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Economic Slowdown Is Expected, but It’s Seen as Fleeting

July 29, 2013 by

New data from the government due out Wednesday is expected to show that the economy came close to stalling during the spring quarter, which ran from April through June. But many experts say the latest slowdown is likely to be temporary. Buoyed by a healthier housing sector, a surging stock market and resilient consumer spending, they say, economic activity should rebound in the second half of 2013 and accelerate into 2014.

“We’ve been saying for some time that second-quarter growth would be the weak spot this year,” said Nariman Behravesh, chief economist at IHS. “This is the spring swoon. But I wouldn’t panic — there is a very specific reason for it, and it will start to wear off.”

“Housing has been sizzling and consumers are spending at a decent pace,” he added. “Businesses have held back so far, but will begin to get on board.”

But haven’t we heard that one before? The latest swoon looks a lot like the previous pauses that have prevented the economy from gaining much momentum since the recession ended in 2009.

Experts estimate that the economy grew at an annual rate of under 1 percent in the second quarter, half the already tepid pace of growth in the first quarter of 2013. Much of that weakness stems from the tax increases and automatic cuts in government spending that went into effect earlier this year, headwinds that should gradually ease in the quarters to come unless Washington makes things worse by cutting spending further or Congress and the White House send markets into a swoon by failing to agree on a painless way to raise the nation’s debt ceiling.

Federal Reserve policy makers, who are set to meet on Tuesday and Wednesday, will be closely analyzing these crosscurrents. The central bank has been purchasing $85 billion a month in Treasury bonds and government-backed mortgages — a program which the Fed’s chairman, Ben S. Bernanke, has hinted will be slowly wound down later this year if the economy proves strong enough.

The Fed is not expected to signal a change in direction when it issues its latest statement early Wednesday afternoon. The data on economic growth due out Wednesday morning, however, as well as the latest figures on employment that will be released by the Labor Department on Friday, could help determine whether the Fed begins tapering back as early as September or instead waits until December or even longer.

“The Fed will have a lot of information,” said Michelle Meyer, senior United States economist at Bank of America Merrill Lynch. “Our baseline scenario is that December is marginally more likely than September, but it is a very close call.”

Wall Street is intensely focused on when the Fed will begin easing back, and traders will be paying close attention to any change in the language of the Fed’s statement. In May and June, stocks fell after Mr. Bernanke seemed to suggest the tapering could begin soon.

Since then, though, Wall Street has bounced back and Mr. Bernanke emphasized in testimony before Congress earlier this month that the central bank was committed to bolstering the economy, easing fears of an abrupt tapering. In fact, he highlighted the risk that “tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect.”

Other questions are looming, too. Besides the issue of whether businesses will start investing at a faster pace, the recent rise in mortgage rates has some observers worried that the housing market could cool. The National Association of Realtors reported on Monday that its index for pending home sales dropped 0.4 percent in June, a sign buyers may be getting more cautious as borrowing costs increase.

More clues about the health of the housing sector will come on Tuesday, with the release of the latest figures in the S. P./Case-Shiller index for home prices. Economists are expecting the index for May to post a 12.3 percent gain over the same month a year earlier, a reflection of what has been a strengthening housing market in many parts of the country. The Conference Board is also scheduled to report its latest reading on consumer confidence on Tuesday.

Experts who are fairly optimistic in the long-term, like Ian Shepherdson, chief economist at Pantheon Macroeconomics, caution that Wednesday’s numbers on overall economic performance could look rather bleak.

“The second quarter was horrible, no matter how you slice it,” he said. “The crunch in government spending is holding back growth and it doesn’t just appear in the government component. It feeds pretty much into everything.”

Mr. Shepherdson is actually a bit more pessimistic about the current situation than many of his peers — he says he believes the economy grew at only 0.5 to 0.6 percent in the second quarter — but he emphasized that Wednesday’s report on gross domestic product was something of a wild card.

Inventory changes are hard to predict, as is the full impact of the cutbacks in Washington.

“We could be anywhere from minus 0.5 percent to plus 1.5 percent,” he said. “I wouldn’t be surprised if we saw a negative number.”

Even as economists on Wall Street, at the Federal Reserve and elsewhere study the data for the second quarter, government statisticians at the Commerce Department’s Bureau of Economic Analysis will also be undertaking a comprehensive revision of how they measure the economy itself.

The bureau will now count expenditures on research and development as akin to more traditional business investment, as well as make adjustments for the value of artistic property like movies and books. Pension plans will also be measured differently. It is the first revision of its kind since July 2009.

