers get a tax credit for each new person hired, and to help local governments avert more teacher layoffs.

Separately next week, Mr. Obama is expected to recommend ways to reduce annual budget deficits to a special Congressional committee charged with finding up to $1.5 trillion in savings over 10 years. He plans to propose more than that in deficit reductions, aides say, partly to offset the stimulus costs.

But in Detroit Mr. Obama emphasized job creation. His backdrop was the high-rise headquarters of General Motors, which, along with Chrysler, has restructured and returned to profit and hiring after their rescue early in his administration.

“We’ve got a lot more work to do to recover fully from this recession,” Mr. Obama said. “I’m going to propose ways to put America back to work that both parties can agree to because I still believe both parties can work together to solve our problems.”

That expression of faith in bipartisanship drew loud groans of skepticism, reflecting a growing sentiment among Obama supporters that he is too conciliatory toward Republicans.

As if acknowledging the skeptics, Mr. Obama quickly added, to applause: “But we’re not going to wait for them. We’re going to see if we’ve got some straight shooters in Congress. We’re going to see if Congressional Republicans will put country before party.”

Flying here with Mr. Obama were several union leaders, including Richard Trumka, president of the A.F.L.-C.I.O., who has been critical of his compromises with Republicans.

Also joining Mr. Obama was Senator Carl Levin, Democrat of Michigan, who, as Mr. Obama told his audience, gave the president a Labor Day address that President Harry S. Truman delivered in Detroit in 1948, the year of his come-from-behind election after campaigning against “do-nothing” Republicans.

Afterward, Mr. Levin said he told the president, “Here’s a ‘give ’em hell’ kind of speech.”

The president’s Labor Day addresses trace the stubbornness of the crisis he inherited.

In 2009, he spoke to an A.F.L.-C.I.O. picnic in Cincinnati, just after the government reported 216,000 jobs lost in August — relatively good news because it marked a second month of declining losses from a high of 750,000 as Mr. Obama took office. Six months earlier, in February, a Democratic-controlled Congress had passed his two-year, $800 billion stimulus program of tax cuts and spending.

“It’s working,” Mr. Obama said then. Most economists agreed, though many have since concluded that the package was not forceful enough to counter a recession and crises in the financial and housing sectors. Republicans, who generally opposed it, continue to say that the stimulus program failed and that they will not support another round.

“We’re on the road to recovery, but we’ve still got a long way to go,” Mr. Obama said two years ago. That would become a refrain.

Last year, Mr. Obama was in Wisconsin with union families. While private-sector hiring had expanded for eight months, the unemployment rate was 9.6 percent — just a tenth of a percentage point lower than the year before. With his two-year stimulus plan winding down, Mr. Obama announced new plans for infrastructure projects and more.

“Now the plain truth is, there’s no silver bullet or quick fix to the problem,” he said in Milwaukee. “Even when I was running for this office, we knew it would take time to reverse the damage of a decade’s worth of policies that saw a few folks prosper while the middle class kept falling behind.”

But his infrastructure plans went nowhere before Republicans, capitalizing on voters’ economic frustrations, won control of the House in November.

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Filed Under: Business News Tagged With: number 13, payroll tax, recess

Focus Turns Back to Fed on Economy

August 2, 2011 by NewsMaker Leave a Comment

Failing to raise the debt ceiling could lead to an economic catastrophe. But even if the Senate on Tuesday joins the House in agreeing to let the government borrow more money, there is mounting evidence that the political turmoil has made a bad economic situation worse.

Manufacturing activity declined in July, a trade group reported Monday. Unemployment is climbing. So is inflation. And the high pitch of partisan rancor in Congress makes it difficult for either party to advance their incompatible economic agendas.

The deal to raise the debt ceiling would reduce federal spending this year by billions of dollars, exacerbating a broader downturn in federal aid as the stimulus peters out. A payroll tax cut and extended benefits for the unemployed are scheduled to expire at the end of the year.

