Tag Archives: recovery

America: Optimism on hold

By Alan Beattie and Robin Harding

Published: July 9 2010 20:40 | Last updated: July 9 2010 20:40

Mall of America
Shopped out: downtime at the Mall of America, one of the biggest in the US. Job growth remains too slow to support the rise in consumption required for a self-sustaining recovery

A month ago, it all seemed to be going so well. Growth in the US economy was picking up. The financial system was, mainly, functioning. The risk of contagion from Europe had diminished after an unprecedented €110bn ($139bn, £91bn) bail-out from the European Union and the International Monetary Fund. Things were creeping back towards normality.

Then in early June, as Alan Greenspan, former Federal Reserve chairman, put it, the economy hit “an invisible wall”. The US had a run of bad news – disappointing job growth; unexpectedly low employment; indices suggesting manufacturing and services losing momentum; renewed jitters from Europe’s sovereign debt markets and its banks. While most economists think it unlikely this heralds the famous double-dip recession feared by policymakers, it does come at a time when America’s monetary and fiscal authorities are struggling for room to manoeuvre.

In truth, there was always a risk that growth would hiccup at this point. Fiscal stimulus and companies rebuilding inventories have given the recovery a strong push start. But those are one-off effects; the recovery must now switch to power from its internal engine. “We haven’t entered into that self-sustaining stage yet,” says Gus Faucher of Moody’s Analytics, who estimates the chance of a dip back into recession at 25 per cent.

A self-sustaining recovery needs a steady rise in jobs, wages and profits that will allow a steady rise in consumption and investment, feeding back into jobs, wages and profits. So it is worrying that private payrolls rose by only 33,000 in May and 83,000 in June – not fast enough to support a rapid rise in consumption – and both average wages and hours worked have dipped a little.

Business investment has boosted the recovery in the past few quarters but some surveys suggest it is slowing. June’s purchasing managers index for manufacturing fell from 59.7 to 56.2 – implying still rapid but slowing expansion. Nor is the housing market a roaring source of growth. Home sales and housing starts fell in May after the expiry of a tax credit. Prices appear to have stabilised but the IMF recently noted that “the backlog of foreclosures and high levels of negative equity, combined with elevated unemployment, pose risks of a double dip in housing”.

All this sounds bad. But as Neal Soss of Credit Suisse in New York points out, there is a big difference between a slowdown in growth and actual falls in economic activity. “The economy is still growing and there’s every reason to think it will keep growing,” he says.

Like many economists, Mr Soss has always thought the recovery would be slow as households have heavy debts and banks need to repair their balance sheets. One consequence, however, may be recurring alarm about a double dip. “You’ll have some speed-up scares and some slowdown scares,” he says. “But if you’re starting from a high level of unemployment, then slowdown scares are more likely to get attached to words like ‘recession’ instead of ‘deceleration’.”

The US could really do with a helping hand. Sadly, that seems elusive. If Europe thought the Greek crisis had been solved by the EU-IMF rescue package, it had succumbed to an early bout of World Cup euphoria. It may have eliminated Athens’ immediate financing needs but it did not end speculation that Portugal or Spain would follow. Nor did it quiet fears about the amount of Greek and Spanish debt held by eurozone banks.

In the past month, a familiar pattern of risk aversion has re-emerged. Credit spreads of indebted countries widened as investors fretted about the solvency of governments; equities dropped; the dollar and US Treasury bond prices rose as investors sought safe havens. This is not all bad news: higher bond prices equal lower long-term interest rates.

But more than America needs cheaper money, it needs businesses and consumers to be optimistic. “The net effect of the past month on the US has been slightly negative. The purely economic factors cancel each other out but the uncertainty, on top of a poor jobs picture, has not done any good,” says Professor Eswar Prasad of New York’s Cornell University.

Seeking to rebalance its lopsided economy, the US is embarking on a drive to double exports and thereby create 2m jobs. But plans an­nounced this week by President Barack Obama – a ragbag of bureaucratic shake-ups and trade missions – are regarded by many economists as inadequate. Far more importantly, the global environment for demand looks unpropitious.

With a strong dollar, even higher demand growth in emerging markets is unlikely to give US net trade much of a boost. The flexibility in the Chinese exchange rate announced in June was symbolically important. But the small rises allowed so far will not suck in many US exports.

