November 18, 2024

Stocks & Bonds: Wall St. Slides After Bleak Jobs Report

Many investors had sold stocks ahead of the Labor Department’s jobs report, which analysts in a Bloomberg News survey had forecast would show a gain of 68,000 nonfarm payrolls.

The monthly report showed there was no job growth in the United States in August, and the flat performance had a direct impact on stocks in market-sensitive sectors.

The August jobs figure was down from a revised 85,000 new jobs added in July. The unemployment rate stayed at 9.1 percent in August, the department said.

Philip J. Orlando, chief equity market strategist at Federated Investors, said the jobs report was “very disappointing. It was much weaker than expected. We were thinking that if today’s jobs number was poor, we would start to see a pullback.”

In addition, analysts said financial stocks were hurt during the day by the prospect that a federal agency was set to file lawsuits against more than a dozen big banks over their handling of mortgage securities. Regulators filed the suits on Friday.

The suits by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs, Citigroup and Deutsche Bank, among others.

“This is not good news from the perspective of the banking sector,” Mr. Orlando said.

When the stock market opened, all three major Wall Street indexes slid lower and stayed there. The Dow Jones industrial average closed down 253.31 points, or 2.20 percent, at 11,240.26. The Standard Poor’s 500-stock index was down 30.45 points, or 2.53 percent, at 1,173.97. Both indexes ended the week lower, the Dow by 0.3 percent and the S. P. 500 by 0.2 percent.

The Nasdaq composite index ended the day down by 65.71 points, or 2.58 percent, at 2,480.33. But it managed to squeeze out a 0.2 percent gain for the week.

The Treasury’s benchmark 10-year note rose 1 8/32, to 101 6/32, and the yield fell to 1.99 percent from 2.13 percent late Thursday.

Kate Warne, investment strategist at Edward Jones, said the jobs report raised fresh concerns about whether the economy might be headed for a new recession.

“Clearly, stocks are responding to the very disappointing jobs report,” Ms. Warne said. “It is one more piece of bad news that is really leading to a reassessment of the possibility of even slower economic growth.”

Though she said she did not believe there would ultimately be a double-dip recession, “the risks probably have risen.”

Financial stocks were affected by the jobs report because of its implications for the real estate market, retailing and consumer lending. The financial sector slid by 4 percent, dragging down the broader market, with the five most actively traded banks in the sector each down by 4 percent or more. Bank of America was more than 8 percent lower at $7.25. Wells Fargo was down 4 percent at $24.20 and JPMorgan was down more than 4 percent at $34.63.

Ms. Warne said that the impending lawsuits meant the banks would face additional legal troubles from lending that took place before the last recession. “There are not just concerns about weak growth, but increased worries that those problems are not behind them,” she said.

Industrial shares fell more than 3 percent. General Electric was down by 2.7 percent at $15.76. CSX was down 4.5 percent at $20.56.

Lower market results in the United States came after declines in Asia and Europe. The Euro Stoxx 50 index closed down by 3.69 percent. The DAX in Germany lost 3.36 percent and the CAC 40 in France fell 3.59 percent, while the F.T.S.E. in Britain was down by 2.34 percent. In Asia, the Shanghai, the Nikkei and the Hang Seng indexes each closed down by more than 1 percent.

“The latest fall follows a highly volatile August period which saw global markets take substantial hits over political uncertainty over the U.S. debt ceiling and subsequent credit downgrade,” John Douthwaite, chief executive of SimplyStockbroking, said in a research note.

In August, all three indexes in the United States turned in their worst monthly performance since 2001. Shares took a beating for reasons that included fears of an economic slowdown and fiscal problems in the United States as well as continuing concerns over debt issues in Europe.

Mr. Douthwaite said market turbulence would probably continue in September because of weak economic data from the United States and Europe.

The worse-than-expected jobs report led some economists to predict new action by the Federal Reserve at its meeting on Sept. 20-21.

Economists from Goldman Sachs said that the Fed was more likely to lengthen the average maturity of its balance sheet, with sales of relatively short-dated Treasuries and purchases of relatively long-dated Treasuries. Mr. Orlando said the central bank could also cut the premium on banking reserves to encourage banks to lend more.