All together, these changes will affect reports of economic activity going back decades and are expected to increase the estimated size of the American economy by roughly $400 billion. That may be less than 3 percent of the nation’s $16 trillion in annual output, but it’s larger than the entire economy of dozens of countries.

And while no one will notice the difference in their own lives, in the world of economics, the bureau’s revision is a major event. “For numbers geeks like myself,” Mr. Behravesh said, “these changes are anticipated with great interest.”

Article source: http://www.nytimes.com/2013/07/30/business/economy/economic-slowdown-is-expected-but-its-seen-as-fleeting.html?partner=rss&emc=rss

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Markets Soar to New Highs on Jobs Data

May 3, 2013 by Leave a Comment

The indexes’ surge to fresh records was propelled by the announcement that the economy added 168,000 jobs in April and significantly more than had been initially reported in February and March.

The job growth is still barely enough to keep up with the expansion of the population, but just a few weeks ago stock prices were falling on fears that the labor market might be shrinking.

Investors have become accustomed to big slowdowns in late spring; downturns have hit about this time each of the last three years. This time around, though, the economic data is showing signs of improvement and there are few of the looming threats that sent markets into tailspins in previous years.

“We worried about a double dip each of the last few years,” said Michelle Girard, the chief United States economist at RBS Securities. “I don’t think we will get to that point this time.”

“The U.S. is on more solid footing than at any point in the last couple years,” she added.

The blue-chip Dow briefly rose above 15,000 before slipping back later in the day. But it still finished at a record, up 1 percent, or 142.38 points, at 14,973.96.

The S.P. 500 climbed 1 percent, or 16.83 points to 1,614.42. The Nasdaq composite index rose 1.1 percent, or 38.01 points to 3,378.63. The technology-heavy index is still well below the peak it hit during the dot-com boom in 2000.

The gains built on a nearly two-week long rally that has brought the S.P. 500 up 13.2 percent for the year. The dissipating concerns were also evident in the sell-off in Treasury bonds, which investors have flocked to in times of danger. The interest rate on the 10-year government bond rose to 1.741 percent, up 11.5 basis points.

Still, the outlook is not entirely rosy. Chinese growth, one of the few reliable engines of the global economy, has been slowing more than expected. Meanwhile in Europe, most countries have fallen into recession again. The Cypriot banking crisis earlier this year showed how sensitive traders still are to any flare-up of problems in Europe’s financial system. Last summer’s market swoon was set off by fears that Greece would have to leave the European Union.

But investors have been comforted by the European Central Bank’s insistence that it will provide a backstop if there are new problems on the continent. This week, the central bank dropped its benchmark interest rate to the lowest level ever in an effort to encourage economic growth. Stock indexes across Europe are up this year, and rose Friday after the jobs report.

The moves by the E.C.B. provide a reminder of just how important central banks have been in the market’s recovery since the 2008 financial crisis. In the United States, the Federal Reserve gave reassurances this week that it was not planning to taper off its economic stimulus programs any time soon.

While the easy money has been a big help to banks, there are signs that the Fed policy is beginning to provide support for the real economy as well. The employment report on Friday showed that the size of the United States work force grew in March, while the number of long-term unemployed shrunk.

But the new data, like many other recent economic reports, was more indicative of slow expansion than roaring growth. A survey of the American service sector, released Friday, showed the lowest level of growth since last summer.

“These numbers aren’t going to be bringing down the unemployment rate in a serious fashion,” said Jonathan Lewis, the chief investment officer at Samson Capital Advisors. “No one is going to say it is robust, but people were so geared up for a weaker than expected number that these numbers have led to a lot of buoyancy in the market.”

The meager growth has made it hard for companies to expand their revenues. In the first quarter of this year, revenues have been flat among companies in the SP 500, according to Thomson Reuters. But companies have used cost cutting, and the easy availability of credit to continue to rake in record profits, the most important factor in stock prices.

Share prices have risen so quickly this year that there are questions about whether it can continue without economic growth picking up. If it does slowdown, though, strategists are expecting it to be more gradual, unlike the vacation-interrupting crises of recent summers.

“The further we get from the crisis, the more it clear that central bankers have put a floor on the next big event,” Mr. Lewis said. “It seems less likely that you’ll have that sudden severe sell-off.”

Article source: http://www.nytimes.com/2013/05/04/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Fed to Hold Rates Down Until Jobless Rate Is Below 6.5%

December 12, 2012 by Leave a Comment

WASHINGTON — The Federal Reserve said Wednesday that it would maintain its efforts to revive the economy in the new year by continuing its monthly purchases of $85 billion in Treasury bonds and mortgage-backed securities.