Net trade boosted US gross domestic product by 1.2 percentage points in 2009 but largely because weak consumer spending caused a huge drop in imports. The Organisation for Economic Co-operation and Development, the Paris-based think tank, predicts that imports will grow faster than exports, subtracting from economic growth by 0.3 percentage points this year and 0.4 percentage points in 2011.

Worryingly, a combination of economic and political factors constrains US authorities. Thus any hit to confidence from events such as the Greek crisis are likely to be magnified.

On the monetary policy front, Federal Reserve officials are, as yet, not particularly concerned about the health of the recovery. They still think that the most likely outcome is steady growth over the next couple of years. But they do think the downside risks to growth and inflation have risen in recent months, and probably outweigh upside risks such as a surge in bottled-up consumer demand.

So one measure Fed officials will watch is inflation expectations, especially if inflation is very low later this year, which could be­come a self-fulfilling process. The risk of a slide into outright deflation could prompt easier monetary policy from the Fed.

The central bank thinks it has tools available for the unlikely eventuality that it is forced to act. One is buying more long-term assets such as Treasury bonds and mortgage-backed securities. Another is cutting the interest rate paid to banks that deposit money with it. That would increase their incentive to lend money out instead.

But no amount of monetary easing will help if banks do not extend credit because consumers do not want to spend nor companies to invest. And the weapons governments tend to use in such circumstances – spending rises and tax cuts – pose prob­lems more political than economic.

On the economic side, bond market investors do not seem worried about the effect of current deficits on US solvency or expecting Washington to inflate its way out of debt. Yields on 10-year Treasury bonds have sunk to very low levels, about 3 per cent, and expected inflation derived from the prices of index-linked bonds remains about 2 per cent.

Less happily for those in the administration who believe in continued stimulus, political support for public spending is eroding. Al­though recent primary elections ahead of November’s midterms have produced mixed results, some seemed to punish candidates for favouring Big Government.

Administration officials insist that the damage is mainly to candidates who supported the troubled asset relief programme, the federal financial bail-out, rather than government spending in general. But even continuing current stimulus is a struggle. Proposals to extend unemployment benefits and prolong aid to states are snarled in Congress. One senior administration official reports an interlocutor saying: “There are only three Keynesians left in America, and they all work in the administration.”

Alec Phillips of Goldman Sachs says: “The potential expiration of stimulus measures appears to be an increasingly important risk to growth.” As Treasury secretary Tim Geithner is fond of pointing out, for all the accusations that the US is a fiscal profligate, its deficit is due to fall more sharply in the near future than that of almost any other leading economy, from 10.6 per cent of GDP in 2010 to 5.1 per cent in 2013, compared with a fall from 5.5 per cent to just under 3 per cent in supposedly self-flagellating Germany.

Mr Phillips calculates that if the stimulus bill enacted last year is allowed to expire, including unemployment benefits, aid to states and a special personal tax credit, the effect could be to subtract 2 percentage points of GDP growth – more than half the US trend growth rate – at about the middle of next year. Even a more plausible scenario, in which the unemployment payments and tax credits are extended, would take at least a percentage point off growth throughout next year.

The US economy is not yet in severe trouble. Rises in equity prices over the past few days have comforted optimists that confidence is returning. But the economy’s sputter over the past month indicates just how fragile the recovery is and how dependent America is on generating its own demand. And if it starts to turn down rather than simply to decelerate, policymakers turning to their arsenal will find it dangerously depleted.

Reality of America’s fiscal mess starting to bite

By Gillian Tett

Financial Times

Published: June 17 2010 16:15 | Last updated: June 17 2010 16:58

If you pop into a toilet on the Seattle waterfront this summer, you might see over-flowing bins. The reason? A polite notice explains that “because of 2010 budget reductions”, the Seattle government can no longer afford to “service this comfort station” each day. Hence the dirt.

Investors would do well to take note. In recent months, America’s fiscal mess has assumed a rather surreal air. On paper, the country’s federal-level deficit and debt numbers certainly look very scary. But in practical terms, the impact of those ever-swelling zeroes still seems distinctly abstract.

After all, so far the federal government has not been slashing spending; on the contrary, there was a stimulus bill last year. And, as my colleague John Plender pointed out this week, Treasury bond yields have been falling as investors flee the eurozone woes. As a result, those scary numbers still seem to be a problem primarily concocted in the world of cyber finance.