Oil futures in New York for October delivery fell 2.8 percent to about $86.45. Energy related stocks declined by more than 2.5 percent.

Gold rose 2.6 percent to $1,873.70.

Shaila Dewan and Nelson D. Schwartz contributed reporting.

Article source: http://www.nytimes.com/2011/09/03/business/daily-stock-market-activity.html?partner=rss&emc=rss

With No New Jobs in August, Calls for Urgent Action

The dismal showing, the first time in 11 months that total payrolls did not rise, was the latest indication that the jobs recovery that began in 2010 lacked momentum. The unemployment rate for August did not budge, remaining at 9.1 percent.

As President Obama prepared to deliver a major proposal to bolster job creation next week, the report added to the pressure on the administration, on Republicans who have resisted any new stimulus spending, and on the Federal Reserve, which has been divided over the wisdom of using its limited arsenal of tools to get the economy moving again.

The White House immediately seized on the report as evidence that bold action was needed, calling the unemployment rate “unacceptably high.” Secretary of Labor Hilda L. Solis said in an interview that she hoped the president’s proposals would be embraced by Congress. “If they’re not supported, then he’s going to take it out to the public,” she said.

Republicans, in turn, argued that the numbers were further proof that the policies of Mr. Obama, whom they quickly dubbed “President Zero,” were not working. The lack of growth in nonfarm payrolls was well below the consensus forecast by economists of a 60,000 increase, which itself was none too optimistic. It was a sharp decline from July, which the Labor Department on Friday revised to show a gain of 85,000 jobs.

August’s stall came after a prolonged increase in economic anxiety this summer that began with the brinksmanship in Washington’s debt-ceiling debate, followed by the country’s loss of its AAA credit rating, stock market whiplash and renewed concerns about Europe’s sovereign debt.

On Friday, Wall Street stocks indexes promptly lost more than 2 percent of their value at the opening of trading, with the Dow Jones industrial average down 253 points by the close of trading, and some economists upgraded their expectations for a double-dip recession.

The total employment figure, a monthly statistical snapshot by the Department of Labor, appears slightly more negative because 45,000 Verizon workers were on strike when the survey was taken and their jobs were not included. They will reappear in next month’s total.

But even factoring in the Verizon jobs, private sector growth was the slowest it has been since May of last year. In addition, the report showed that job growth in June and July was softer than previously thought.

“As long as payrolls are weak, you will continue to hear cries of not just recession risk, but cries that the United States is in a recession and we just don’t know it,” said Ellen Zentner, the senior United States economist for Nomura Securities.

Economists blamed both sluggish demand for goods and services and the heightened uncertainty over the economy’s direction for the slow pace of job creation, saying political deadlock was creating economic paralysis.

“There is really a darkening cloud that seems to hover over the U.S. economy because of the lack of progress being made on economic issues,” said Bernard Baumohl, the chief economist at the Economic Outlook Group. “There is extreme frustration with Congress and the administration not working together to address the fiscal issues.”

Government continued to shed jobs over all, though small gains were posted at the state level, the Labor Department reported. Local governments, on the other hand, lost 20,000 jobs.

Two of the bright spots in the economy over the last year, manufacturing and retail, lost steam, falling by 3,000 and 8,000 jobs, respectively, in August. The health care sector added 29,700 jobs.

The number of long-term unemployed — people out of work for 27 weeks or more — remained about the same as in July, at 6 million , as did the median duration of unemployment, at 19.6 weeks compared with 19.7 weeks in July.

The general unemployment rate, which counts only people who looked for work in the previous four weeks, held steady at 9.1 percent. But a broader measure that includes people who have looked for work in the last year and people who were involuntarily working part-time instead of full-time, fell slightly to 16.1 percent. The percentage of working-age adults who were employed, already at its lowest rate since 1983, ticked down to 58.5 percent from 58.6 percent.

Though unexpectedly low, the jobs report may not change the mainstream view among economists that the economy will stay in growth mode, albeit at a level that is barely perceptible, much less comforting, to Americans without jobs.