The Fed said it would keep buying bonds until the outlook for the labor market improves substantially, reiterating a policy it first announced in September.

Looking even further into the future, the Fed said that it expected to maintain short-term interest rates near zero, even after it stops buying bonds, for as long as the unemployment rate remained above 6.5 percent, provided that medium-term inflation does not exceed 2.5 percent. The November jobless rate was 7.7 percent.

That replaces the central bank’s earlier guidance that it expected interest rates to remain near zero at least until mid-2015, further emphasizing that reducing unemployment is now the Fed’s priority.

As in September, the Fed’s statement suggested that it is not responding to evidence of new economic problems, but instead increasing its efforts to address existing problems that have restrained a recovery for more than three years.

“The committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens,” the Fed’s policy-making committee said in a statement issued after a two-day meeting in Washington.

The action was supported by 11 members of the committee, led by the chairman, Ben S. Bernanke. The only dissent came from Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, who would like the Fed to do less.

The Fed announced in September that it would expand its holdings of mortgage-backed securities by about $40 billion a month until the outlook for the job market showed “sustained improvement.” The central bank also said that it planned to hold short-term interest rates near zero until at least the middle of 2015.

The announcement was the first time that the Fed had tied the duration of an aid program solely to its economic objectives, omitting any end point. The Fed also broke new ground by insisting that the purchases would continue even as the economy began to recover. Both steps were intended to underscore the central bank’s commitment to reducing unemployment, formalizing a shift away from the decades when inflation was its constant priority.

This week’s meeting marked the first test of that commitment. The Fed had announced earlier in the year that it would buy about $45 billion in Treasury securities each month through the end of December. Its September announcement underscored that the two sets of purchases should be considered part of a single effort. So the decision about whether to keep buying Treasuries in the new year stood as the first checkpoint for the promises made in September.

The Fed’s asset purchases are akin to removing seats from a game of musical chairs. Would-be investors in Treasuries and mortgage bonds are forced to compete for the remaining supply by accepting lower interest rates — that is, they are forced to pay upfront a larger share of the money they are entitled to receive as the bond matures.

A number of Fed officials have said in recent weeks that they see clear evidence the new mortgage purchases are reducing interest rates for borrowers. William C. Dudley, president of the Federal Reserve Bank of New York, noted in a recent speech that average rates on 30-year fixed mortgages had fallen by about 0.23 percentage points since September – and even more since the first rumblings in August that the Fed was planning to start buying mortgage bonds.

Indeed, some Fed officials argue that the mortgage bond purchases have a larger impact on the economy than buying Treasuries. The purchases allow the Fed to target interest rates in a critical economic sector. Fed Governor Jeremy C. Stein also argued recently that reducing the cost of mortgage loans has a larger economic impact than reducing the cost of corporate borrowing because people are more likely to take the money that they save and spend it.

But the Fed already is purchasing more than half of the volume of new mortgage securities, leaving little room to expand those purchases without essentially replacing the private market. And by law, the Fed is barred from buying most other kinds of securities. That leaves Treasuries, which are not in short supply, thanks to the federal government’s ever-expanding debts.

The Fed also will publish later Wednesday updated economic forecasts submitted by the members of its policy-making committee. Some of those officials have sounded increasingly upbeat in recent weeks, but they also have repeatedly overestimated the health of the economy and the pace of the recovery.

The forecasts published Wednesday will all be optimistic in at least one respect. They will assume that Congress and the White House reach a deal to avert scheduled tax increases and spending cuts next year.

If not, Fed officials agree that their own efforts will be trivial in comparison to the negative consequences, and that the economy likely will return to recession.

Article source: http://www.nytimes.com/2012/12/13/business/economy/fed-to-maintain-stimulus-bond-buying.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Bucks Blog: Insurance as an Investment Alternative

October 15, 2011 by Leave a Comment

In his Wealth Matters column this week, Paul Sullivan writes about some investors who are turning to life insurance to insulate themselves from the volatility in the stock market. Insurance, after all, allows you to leave money to your heirs tax free or to make sure you have money when you need it.

The problem is that insurance products often generate huge fees for the companies that sell them.

So, have you been looking for an alternative to stocks or Treasury bonds and considering permanent life insurance (meaning that it won’t lapse during your lifetime as term life insurance policies do)? If you have already moved some money into insurance, what was your experience?