Ben S. Bernanke, the chairman of the Federal Reserve, said in the spring that it was time to see whether the economy could stand on its own. Last month he said the Fed would consider new steps if conditions deteriorated significantly. As the Fed’s policy-making committee prepares to meet Aug. 9, the drums are beating louder.

“I don’t think they can do anything until we see how much was lost and how much we can recoup,” said Diane Swonk, chief economist at Mesirow Financial. “But if we have persistent weakness, and stagnant employment growth through the third quarter, I just don’t see how they can’t step back into the game.”

The Fed already is engaged in a vast and unprecedented effort to bolster economic growth. It has held short-term interest rates near zero for almost three years, and amassed more than $2 trillion in Treasuries and mortgage bonds to hold down long-term rates. But since the end of June, when it completed its most recent round of asset purchases, the Fed has chosen to stand pat.

Its available options now are modest steps including replacing its promise to maintain low rates “for an extended period” with a more specific commitment, like a six-month minimum. More aggressive steps could include tilting the composition of its investment portfolio toward longer-term Treasury securities, to increase the downward pressure on long-term rates. The most drastic step, which analysts also consider least likely, would be a decision to increase the size of its portfolio.

For the moment, and for as long as possible, the central bank would like to do nothing. There is broad agreement that the unprecedented size of the Fed’s portfolio has complicated its ability to control the pace of inflation, and that additional purchases would exacerbate the difficulty.

Mr. Bernanke has said that growth must weaken and price increases abate. A vocal minority of Fed officials has gone further, arguing the central bank has reached the limit of its powers.

“It seems unlikely that the forces limiting the pace at which U.S. growth is recovering are amenable to monetary policy,” Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, said in a speech last week. “Additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth.”

The Fed is even less eager to renew its interventions into financial markets. The central bank has hovered on the edge of the debt ceiling debate like a homeowner riding out a hurricane, hoping for limited damage to the lethargic economy.

“I want to eliminate any expectation that the Fed through any mechanism could offset the impact of a default on the government debt,” Mr. Bernanke told Congress in July.

Even if the Congress meets President Obama’s Tuesday deadline for a debt ceiling deal, the ratings agency Standard Poor’s has warned that it may downgrade long-term Treasury bonds, altering a basic premise of many financial transactions and unleashing smaller but still significant disruptions.

“If a huge amount of harm is being done to the markets and the economy, they will have to consider carefully whether there’s anything they can do to help,” said Donald L. Kohn, who stepped down last June after serving four years as vice-chair of the Fed’s board of governors. “The point of that would be to help the markets get through a chaotic period.”

During a previous debt ceiling standoff, which ran from the fall of 1995 through the spring of 1996, the Fed considered offering loans to banks that did not receive expected payments from the government, and honoring defaulted Treasuries as collateral, according to Alan Blinder, who served as vice chairman of the board of governors at the time.

“We had extensive discussions with the principal clearing banks in New York which then were Chase and Bank of New York,” said Mr. Blinder, now a Princeton economics professor. “What we on the board were most worried about was preserving the remnants of the Treasury market because of its central role in providing liquidity to the whole system.”

The Fed also could buy dollars in the event of a downgrade. Uncertainty already is driving investors to other currencies, and a sharper decline could undermine the dollar’s role as an international reserve currency — a status that has significant benefits for the American economy.

Such a step would be taken at the behest of Treasury, because the administration sets currency policy.

But there are strong reasons to doubt the government would try such an intervention. A weaker dollar could bolster growth by making American exports more attractive. In particular, it could improve the balance of trade with China — while intervening to prop up the dollar would undermine the credibility of American efforts to convince China to stop manipulating its currency.

Perhaps most important, intervening in exchange markets may not prevent the dollar’s fall. “If the dollar were just weak because people had lost confidence in the U.S. government, I don’t see why buying dollars is going to restore confidence,” said Mr. Kohn, now a senior fellow at the Brookings Institution. “The cure for that isn’t intervention. The cure is the government acting like adults.”