“We’ve got at least another 12 months of difficulty to go through,” said Steven Ricchiuto, United States economist for Mizuho Securities USA. “I know that doesn’t help politicians who are worried about the elections.”

It is unclear whether the report increases the chances that Congress will act on any of the recommendations President Obama may make next week, such as a tax incentive for companies to hire new workers. But several economists said that given the fragility of the recovery, the payroll tax cut and extended unemployment benefits, both set to expire at the end of the year, should be renewed.

“It’s probably not the time for adding to fiscal drag,” said Jim O’Sullivan, the chief economist for MF Global. He said that together the tax cut and unemployment benefits account for 1 percent of the gross domestic product.

Some analysts had already downgraded their forecast for the jobs numbers on Thursday based on new economic indicators including weaker online job advertising, a rise in announced layoffs and a growing pessimism about the job market by consumers. A major report on manufacturing showed slowing employment growth and shrinking production and new orders.

But other indicators suggested that fears of recession have outstripped reality. Consumer confidence dropped sharply and pending home sales dipped, but in July retail sales increased and orders for durable goods — expensive items often purchased on credit — were up 4 percent. A report on chain-store sales indicated modest back-to-school shopping, somewhat slowed by Hurricane Irene.

Article source: http://feeds.nytimes.com/click.phdo?i=47f07393619c280086b412269a127437

Job Growth at Halt in U.S.; Worst Showing in 11 Months

The dismal showing, the first time in 11 months that total payrolls did not rise, was the latest indication that the jobs recovery that began in 2010 lacked momentum. The unemployment rate for August did not budge, remaining at 9.1 percent.

As President Obama prepared to deliver a major proposal to bolster job creation next week, the report added to the pressure on the administration, on Republicans who have resisted any new stimulus spending, and on the Federal Reserve, which has been divided over the wisdom of using its limited arsenal of tools to get the economy moving again.

The White House immediately seized on the report as evidence that bold action was needed, calling the unemployment rate “unacceptably high.” Secretary of Labor Hilda L. Solis said in an interview that she hoped the president’s proposals would be embraced by Congress. “If they’re not supported, then he’s going to take it out to the public,” she said.

Republicans, in turn, argued that the numbers were further proof that the policies of Mr. Obama, whom they quickly dubbed “President Zero,” were not working. The lack of growth in nonfarm payrolls was well below the consensus forecast by economists of a 60,000 increase, which itself was none too optimistic. It was a sharp decline from July, which the Labor Department on Friday revised to show a gain of 85,000 jobs.

August’s stall came after a prolonged increase in economic anxiety this summer that began with the brinksmanship in Washington’s debt-ceiling debate, followed by the country’s loss of its AAA credit rating, stock market whiplash and renewed concerns about Europe’s sovereign debt.

On Friday, Wall Street stocks indexes promptly lost more than 2 percent of their value at the opening of trading, with the Dow Jones industrial average down about 200 points by midday, and some economists upgraded their odds for a double-dip recession.

The total employment figure, a monthly statistical snapshot by the Department of Labor, appears slightly more negative because 45,000 Verizon workers were on strike when the survey was taken and their jobs were not included. They will reappear in next month’s total. But even factoring in the Verizon jobs, private sector growth was the slowest it has been since May of last year. In addition, the report showed that job growth in June and July was softer than previously thought.

“As long as payrolls are weak, you will continue to hear cries of not just recession risk, but cries that the United States is in a recession and we just don’t know it,” said Ellen Zentner, the senior United States economist for Nomura Securities.

Economists blamed both sluggish demand for goods and services and the heightened uncertainty over the economy’s direction for the slow pace of job creation, saying political deadlock was creating economic paralysis.

“There is really a darkening cloud that seems to hover over the U.S. economy because of the lack of progress being made on economic issues,” said Bernard Baumohl, the chief economist at the Economic Outlook Group. “There is extreme frustration with Congress and the administration not working together to address the fiscal issues.”

Government continued to shed jobs over all, though small gains were posted at the state level, the Labor Department reported. Local governments, on the other hand, lost 20,000 jobs.

Two of the bright spots in the economy over the last year, manufacturing and retail, lost steam, falling by 3,000 and 8,000 jobs, respectively, in August. The health care sector added 29,700 jobs.

