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Tuesday, March 27, 2012

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Economic Events of the Week

Tuesday – Supreme Court arguments continue, Case-Shiller Index
Wednesday – Supreme Court arguments conclude, Durable Goods
Thursday – Q4 GDP Final
Friday – Personal Income

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Story of the Day
Fed Doubts US Jobless Falls Will Last (Financial Times)

Washington Update
House GOP Budget Measure Expected to be Adopted, Create Conflict With Senate (CQ)
House Dems Introduce $3.6T Budget Plan (The Hill)
Anxiety Permeates Health Care Case (Roll Call)

Market Talk
How Well Do Initial Claims Forecast Employment Growth? (St Louis Federal Reserve)
Oil Spills (Morgan Stanley)

Editorials & Opinions
Supreme Court Won’t End Republican Obamacare Attacks (Ramesh Ponnuru in Bloomberg)
Step to the Center (David Brooks in New York Times)
Ryan and the Right (Wall Street Journal Editorial)

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Story of the Day

Fed Doubts US Jobless Falls Will Last (Financial Times)

Rapid recent falls in US unemployment may prove to be a one-off unless economic growth picks up, Ben Bernanke, chairman of the US Federal Reserve, warned on Monday. The downbeat comments, underscoring the Fed’s support for easy monetary policy, may calm investors who had begun to doubt the central bank’s forecast of exceptionally low interest rates until “late 2014”. The speech marked the first time Mr Bernanke had given his analysis of the rapid fall in the unemployment rate from 9.1 to 8.3 per cent over the past six months. He said it may reflect a one-off bounce back from big job cuts in 2008 and 2009. “To the extent that this reversal has been completed, further significant improvements in the unemployment rate will probably require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” Mr Bernanke told a National Association of Business Economists conference in Arlington, Virginia.


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Washington Update

House GOP Budget Measure Expected to be Adopted, Create Conflict With Senate (CQ)

The House will take up a fiscal 2013 budget resolution Wednesday that may not meet all the desires of conservatives in the Republican Conference but appears sure to be adopted, even with Democrats united in opposition. The resolution, which was written by Budget Chairman Paul D. Ryan, R-Wis., will serve as the House GOP’s tax and spending framework for the coming year as well as a statement of fiscal principles heading into the fall elections. It will also almost surely result in a confrontation between the House and the Senate later in the year, since it calls for limiting discretionary appropriations for the fiscal year that begins Oct. 1 to $1.028 trillion. That figure is $19 billion lower than the $1.047 trillion spending cap set in the August debt limit law, which the Senate has said it will use to write appropriations bills for next year.

House Dems Introduce $3.6T Budget Plan (The Hill)

House Democrats on Monday night introduced their 2013 budget plan to compete with the Republicans' proposal on the chamber floor this week. Sponsored by Rep. Chris Van Hollen (Md.), senior Democrat on the House Budget Committee, the $3.6 trillion proposal is not expected to pass, but nonetheless provides the Democrats with a comprehensive plan from which to distinguish their policy priorities from those of Republicans this election year. The proposal adopts much of President Obama's job-creation agenda, including tens-of-billions of dollars for near-term stimulus spending on infrastructure and other federal programs, while keeping Medicare and other entitlement benefits largely intact. Van Hollen said the proposal "stands in clear contrast" to the GOP bill, which the Democrats have attacked as a giveaway to the wealthy at the expense of seniors and the middle class.

Anxiety Permeates Health Care Case (Roll Call)

The Supreme Court will hear the core of the case against President Barack Obama’s signature health care law today, after appearing Monday to brush aside a technicality that would put off the case until 2015. With protests and press conferences outside and respectful silence within, the court began the rare three-day argument Monday with anxiety on both sides over the fate of the most far-reaching federal law in decades. In the first 90 minutes of argument, the justices gave few clues as to how they will ultimately rule, but they appeared eager to do so. Justice Anthony Kennedy — potentially the swing vote in the case — punctured the tension in the room at one point. “Don’t you want to know the answer?” he asked of how the court would rule on a technical question Monday, to laughs. Today, the court will hear arguments on the central question facing the justices: Can the federal government mandate that individuals buy health insurance coverage?