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Filed Under: Business News Tagged With: debt ceiling, payroll tax, unprecedented effort

New Data Shows Sharp Slowdown in Growth Rate

July 30, 2011 by NewsMaker Leave a Comment

The broadest measure of the economy, known as the gross domestic product, grew at an annual rate of less than 1 percent in the first half of 2011, the Commerce Department reported on Friday. The figures for the first quarter and the second quarter, 0.4 percent and 1.3 percent respectively, were well below what economists were expecting, and signified a sharp slowdown from the early months of the recovery.

The government also revised data going all the way back to 2003 that showed the recession was deeper, and the recovery weaker, than initially believed.

With so little growth, the economy can hardly withstand further shocks from home or abroad, and worrisome signals continue to emanate from heavily indebted European countries.

If the domestic economy were to contract, any new recession would originate on President Obama’s watch — unlike the last one, which began a year before he was elected.

If Congress leaves existing budget plans intact, some of the government’s economic assistance, like the payroll tax cut, will phase out and thereby act as a drag on growth.

And by many economists’ thinking, whatever additional budget cuts Congress eventually agrees to (or does not) will weaken the economy even further.

On the one hand, if legislators cannot come to an agreement to raise the debt ceiling by Tuesday, the United States may be unable to pay all its bills. Borrowing costs across the economy could then surge, because so many interest rates are pegged to how much it costs the federal government to borrow. The forecasting firm Macroeconomic Advisers has predicted that the resulting financial mayhem would most likely plunge the economy back into recession.

On the other hand, if legislators do reach an agreement, it will probably include austerity measures that could chip away at the already fragile recovery. Spending cuts — particularly if they take effect sooner rather than later, as some of the House’s more conservative members want — will weaken the economy, since so many industries and workers are directly or indirectly dependent on government activity.

Macroeconomic Advisers has estimated that the plan of Senator Harry Reid, the Nevada Democrat who serves as majority leader, for example, could shave a half a percentage point off growth as its spending cuts peak.

Citing the debt reductions that Congress undertook in 1937 and that ushered in the most severe phase of the Great Depression, some economists fear that imposing austerity measures too soon could likewise result in a recessionary relapse.

Simply prolonging the debt negotiations could also damage prospects for growth in the third quarter, as businesses and families wait to make big purchases until the threat of a federal default subsides.

“The business and consumer uncertainty over whether the government will be able to pay its bills is the biggest thing weighing around our neck right now,” said Austan Goolsbee, the departing chairman of the President’s Council of Economic Advisers.

The economy is smaller today than it was before the Great Recession began in 2007, though the country’s labor force and production capacity have grown. The outlook for digging out of that hole is getting weaker by the day, and analysts across Wall Street have already begun slashing their forecasts for output and job growth for the rest of this year. Usually, a sharp recession is followed by a sharp recovery, meaning the recovery growth rate is far faster than the long-term average growth rate; last quarter, though, output grew at less than half of the average rate seen in the 60 years preceding the Great Recession.

Particularly distressing to economists is that consumer spending — which, alongside housing, usually leads the way in a recovery — has been extraordinarily weak in recent quarters. Inflation-adjusted consumer spending in the second quarter barely budged, increasing just 0.1 percent at an annual rate, the Commerce Department report showed.

“People are spending more, but that spending is being absorbed in higher prices, not in buying more stuff,” said John Ryding, chief economist at RDQ Economics.

Even the brightest parts of the latest report were bittersweet. For example, motor vehicle output fell much less than was predicted after the natural disasters in Japan disrupted supply chains. But that means there will probably be a less buoyant bounce in coming months in autos, which economists were counting on to raise growth rates later this year.

Some economists cautioned not to read too much into this figure, though, or any individual quarterly number from the last report. The Commerce Department will probably make substantial revisions to the latest numbers, just as it did on Friday for the data released over the previous decade. Among the more jarring revisions in its latest report was the downgrade for growth in the first quarter of this year, from the original estimate of a 1.9 percent annual growth rate to a rate of just 0.4 percent.