The number of long-term unemployed — people out of work for 27 weeks or more — remained about the same as in July, at 6 million , as did the median duration of unemployment, at 19.6 weeks compared with 19.7 weeks in July.

The general unemployment rate, which counts only people who looked for work in the previous four weeks, held steady at 9.1 percent. But a broader measure that includes people who have looked for work in the last year and people who were involuntarily working part-time instead of full-time, fell slightly to 16.1 percent. The percentage of working-age adults who were employed, already at its lowest rate since 1983, ticked down to 58.5 percent from 58.6 percent.

Though unexpectedly low, the jobs report may not change the mainstream view among economists that the economy will stay in growth mode, albeit at a level that is barely perceptible, much less comforting, to Americans without jobs.

“We’ve got at least another 12 months of difficulty to go through,” said Steven Ricchiuto, United States economist for Mizuho Securities USA. “I know that doesn’t help politicians who are worried about the elections.”

It is unclear whether the report increases the chances that Congress will act on any of the recommendations President Obama may make next week, such as a tax incentive for companies to hire new workers. But several economists said that given the fragility of the recovery, the payroll tax cut and extended unemployment benefits, both set to expire at the end of the year, should be renewed.

“It’s probably not the time for adding to fiscal drag,” said Jim O’Sullivan, the chief economist for MF Global. He said that together the tax cut and unemployment benefits account for 1 percent of the gross domestic product.

Some analysts had already downgraded their forecast for the jobs numbers on Thursday based on new economic indicators including weaker online job advertising, a rise in announced layoffs and a growing pessimism about the job market by consumers. A major report on manufacturing showed slowing employment growth and shrinking production and new orders.

But other indicators suggested that fears of recession have outstripped reality. Consumer confidence dropped sharply and pending home sales dipped, but in July retail sales increased and orders for durable goods — expensive items often purchased on credit — were up 4 percent. A report on chain-store sales indicated modest back-to-school shopping, somewhat slowed by Hurricane Irene.

Article source: http://www.nytimes.com/2011/09/03/business/economy/united-states-showed-no-job-growth-in-august.html?partner=rss&emc=rss

Economix: By One Survey, Fewer Jobs Than 2 Years Ago

The job numbers every month come from two different surveys, which sometimes point in different directions. The establishment survey questions employers, and produces one headline number. This month it concluded that, seasonally adjusted, the economy added 117,000 jobs in July. The household survey asks people if they are working, and is used to calculate the unemployment rate.

FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

The two surveys do not cover the same thing: Self-employed people are not counted in the establishment survey. But someone with two jobs may be counted twice. Add in issues of sampling error, and they can diverge for long periods of time.

But it is interesting to observe that the total number of people with jobs in the household survey in July was 139,296,000. That figure is half a percent less than the figure in June 2009, when the recession officially ended. The unemployment rate is lower only because there are fewer people in the work force.

The establishment survey looks a little better. It shows employment up half a percent since the end of the recession.

Source: Bureau of Labor Statistics, via Haver Analytics

Both surveys indicate employment hit bottom in the winter of 2009-10, and is now higher. But while the establishment survey indicates the rise has been slow but steady since then, the household survey showed a sharp rise in early 2010 but has done little since then.

Article source: http://feeds.nytimes.com/click.phdo?i=b867c7b36894bea7bfb073c48f0ce34e

Even Boom States Get the Blues

Among them was Lisa Tankersley, whose husband was one of the thousands to land a well-paying job in the oil fields that are helping to drive the economic boom. She arrived at her new home here last Monday afternoon, weary from the two-day drive from East Texas. Fifteen minutes later, not having unloaded a single box, she was ordered by a police officer to evacuate: floodwaters were on the way.

“I was freaking out,” said Ms. Tankersley, who immediately threatened to drive back to Texas but consented to stay indefinitely at the apartment of friends who had also migrated north. “Here I am, hundreds of miles from home, with my two children and all my worldly belongings, and I have no place to live.”