But there is one place where reality is already starting to bite in America and that is in terms of state finances. Just look at the statistics. A report from the US Center on Budget and Policy Priorities issued last month estimates that in fiscal 2010 the US states collectively posted a $200bn-odd budget shortfall, equivalent to 30 per cent of all state budgets.

Last year, that pain was partly eased by Barack Obama’s stimulus package(s). But that spending splurge is now fading away. And in fiscal 2011 and 2012, the states are expected to face another combined budget deficit of $260bn, with the 2011 shortfall in places such as New Jersey, Illinois, Nevada and Arizona projected to be more than 35 per cent of last year’s budget.

So far, the municipal bond market has been dangerously complacent about all this, with yields on 10-year municipal bonds hovering just above 3 per cent. But even if markets seem relatively relaxed, the key point is that the state statistics are already having a very real world impact – in contrast to the federal debt.

Never mind the trivial matter of Seattle’s comfort stations; as it happens, Washington State’s finances are better than most. In New Jersey schools, classes are being cut. In California, public sector employees are not getting paid. In New York, a subway extension has just been cancelled. And in places such as Illinois and San Diego, pension benefits are being renegotiated altogether, breaking numerous taboos.

This, in turn, begs a bigger question: what will be the wider economic and psychologal impact? One obvious, immediate consequence of these cuts is that they appear to be undermining consumer confidence, over and above the damage already being inflicted by the stubbornly high unemployment rate. The pattern may also be fuelling some subtle shifts in terms of how investors view the future.

In Seattle, for example, local insurance companies have recently changed the message they are giving to customers. For though financial planners used to steer households into tax-deferred products (such as 401K), since they assumed that employees would pay lower taxes when they retired, the new mantra is “tax diversification”. That is based around the idea that households should not defer tax payments, since taxes wll inevitably rise in the future, as the fiscal squeeze takes hold. And that, in turn, raises another question: namely what all of this real-world squeeze in Seattle (and eslewhere) might – or might not – do to the bigger debate about the federal debt.

It is a fair bet that eventually the debate about state spending cuts will encourage investors and voters to start paying more attention to the seemingly abstract federal fiscal numbers.

That might spark more market upheaval. it might also create more political upheaval. Just look at the rise of the Tea Party for signs of that.

But if you want to be optimistic, it is also possible to put a more upbeat spin on this. For all the gloomy statistics about state deficits and spending cuts, what has not received as much attention is that some states are now trying proactively to tackle their woes. Illinois, for example, is facing a big crunch due to credit downgrades; but it is also doing some imaginative things, such as raising the retirement age for local state employees.

That may not please voters. Nor will it necessarily save Illinois from further downgrades to its debt. But this is the type of step that needs to embraced at the federal level, too. So if places such as Illinois can actually break these taboos, it could be a reason for cheer; conversely, if it sparks too much social unrest, it will be a powerful warning sign. Either way, holders of US Treasury bonds had better keep a close watch on what happens to state budgets this year; even in the all-too-tangible world of the Seattle waterfront.

It’s time to consider cutting instead of spending!!

Prune and Grow



Sixteen months ago, Congress passed a stimulus package that will end up costing each average taxpayer $7,798. Economists were divided then about whether this spending was worth it, and they are just as divided now.

The president’s economists ran the numbers through their model and predicted that the stimulus package would create or save at least three million jobs. John F. Cogan and John B. Taylor of Stanford and Tobias Cwik and Volker Wieland of the Goethe-University of Frankfurt argue that the White House methodology is archaic. Their model suggests the stimulus will create about a half-million jobs.

Edward L. Glaeser of Harvard compared the change in employment in each state to the amount of stimulus money it has received. He found a slight relationship between stimulus dollars and job creation, but none at all if you set aside three states: Alaska and the Dakotas.

Over all, most economists seem to think the stimulus was a good idea, but there’s a general acknowledgment that we know relatively little about the relationship between fiscal policy and job creation. We are left, as Glaeser put it on The Times’s Economix blog, “wading in ignorance.”

If the economists are divided about what just happened, the rest of the world is not divided about what should come next. Voters, business leaders and political leaders do not seem to think that the stimulus was such a smashing success that we should do it again, even with today’s high unemployment.

They seem to see the fiscal floodgates wide open and that the private sector still only created a measly 41,000 jobs last month. That doesn’t inspire confidence. Furthermore, they understand something that is hard to quantify: Deficit spending in the middle of a debt crisis has different psychological effects than deficit spending at other times.