“Sometimes it feels like I’m a physicist who’s been flipped into a different universe trying to explain these revisions, rather than an economist tracking output growth,” said Mr. Ryding. “The economy is clearly performing poorly, though we don’t know quite how poorly because these individual quarterly revisions can sometimes be something of a joke.”

The slow growth rate is largely responsible for stubbornly high joblessness across the country. Businesses are sitting on a lot of cash, but are still reluctant to hire because there is so much uncertainty about the future of the economy and whether they will continue to have a steady flow of customers. As of June, 14 million Americans were actively looking for work, and the average duration of unemployment has been climbing to record highs month after month.

Slow growth takes not only a human toll, but a fiscal one. Tax revenues do not expand enough to pay down the nation’s debt.

Given some festering inflation concerns, it also seems unlikely that the Federal Reserve will swoop in with another round of monetary easing to invigorate the economy.

“There’s not going to be additional monetary stimulus, and it’s hard to imagine any fiscal stimulus given the current discussion in Washington,” Mr. Ryding said. “So what’s going to get us out of this? The inevitable conclusion is time, and that’s not very satisfactory.”

Article source: http://feeds.nytimes.com/click.phdo?i=94e2babb8abf047d4762ee4be7f19bbe

Filed Under: Business News Tagged With: domestic economy, federal gov, payroll tax

Recovery Still Slow as New Data Show Little Growth

July 29, 2011 by NewsMaker Leave a Comment

The country’s gross domestic product, a broad measure of the goods and services produced across the economy, grew at an annual rate of 1.3 percent in the second quarter, after having grown at an annual rate of 0.4 percent in the first quarter — a number that itself was revised sharply down from earlier estimates of 1.9 percent . Both figures were well below economists’ expectations.

Data revisions going back to 2003 also showed that the 2007-2009 recession was deeper, and the recovery to date weaker, than originally estimated. Indeed, the latest figures show that the nation’s economy is actually smaller than it was in 2007, when the Great Recession officially began.

“The word for this report is ‘shocking,’ ” said John Ryding, chief economist at RDQ Economics. “With slow growth, higher inflation and almost no consumer spending growth, it is very tough to find good news.”

The latest figures come as Congress is debating how to put the nation on a more sustainable fiscal path, with measures that some economists worry could further slow the recovery and even throw the economy back into recession. Even in the absence of further austerity measures, some of the government’s stimulative policies, such as the payroll tax cut, are phasing out, and state and local governments are slashing spending dramatically.

Such fiscal retrenchment was already expected to be a drag on growth in the coming year; the Commerce Department’s report only magnifies those concerns.

“There’s nothing that you can look at here that is signaling some revival in growth in the second half of the year, and in fact we may see another catastrophically weak quarter next quarter if things go wrong next week,” said Nigel Gault, chief United States economist at IHS Global Insight. By “things going wrong,” he said he means “if Congress actually starts implementing a massive contraction by suddenly cutting government spending immediately,” as many Republican representatives hope to do.

Prolonging the continuing talks in Washington to raise the amount of money the United States can borrow could also damage prospects for growth in the third quarter, he said, because the resulting uncertainty and threat of federal default are “surely paralyzing businesses and consumers,” making them reluctant to make the big purchases that keep the economy humming.

Usually, a sharp recession is followed by a sharp recovery, meaning the recovery growth rate is far faster than the long-term average growth rate; last quarter, though, output grew at only about one-third of the average rate seen in the 60 years preceding the Great Recession. As a result, the country’s output is far below its potential.

“People are spending more, but that spending is being absorbed in higher prices, not in buying more stuff,” Mr. Ryding said.

Even the brightest parts of the report were seen as bittersweet. For example, motor vehicle output fell much less than was predicted after the natural disasters in Japan disrupted supply chains. But that means there will likely be a less dramatic bounce back in autos in the coming months, which economists were counting on to raise growth rates later this year.