In many ways this has been a year of triumph for North Dakota, home to the nation’s lowest unemployment rate and fastest growing economy. But with historic flooding from one side of the state to the other, this is also the year when North Dakota reminded its residents that even in good times the state is — in the words of Andy Peterson, head of the state Chamber of Commerce — “not for the faint of heart.”

First the Red River flooded to near record heights for the third consecutive year, forcing weeks of desperate work to protect Fargo, the state’s largest city. Later, the unprecedented rise of the Missouri River forced Bismarck, the state’s capital and second largest city, into a flood fight expected to last the whole summer. And over the last week, the Souris River broke the century-old high mark not by inches but by feet, swamping more than a quarter of Minot.

Together, these and other waterways — fed by record rain and snow — harassed large and small communities, forcing evacuations, destroying crops and causing tens of millions of dollars in damage to infrastructure. But even as officials acknowledged that the extreme weather would cause hardships for the many affected residents and perhaps chase away some of the newcomers, they insisted that it would not knock the galloping economy off its stride.

“Will this flooding set us back some? Yes it will,” said Senator John Hoeven, a North Dakota Republican who grew up in Minot and focused on promoting economic development during his three terms as governor before winning election to the Senate last year. “But our fundamentals are there. We’ll recover, we’ll help people recover, and we’ll continue to grow.”

Tucked into a narrow valley and surrounded by plains, Minot, the fourth largest city in the state, offers a case study in this roller coaster year. The city, serving as a regional hub for the northwest corner of the state, has experienced frenetic growth over the last decade, driven largely by development of the nearby Bakken shale field, which has made the state one of the top producers of oil. Then, last week, it went under water.

The Souris River, known as the Mouse after its French name, stopped rising on Sunday. The crest topped the 130-year-old record by almost four feet, lower than predictions. But the river, which flooded many homes to their roofs and displaced an estimated 12,000 people, is expected to subside slowly, so residents must wait to see what damage lies beneath the muddy surface.

“Before the flood, the major challenge Minot faced was how do you handle the growth?” said John Coughlin, a developer who stopped work on several projects to help build protective levees.

“The flood has distracted the forward momentum,” he continued. “The recovery is going to cost money, and it’s going to cost time.”

Over the last decade, the population of North Dakota grew to 673,000, just short of the high mark achieved eight decades earlier. And while high commodity prices in an economy driven by energy and agriculture has led the growth, Gov. Jack Dalrymple said a diversified economy had been fostered by businesses-friendly laws, regulations and taxes passed during years of economic malaise and population loss.

Article source: http://feeds.nytimes.com/click.phdo?i=d76314c434a143cc97e6b1dbde892db3

Economix: Podcast: Creating Jobs, and Juggling Them

The budget deficit has been grabbing many of the headlines and much of the attention in Washington. But it’s a distraction. There’s a more immediate economic problem.

So says Robert Frank, the Cornell economist, in the new Weekend Business podcast. Mr. Frank, who elaborates on this position in the Economic View column in Sunday Business, says that trimming the deficit is indeed necessary and important, but that it’s a long-term problem. For the short term, with the unemployment rate still stuck at 9.1 percent, putting people back to work is far more crucial, he says. And because increased employment would generate more national income and more government revenue, he says, failing to take action now is like setting a national bonfire and burning hundreds of billions of dollars worth of goods and services.

He suggests instituting a payroll tax holiday through 2012 as a politically acceptable way to stimulate the economy and create more jobs.

Juggling multiple jobs has always been a skill that writers, artists, actors and other creative people have had to master just to make ends meet, but in the weak American economy, many other people have had to learn this art, too. In a conversation in the podcast, Hannah Seligson tells Phyllis Korkki that this is particularly true for recent college graduates, many of whom have had great difficulty landing appropriate full-time employment.

In a cover article in the Sunday Business section, Ms. Seligson says that while holding several part-time jobs simultaneously may be needed to bring in enough income now, it often results in diminished earnings over the course of a long career. And part-time jobs rarely provide benefits like health care coverage, adding to the difficulties of those who manage to hold down more than one of them.

The global economy is still reeling from the effects of the subprime mortgage problems of 2006 and 2007, as Gretchen Morgenson says in a separate podcast conversation. When those mortgages began to go sour, the downturn in mortgage and asset-backed securities markets blossomed into both a full-blown housing crisis in the United States and a financial crisis throughout much of the world.