Let us know below.

Article source: http://feeds.nytimes.com/click.phdo?i=6d3ea88bb6d0a30a8c94c50d0d79222d

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Nervous Investors Chase Low-Risk Assets

August 5, 2011 by Leave a Comment

Investors roared into Treasury bonds, cash and other low-risk assets on Thursday, acting on their fears about the weak global economic outlook on a day when stock markets in the United States declined more than 4 percent.

Just last week, the markets showed signs of nervousness about the government’s creditworthiness during a standoff over Washington’s debt limit. But on Thursday, yields on two-year Treasury notes touched 0.26 percent, the lowest ever, while the yield on the benchmark 10-year bond dropped 21 basis points to 2.41.

The low yields reflected a surging demand for Treasuries, which have long been considered almost as secure as cash. The 10-year rates approached depths not seen since October 2010, shortly before the Federal Reserve began to pump hundreds of billions of dollars into the economy amid fears of a slowdown.

Rates on even shorter-term credit, including six-month Treasury bills and overnight loans in the vast market for repurchase agreements, swung toward zero Thursday. Yields on one-month bills actually fell into negative territory before closing at zero.

Above all else, cash has become the investments of choice this week as the deepening economic and debt worries in the United States and Europe have made stocks look like a minefield to be avoided.

“The move to cash is symptomatic of a broader concern about growth and the stock market,” said Mike Ryan, chief investment strategist at UBS Wealth Management Americas. “It’s all part of a generic derisking exercise.”

Tom Forester, chief investment officer for the Forester Value Fund, based in Lake Forest, Ill., summed up the situation more succinctly. “Cash doesn’t go down,” he said.

Mr. Forester said he was shifting assets into a money-market fund that invests in Treasury notes. For other institutional investors, even money market funds seemed risky, and they instead sought the security of cash invested in commercial bank accounts.

The huge buildup in cash does not suggest that the world financial system is on the brink of another Lehman-like panic. But it does underscore the broader economic challenges facing both the United States and Europe, particularly the fear and uncertainty that has taken hold among companies, financial institutions and individuals.

Many companies are holding off on investing in new capacity and creating new jobs, instead stockpiling cash in case of another panic. And banks on both sides of the Atlantic are cautious about lending, restricting the money available to both businesses and consumers. Finally, individuals are clamping down on spending, too. Consumer spending in June dropped for the first time in nearly two years, according to government data announced earlier this week.

At the height of the uncertainty over whether the debt ceiling would be raised and with a potential default in the offing, in late July, investors pulled out more than $100 billion from money market funds and put much of it into banks, lifting fears that the funds could see a run that resembled the one after Lehman Brothers’ collapse in 2008.

Since the beginning of this year through July 20th, holdings of cash in United States commercial banks surged 85 percent, or $912.7 billion, to $1.98 trillion, according to the Federal Reserve.

In a sign of just how much cash had poured into commercial bank accounts, Bank of New York Mellon said on Thursday that it would charge institutional clients with more than $50 million on deposit a fee of 13 basis points. The move is intended to recover some of the cost of managing the money, but is also a bid to slow the so-called hot money that has been ricocheting between Treasuries, money-market funds and pure cash balances at the big banks.

The Bank of New York Mellon said the fee would only be applied “to a small number of institutional clients with extraordinarily high deposit levels where the deposits have increased significantly in recent weeks, well above market trends.” The bank did not disclose just how much cash had poured into its coffers recently.

Over all, banks took in nearly $200 billion between mid-June and mid-July as institutional investors fled money market accounts and sought the safety of accounts protected by the Federal Deposit Insurance Corporation, according to Joseph Abate, a money market strategist at Barclays Capital.

While its rivals have not yet announced similar moves, the Bank of New York’s charges are likely to force cash out of banks and back into money market funds and Treasuries, driving rates even lower where possible, Mr. Abate said in a note to investors Thursday.

“The movement into deposits during a financial crisis is expensive for U.S. banks because they have to pay deposit insurance on these extra inflows,” Mr. Abate wrote. “These inflows mostly represent ‘hot money.’ ”

There are signs that money market funds are beginning to regain some of their appeal now that the debt ceiling has been raised and as stocks swoon.

Amid the decline on Wall Street and approval of the debt ceiling increase this week, $13.1 billion went back into money market funds on Tuesday and Wednesday, said Peter Crane, the president of Crane Data, which tracks money market mutual fund flows. Data for Thursday was not in yet, but Mr. Crane said he expected this trend to continue in the coming days.