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Market Talk

How Well Do Initial Claims Forecast Employment Growth? (St Louis Federal Reserve)

Labor market statistics are often scrutinized for insights about the strength of economic activity, especially when the economy appears to be faltering or in the early stages of a recovery. The initial claims for state unemployment insurance benefits, which are reported weekly by the Employment Training Administration of the Bureau of Labor Statistics, represent one such statistic. Initial claims measure labor flows from the ranks of the employed to the ranks of the unemployed (or vice versa) and are considered a leading indicator of economic activity, especially of the growth of employment. According to former Federal Reserve Chairman Alan Greenspan, initial claims are the “earliest clear indicator of what’s happening to the economy.” Similarly, the National Bureau of Economic Research Business Cycle Dating Committee states that “a bulge in jobless claims usually forecasts declining employment and rising unemployment.” Although economists have argued that data on initial claims are useful for predicting monthly changes in payroll employment, empirical evidence has been mixed. Interestingly, we obtain quite different results when estimating the models using data for 1990-2011. For this period, initial claims produce statistically significant improvement in forecasts of employment growth during expansion months but not during recession months.

Oil Spills (Morgan Stanley)

The Fed and the ECB both noted better economic and market conditions in the statements following their respective policy meetings. However, they also made specific references to the near-term upside risks to inflation from oil prices. While the Fed downplayed the risks to inflation as "temporary", the ECB sounded a lot less dovish as it highlighted the role of energy prices (and indirect taxes) in creating upside risks to inflation. Despite this apparent difference in tolerance, we believe that both central banks are likely to act in a similar way should there be a further moderate, supply-driven increase in oil prices: by not doing much. In today's note, we assess the impact of a moderate, supply-driven change in oil prices (a further 15-20%) on DM and EM economies, given the stagflationary concerns surrounding such changes. A demand-driven change in oil prices is much more benign - in fact, oil prices then act like automatic stabilisers - and so we focus on the more worrisome path.


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Editorials & Opinions

Supreme Court Won’t End Republican Obamacare Attacks (Ramesh Ponnuru in Bloomberg)

The Supreme Court is much on Mitch McConnell’s mind these days. The Senate minority leader, a Kentucky Republican, just finished reading Jean Edward Smith’s biography of the great Chief Justice John Marshall. The book, a gift from the current chief justice, John Roberts, reminded McConnell that disagreement over the scope of the congressional power to regulate commerce among the states “goes back to the beginning of the country.” The court is again grappling with the issue this week, as it hears arguments about the constitutionality of the health- care legislation that President Barack Obama signed two years ago. McConnell plans to attend part of the oral argument. “The president doesn’t want to talk about it,” says McConnell, but his fellow Senate Republicans are happy to. They will be making a point of it this week and next.

Step to the Center (David Brooks in New York Times)

The Obama health care law represents another crucial moment in the move toward centralization. With its state insurance exchanges, Obamacare is not as centralized as a single-payer system. Still, it centralizes authority in at least four ways. First, while government has always had the power to regulate contracts and business activity, Obamacare compels people to enter into activity so that it can regulate them. This new ability to compel activity opens up vast new powers. Second, Obamacare centralizes Medicare decisions — and the power of life and death — within an unelected Independent Payment Advisory Board. Fifteen experts are charged with controlling costs from the top down. Third, Obamacare would continue the centralization of the nation’s resources — absorbing an estimated $1.76 trillion over the next 10 years. Finally, it would effectively make health care a political responsibility.

Ryan and the Right (Wall Street Journal Editorial)

It's no surprise that the White House has denounced Paul Ryan's new House budget as the end of welfare-state civilization. The puzzle is why some conservatives are taking shots at the best chance in decades for serious government reform. A pair of freshman Republicans, Tim Huelskamp of Kansas and Justin Amash of Michigan, joined every Democrat in voting against the budget in committee last week, claiming it didn't balance the budget fast enough. The budget passed 19-18, but if the rebellion spreads it will play into the hands of Nancy Pelosi, who wants to show that Republicans can't govern. Then there's Chris Chocola, the former Member of Congress who now runs the Club for Growth political donors' group, who groused that "on balance" Mr. Ryan's budget is "a disappointment for fiscal conservatives." Mr. Chocola says the proposal doesn't get to balance fast enough and waives the automatic defense cuts from last year's debt-limit deal with President Obama. The GOP critics are wrong on the economics and politics.


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