As Ms. Morgenson writes in her column in Sunday Business, a settlement has now been reached involving Morgan Keegan, a company with mutual funds that held securities based on these troubled mortgages but that failed to tell investors how risky those funds actually were, according to regulators.

Morgan Keegan, based in Memphis, reached the $200 million settlement with the Financial Industry Regulatory Authority, state securities regulators and the Securities and Exchange Commission. Investors lost more than $1 billion in the funds, though, and arbitration cases are continuing, Ms. Morgenson says in separate conversation in the podcast. Morgan Keegan neither admitted nor denied wrongdoing in the settlement.

But she says that regulators described a detailed pattern of misleading investors and of changing fund valuations in order to prevent losses by the fund company.
In the news section of the podcast, I also discuss several other big developments. They include the decision of the United States and its allies to release strategic oil reserves into the global market, and the continuing efforts to contain the debt crisis in Greece.

You can find specific segments of the podcast at these junctures: Gretchen Morgenson on Morgan Keegan (30:11); news headlines (22:16); Hannah Seligson on multiple jobs (17:56); Robert Frank on unemployment (11:45); the week ahead (2:35).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

Article source: http://feeds.nytimes.com/click.phdo?i=f260b27ff304e980ee5b924682dbe1e5

Mixed Data Show Tepid U.S. Economy, but Leading Indicators Rising

But a separate report suggested that the rate of the recovery could soon pick up after stalling in the first half of the year.

Taking the unexpected soft patch into account, the International Monetary Fund cut its forecast for economic growth in the United States, warning Washington and debt-ridden European countries that they were “playing with fire” unless they took immediate steps to reduce their budget deficits.

While the I.M.F. thinks downside risks to growth have increased, it still expects the economy to gain speed next year.

Consumer sentiment in the United States declined more than expected in June, the Thomson Reuters/University of Michigan survey showed, as consumers remained pessimistic about stagnant incomes and job prospects.

“Job growth is, at best, anemic and the unemployment rate is high. If you’ve been laid off, it’s probably been for a long period of time,” said Cary Leahey, economist and managing director at Decision Economics in New York. “That can’t help but affect these sentiment figures.”

The preliminary reading showed the index at 71.8, down from 74.3 the month before. It was below the median forecast of 74.0 among economists polled by Reuters.

Although the data contained little evidence that a new downturn was under way, the survey found that most consumers believed the recession had not yet ended.

Consumers’ view of rising prices was also mixed as the survey’s one-year inflation expectation fell to its lowest since February, to 4.0 percent from 4.1 percent. But the five-to-10-year inflation outlook was at 3.0 percent, edging up from 2.9 percent.

A separate report showed that a gauge of future economic activity rose more than expected in May, but high gasoline prices and a weak housing market are expected to keep growth moderate.

The independent Conference Board said on Friday its Leading Economic Index increased 0.8 percent to a record high of 114.7, after a revised 0.4 percent fall in April. Economists had expected a rise of 0.2 percent.

The rise in the economic indicators was an encouraging sign after recent sluggish data, and underscored releases on Thursday that showed a better-than-expected picture of the labor and housing markets, but a contraction in Mid-Atlantic factory activity in June.

“This rebound in the leading indicators index is an encouraging sign that the recent slowdown in the economy may be short-lived,” Nicholas Tenev, an economist at Barclays Capital, wrote in a note.

In its report Friday, the I.M.F. forecast that the gross domestic product in the United States would grow a tepid 2.5 percent this year and 2.7 percent in 2012. In its forecast just two months ago, it had expected 2.8 percent growth in 2011, rising to 2.9 percent in 2012.

Article source: http://feeds.nytimes.com/click.phdo?i=fc534d1600128bf0e7de3e9131617809

Economix: A Targeted Payroll-Tax Cut

One of the most successful stimulus programs of the last few years has been the cash-for-clunkers program. In it, the government gave $3,500 to $4,500 to people who traded in an old car for a new one that got more miles to the gallon. If you didn’t buy a car — helping the economy in the process — you didn’t get the money.