“Bad news for everyone else is good news for money market funds,” he said.

That is certainly why they appeal to Mr. Forester. He has been building up his cash position for weeks, he said, selling shares of past winners like I.B.M. and Honeywell.

The weak growth in gross domestic product in the first half of 2011, a figure released by the government last Friday, only confirmed his doubts, he said. Now, Mr. Forester’s cash position in his $210 million stock fund equals 22 percent of assets, about double the average since he started the fund 11 years ago.

“You do this ahead of time, you don’t do it when the world’s falling apart,” he said. “We’ve seen a lot of this coming.”

Julie Creswell contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=55ac77ea2810444dc47a19284fe789b5

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China’s Treasury Holdings Make U.S. Woes Its Own

July 19, 2011 by Leave a Comment

As the United States’ biggest foreign creditor — holding an estimated $1.5 trillion in American government debt — China has been a vocal critic of what it considers Washington’s politicized profligacy.

“We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors,” Hong Lei, a foreign ministry spokesman, said at a news conference late last week.

Beijing might prefer to respond by starting to dump some of its American debt. But in this financial version of the cold war, analysts say, both sides fear mutually assured destruction.

One reason the United States would want to avoid defaulting on its debt is that such a move could alienate China, which is a steady purchaser of Treasury bonds. Beijing, meanwhile, already has too much invested in American debt to do much more but continue to buy, hold and grumble.

It is the ultimate “too big to fail” global relationship, said Andy Rothman, an analyst in Shanghai for the investment bank CLSA.

If Beijing even hinted that it might try to sell part of its American debt, “other countries might sell their dollar assets,” Mr. Rothman said, noting that this would drive down the value of China’s holdings. “It would be financial suicide for China.”

China got into this situation, experts say, by indulging its own economic interests. To bolster what has become the world’s largest export economy, China has focused on policies that encourage domestic savings and hold down the value of its currency. The result: huge trade and current-account surpluses. China has accumulated more than $3 trillion in foreign currency reserves, far more than any other nation.

Most of those reserves are held in dollars, and recycled back to the United States through investments in Treasury bonds and other dollar-denominated securities — even stocks. And while some of China’s foreign exchange reserves are plowed into European and Japanese debt, those bond markets are not big or liquid enough to absorb the bulk of China’s ever-larger foreign holdings.

Beijing has tried to diversify its foreign exchange portfolio by creating a sovereign wealth fund that can invest some of the reserves overseas. The government has also encouraged Chinese companies to expand overseas and to acquire mines and natural resources to fuel China’s hungry economy. But because China has too much foreign money for any other outlet to absorb, the vast majority of its fast-growing reserves continue to be destined for the United States bond market.

“China has no choice but to keep buying,” said Zhang Ming, an expert at the Chinese Academy of Social Sciences, a Beijing research group. “After all, U.S. Treasury bonds are still the largest and most liquid investment product in the world.”

All of which has helped enable America’s own fiscally dubious habits.

The United States’ huge deficits — not only in government spending, but in trade and savings as well — have weakened its economy and strangled consumption. Many economists say that would poison the long-term prospects for the dollar, if it were not still the world’s reserve currency and most reliable safe haven.

Helping maintain that role for the dollar are the staggering debt problems that Europe and Japan are struggling with. With global investors like China having few good options besides United States Treasuries, Washington, despite its current debt-ceiling debacle, can continue to hold down interest rates and wallow in cheap borrowing.

Beijing in recent years has frequently fretted aloud about Washington’s monetary policies. In 2009, shortly after the global financial crisis broke out, China’s prime minister, Wen Jiabao, said his country was “worried” about the safety of its huge cache of United States Treasury holdings. Last year Chinese policy advisers criticized the Federal Reserve for undermining the value of holdings by “printing too much money” with its so-called quantitative easing policies.

But even now, despite Beijing’s scolding about the debt impasse in Washington, China’s options may be limited.

”There’s really nothing different they can do,” said Eswar S. Prasad, a Cornell economics professor and former head of the China division at the International Monetary Fund. “Even if China felt the United States was going off a cliff, there’s no other place for them to put their money.”

Over the long run, many economists say the structural imbalances on both sides of the Chinese-American debt symbiosis could be disastrous. Already, for example, many say that those dynamics helped create the global financial crisis by artificially creating the low interest rates that let housing prices reach bubble-bursting levels.

Xu Yan contributed research.

Article source: http://feeds.nytimes.com/click.phdo?i=dc6378ba81f7c2274b027e78022f45cc

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