In times like these, deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn’t induce small businesspeople to hire and expand. It scares them because they conclude the growth isn’t real and they know big tax increases are on the horizon. It doesn’t make political leaders feel better either. Lacking faith that they can wisely cut the debt in some magically virtuous future, they see their nations careening to fiscal ruin.

So we are exiting a period of fiscal stimulus and entering a period of fiscal consolidation. Last year, the finance ministers of the G-20 were all for pumping up economic activity. This year, they called on their members to reduce debt. In this country, deficits are now the top concern.

Some theorists will tell you that if governments shift their emphasis to deficit cutting, they risk sending the world back into recession. There are some reasons to think this is so, but events tell a more complicated story.

Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, “in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”

This was true in Europe and the U.S. in the 1990s, and in many other cases before. In a separate study, Italian economists Francesco Giavazzi and Marco Pagano looked at the way Ireland and Denmark sharply cut debt in the 1980s. Once again, lower deficits led to higher growth.

So the challenge for the U.S. in the years ahead is to consolidate intelligently. That means reducing deficits while at the same time making the welfare state more efficient, boosting innovation in areas like energy, and spending more money on growth-enhancing sectors like infrastructure.

That’s a tough balancing act.

The biggest task will be to reduce middle-class entitlement spending. Alesina found that spending cuts are a more effective way to stabilize debt than tax increases, though we’ll need both.

The second biggest task is to consolidate while addressing another problem: labor market polarization. According to a Hamilton Project/Center for American Progress study by David Autor, high-skill sectors saw no net loss of jobs during the recession. Middle-skill sectors like sales saw an 8 percent employment decline. Blue-collar jobs fell by 16 percent.

In other words, the recession exacerbated the inequalities we’ve been seeing for decades. Somehow government has to cut total spending while directing more money to address the trends that threaten to hollow out the middle class.

During the period of consolidation, in other words, the government will have to spend less, but target better. That will require enormous dexterity and intelligence from a political system that has recently shown neither.

Economic Recovery Ahead?

Topic: Economic Policy
Economic Recovery Ahead?

What will stop our economy from recovering.

by Steve Hutchinson
Monday, March 15, 2010

What a difference a year makes,or does it? A year ago our financial institutions, government and policy regulators faced one of the gravest situations our country has ever dealt with. And before we knew it, Bear Stearns and Lehman Brothers evaporated in a mist of government intervention in the name of economic stability. The investment banking industry disappeared almost overnight and firms with storied names and reputations such as Merrill Lynch and Wachovia were absorbed into larger entities in a rash of orchestrated consolidations and government policy making.

We saw our financial markets drop precipitously as investors clamored for the safety of cash. Uncertainty and fear reigned. Interest rates dropped overnight as the Federal Reserve intervened into the money supply as never seen before. And this was just during the month of October.

What lies ahead? Can our economy rebuild? Can our government deliver on promises of economic security? Will the small businesses of America restore their self confidence and seize the opportunities created by this chaos to grow and expand their businesses? These are good questions .

I am not certain about economic recovery, but I am certain about four precepts that could potentially delay or place our potential for economic prosperity at risk. They are not political in nature, but grounded in solid economics and study.

1. Increasing government control or regulation.

2. Limiting or restricting free-trade

3. Inflationary money supply

4. Raising personal and business taxes.

Each of these independently can be managed, but the implications of all four of these policies manifesting themselves could have significant implications for the resumption of the long term growth of our economy.

Today the government controls two-thirds of our auto industry. The government’s interests in our banking, insurance and investment businesses concerns many Americans. We have seen the Federal Reserve increase the money supply to historic proportions. The impact of unwinding these activities stokes realistic fears of inflation. Tax policy is at the centerpiece of the government’s economic policy. Their focus seems to be taking a larger share of our incomes and redistributing this revenue through more government programs. Many of the the hindrances to reestablishing our prosperity are already in place.

As quickly as one can possibly imagine we have saddled our children and grandchildren with a debt thay can’t possibly repay. As of this date 100% of all tax revenues are used to pay for entitlement programs. The continuing role of confiscatory taxes will be the norm for the future.

We should watch carefully as policy changes manifest themselves and remember that more often than not, uncertainty for the masses can generate opportunities for some if we maintain perspective in our judgments and keep our focus fearless. We have a great country and a great people. Founded in hard work and the love of freedom. But through this we should seek wisdom.

A person who does not seek wisdom, will soon find himself at a banquet of consequences” Author Unknown

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