In my column Wednesday morning, I argued for a similar approach for a new payroll-tax cut for businesses. Rather than giving a tax cut to all businesses, as the White House seems to be mulling (though the details are unclear), a targeted tax cut would reward only those business that added to their payroll. This approach does less to increase the deficit and yet could do more to promote hiring.

Michael Greenstone — an M.I.T. economist who runs the Hamilton Project, a Washington research group, and a former Obama administration official — wrote me an e-mail Wednesday morning making a more detailed argument for a targeted payroll-tax cut for businesses. It’s worth reprinting:

A better policy would be one that cuts payroll taxes for firms’ employment expansions. For example, this could be a tax credit based on total payroll exceeding last year’s payroll, some average over the last several years, or an even more complicated approach. And, one could add the condition that all hires by new firms would be eligible for the credit. Of course, there will be gaming but this will still be more efficient than the subsidization of existing employment as in an across-the-board cut (i.e., neither M.I.T. nor I should receive a credit for my continuing employment).

A targeted payroll tax cut could stop the structural unemployment rate from increasing. Specifically the longer the high levels of unemployment persist, the more likely it is that people will become permanently disconnected from the labor force, thereby raising our structural unemployment rate. At a time when we already must grapple with the high levels of debt and the long-run decline in real wages for many Americans, we should try to avoid adding to the list of our long run economic challenges….

At the same time, it is important to make a targeted payroll tax cut part of a broader package that includes deficit cuts that begin to take hold in a few years. Without this pairing, there is a real risk that financial markets will view a payroll tax cut only as a continuation of the “tomorrow” approach to dealing with the deficit.

I prefer a simple approach: Businesses would not have to pay any payroll taxes on net new employees for a few years. The policy could be backdated to June 1, so companies would not wait to hire before Congress passes the bill.

Article source: http://feeds.nytimes.com/click.phdo?i=e9dbf47d9c62d7861a6362e9e2a35e5c

Stocks Cheered by Retail and Inflation Data

Stocks on Wall Street rose more than 1 percent Tuesday morning after American and Chinese economic data drew investors into an equities market that has been through six weeks of sharp declines.

In the United States, retail sales declined for the first time in nearly a year, but the decline was less than forecast, and so the report helped push stock prices higher and offered some respite to investors overwhelmed by recent weak economic data.

Despite the jump, some investors were still focused on a retreat in the Standard Poor’s 500-stock index to its March low near the 1,250 level. The index closed at 1,271.83 on Monday.

“The consumer isn’t dead,” said Michael Farr, president of investment management firm Farr, Miller Washington in Washington. “I question the sustainability, given the high levels of debt that consumers hold and the unemployment rate. But we don’t want to look a gift horse in the mouth. It’s good news for the day.”

In early trading Monday, the Dow Jones industrial average gained 115.83 points, or 1 percent, bringing it back over the 12,000 mark to 12,068.80 points. The S. P. rose 14.53 points, or 1.1 percent, to 1,286.36, and the Nasdaq composite index added 32.13 points, or 1.2 percent, to 2,671.82.

The S. P. 500 is down more than 7 percent from its high in early May as soft data sparked worries about the sustainability of the economic recovery.

In China, inflation is still a concern after data showed consumer prices rose at their fastest pace in almost three years, but industrial output grew 13.3 percent from a year ago, in line with forecasts.

China’s central bank later increased the reserve requirement ratio for commercial lenders by 50 basis points.

“News out of China is somewhat encouraging in spite of the fact they raised reserve requirements,” said Peter Cardillo, chief market economist at Avalon Partners in New York. He said the data is a sign that perhaps China’s economy “can avoid a hard landing, and that’s cheering the markets.”

“The real focus will be on the fact that the market is in a technical correction,” Mr. Cardillo said. “We have options expiration this week, so any rallies might continue to be short-lived.”

Article source: http://www.nytimes.com/2011/06/15/business/15markets.html?partner=rss&emc=rss

Economic View: The Sickness Beneath the Slump

News accounts of the economic crisis rarely put it in these terms. They tend to focus on distinct short-term developments or on the roles of prominent people like Federal Reserve governors, members of Congress or Wall Street financiers. These stories grab attention and may be supported by some of the economic statistics that the government and private institutions collect.