The economy’s slow growth rate is largely responsible for stubbornly high joblessness across the country, economists say. As of June, 14 million Americans were actively looking for work, and the average duration of unemployment has been reaching record highs month after month. Businesses are sitting on a lot of cash, but are still reluctant to hire because there is so much uncertainty about the future of the economy and whether they will continue to have a steady flow of customers.

Slow economic growth takes not only a human toll, but a fiscal one as well. Tepid output increases mean slow growth in the tax revenue needed to pay down the nation’s debt.

Washington, therefore, has a delicate balancing act in its current debt ceiling debates. Given the unsustainable debt trajectory that the economy is on — primarily because of the country’s growing health care obligations — Congress needs to impose greater fiscal discipline. But imposing too much too soon, or being too focused on the wrong types of spending cuts, could be self-defeating by weakening growth so greatly that tax revenue falls and requires the country to borrow even more.

Given inflation concerns, it also seemed unlikely that the Federal Reserve will swoop in with another round of monetary easing to goose growth.

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Filed Under: Business News Tagged With: economists, global insight, payroll tax

Economy Faces a Jolt as Benefit Checks Run Out

July 11, 2011 by NewsMaker Leave a Comment

Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.

By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year.

In terms of economic impact, that is slightly less than the spending cuts Congress enacted to keep the government financed through September, averting a shutdown.

Unless hiring picks up sharply to compensate, economists fear that the lost income will further crimp consumer spending and act as a drag on a recovery that is still quite fragile. Among the other supports that are slipping away are federal aid to the states, the Federal Reserve’s program to pump money into the economy and the payroll tax cut, scheduled to expire at the end of the year.

“If we don’t get more job growth and gains in wages and salaries, then consumers just aren’t going to have the firepower to spend, and the economy is going to weaken,” said Mark Zandi, chief economist of Moody’s Analytics, a macroeconomic consulting firm.

Job growth has remained elusive. There are 4.6 unemployed workers for every opening, according to the Labor Department, and Friday’s unemployment report showed that employers added an anemic 18,000 jobs in June.

In Arizona, where there are 10 job seekers for every opening, 45,000 people could lose benefits by the end of the year, according to estimates from the state Department of Economic Security. Yet employers in the state have added just 4,000 jobs over the last 12 months.

Some other states will also feel a disproportionate loss of income unless hiring revives. In Florida, where nearly 476,000 people are collecting unemployment benefits, employers have added only 11,200 jobs in the last year. In Michigan, employers have added about 40,000 jobs since May 2010, but about 267,000 people are claiming jobless benefits.

Throughout the recession and its aftermath, government benefits have helped keep money in people’s wallets and, in turn, circulating among businesses. Total government payments rose to $2.3 trillion in 2010, from $1.7 trillion in 2007, an increase of about 35 percent.

While some of that growth was in Social Security and disability benefits as the population aged, the majority resulted from payments to people continuing to suffer from the recession, said Mr. Zandi. Unemployment benefits, including emergency and extended benefits, are more than three times their prerecession level, he said. The nearly 20 percent of personal income now provided by the government is close to a record high.

Approved by Congress last December, the final extension of jobless benefits — for a maximum of 99 weeks for each unemployed person — is scheduled to conclude at the end of this year. A handful of states, like Wisconsin and Arizona, have already cut off weeks 80 through 99 for their residents. Meanwhile, more of the long-term unemployed are bumping up against the 99-week limit.

Consumers account for an estimated 60 to 70 percent of the country’s economic activity, but two years into the official recovery, businesses are still complaining that people simply are not spending enough.

“Regardless of why people have less money to spend, it affects all retailers in all industries,” said Michael Siemienas, spokesman for SuperValu, which operates grocery chains including Cub Foods, Shop ’n Save and Save-A-Lot. Mr. Siemienas said that the number of SuperValu’s customers using electronic benefit transfers to pay bills had grown over the last year.

Article source: http://feeds.nytimes.com/click.phdo?i=ed12ec37ba0496fcc3130e3c6bd8a0da

Filed Under: Economy News Tagged With: benefit checks, payroll tax, unemployment report