But the economic situation is primarily driven by hard-to-quantify sociological factors that play out over many years.

The uptick in the unemployment rate, to 9.1 percent from 8.8 percent two months earlier and the drop in stock prices over the last month have attracted notice, yet in a sense they are symptoms of a deeper economic sickness.

Real estate prices have been a significant indicator of this ailment. An unprecedented bubble in American home prices started in 1997 and ended five years ago. Home prices rose 131 percent in that time, or 85 percent in real inflation-corrected terms, according to the S. P./Case-Shiller National Home Price index. (I helped to develop that index, along with Karl Case of Wellesley College.)

Around the same time, there were bubbles in the nation’s commercial real estate and farmland. And there were real estate bubbles in many other countries, too.

Consider this: Home prices rose nearly 10 percent a year on average in the United States from 1997 to 2006, long enough for many people to become accustomed to the pace and to view it as normal. The conventional 30-year fixed mortgage rate averaged 6.8 percent over those years, far below the appreciation rate on housing, so even if you had a substantial mortgage, you were becoming wealthier by the day, at least on paper. People who owned a home over that period had reason to feel pretty well off and proud of their investment acumen. That fed a contagion of optimism and helped to drive the speculative bubble, propelling the economy and the stock market in a feedback loop that repeated year after year.

Professor Case and I have conducted annual spring surveys of home-buyer attitudes for many years. We ask about long-term expectations: “On average over the next 10 years how much do you expect the value of your property to change each year?”

The survey we conducted in spring 2005, near the end of the bubble, included 407 home buyers. In it, the median expectation for home price appreciation over the next decade — until 2015 — was 7 percent a year. That is substantially less than the 10 percent a year that Americans had recently experienced.

But expected increases of 7 percent a year still implied another doubling of home prices by 2015. And about a quarter of our respondents in 2005 anticipated increases of at least 15 percent a year for the next decade. Something was very wrong with this picture, but few noticed it.

As it turned out, of course, those expected increases didn’t happen. Instead, home prices tumbled 34 percent nationally from the peak in the first quarter of 2006 to the first quarter of 2011 — or 40 percent in real terms — and they still appear to be falling. The brief “recovery” in home prices of 2009 and 2010 was most likely spurred by federal housing stimulus measures like the home buyer tax credit. After that stimulus ended, prices resumed their downward trend.

During the bubble, the sense of rising wealth and high expectations gave people a good reason to spend and a greater willingness to plunge into investment, too. Government policy makers breathed in the same optimism, which no doubt encouraged them to be lax on regulatory restraint.

The mood is far different now. Our latest survey, covering April and May of this year, included 296 home buyers, and their median expectation for annual home price appreciation over the next decade was down sharply, to just 3 percent. And, in comparison with the 2005 results, few people had extravagant expectations.

The 3 percent figure is well below prevailing rates for 30-year mortgages, now hovering between 4.5 and 5 percent. Amid such low expectations, buying a home with a mortgage certainly isn’t being viewed as a way to get rich.

Even for people who have other reasons to buy a house, there may be little urgency to do so. Our 2011 survey found that the median expectation for home price appreciation next year is just 1 percent. So it won’t be surprising if new home sales remain abysmally low and few jobs are created in the hard-hit construction industry. And it shouldn’t be a shock if the personal savings rate stays at around 5 percent, as it has recently, up from around 1 percent in 2005. This would mean that consumer spending will not drive a strong recovery.

A half-century ago, there was a lively discussion among economists about the dynamics of price expectations. For example, Alain C. Enthoven, then of the Massachusetts Institute of Technology, and Kenneth J. Arrow of Stanford wrote in 1956 that expectations that extrapolate past price increases can produce economic instability. But that thinking was largely cast aside in the 1960s, when my profession embraced the theory that efficient markets formed by people holding rational expectations could explain virtually all economic activity.

As a result, economists in recent decades have not developed expectations theory much further. That needs to be corrected in coming years. In the meantime, this failing helps explain why the current crisis was generally unpredicted, and why its future course is so poorly understood.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets.

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