Wednesday, June 6, 2012

Economic Events of the Week

Wednesday – Productivity and Costs, EIA Petroleum Status Report, Beige Book
Thursday – Jobless Claims, Ben Bernanke Speech
Friday – International Trade

e21 Reaction & Commentary
CBO Says Continued Accumulation of Debt Will Weaken U.S. Economy (CQ)

Washington Update
Fed Faces Political Heat in Weighing More Economic Stimulus (The Washington Post)
Taxing Times (National Journal)
Plan Targets Health Care, Financial Regulatory Laws (CQ)

Market Talk
Fed’s Bullard Says Job Slump Hasn’t Changed Outlook (Bloomberg)
Fed Considers More Action Amid New Recovery Doubts (The Wall Street Journal)
Housing: Dude, Where's my inventory? (Calculated Risk Blog)

Editorials & Opinions
US Economy: Something for Everyone (Financial Times)
Big Banks Are Not the Future (Henry Kaufman in The Wall Street Journal)
Obama's Debt Boom (The Wall Street Journal Editorial)

e21 Reaction & Commentary

CBO Says Continued Accumulation of Debt Will Weaken U.S. Economy (CQ)

A new report on the nation’s fiscal path underscores the negative impact that high deficits and growing debt will have on the economy if Congress does not make some tough choices. The Congressional Budget Office on Tuesday warned that if Congress continues current policy by extending expiring tax cuts and putting off scheduled automatic spending cuts, the growth in red ink will harm the economy in years to come. Both Democrats and Republicans pointed to various parts of the agency’s annual long-term budget projection as evidence backing up their positions, with the GOP saying that curbing rising spending is the answer, while Democrats said increased taxes have to be part of the solution. During a House Budget Committee hearing on the report scheduled for Wednesday, Republican members of the panel plan to highlight the damage they say higher taxes would do to the economy. Democrats will argue that the GOP is holding up agreement on extending tax cuts for the middle class by its insistence on not raising taxes for affluent Americans.

Washington Update

Fed Faces Political Heat in Weighing More Economic Stimulus (The Washington Post)

With Europe falling deeper into crisis and Congress paralyzed, only one institution may have the flexibility to try to keep the U.S. economic recovery on track: the Federal Reserve. But the Fed faces a daunting burden. Any new action could provoke tough political criticism. Republicans, in particular, have expressed deep concern about the measures taken by the Fed to support the economy — and could be doubly upset if new efforts goose the stock market and are perceived to work in favor of President Obama’s reelection. “The Fed is going to try to do the right thing,” said Vincent Reinhart, a longtime Fed economist and now top U.S. economist at Morgan Stanley. But, he added, “The headline they most worry about is ‘The Fed acts to help the incumbent.’ ” The central bank fiercely guards its independence from politics. But its unprecedented efforts over the past four years — rescuing banks and printing trillions of dollars in new money to support the economy — have raised concerns among conservatives about a rising risk of runaway inflation and a weakened dollar. In recent months, amid improving economic data, the Fed sent signals that it was pausing its campaign of economic stimulus. But with the escalating crisis in Europe and the sudden slowdown in U.S. economic growth — marked by last week’s report of paltry job growth — many economists say the Fed is likely to reconsider measures to support growth.

Taxing Times (National Journal)

House Republicans are back to repealing pieces of the health care law this week, but this time they are trying to keep the focus on the top issue on voters’ minds: jobs and the economy. “From the start, Republicans have acted with urgency on jobs, passing nearly 30 commonsense bills that would help liberate job creators and build a stronger economy for all Americans,”  wrote Michael Ricci, a staffer for House Speaker John Boehner, on the speaker’s blog on Monday. “This week, the House is set to pass another jobs bill, one repealing an Obamacare medical-device tax that, according to a new nonpartisan analysis, could destroy tens of thousands of jobs.” The 2.3 percent tax on medical-device-company revenues is just one way that Democrats have made the health industry chip in to pay for the health care law. If all goes according to Democrats’ plans, the reform effort will deliver an additional 30 million customers over the next 10 years to the doctors, hospitals, insurers, pharmaceutical companies, and, yes, medical-device companies.

Plan Targets Health Care, Financial Regulatory Laws (CQ)

House Republicans, renewing their attack on major Obama administration initiatives, released a spending plan Tuesday that would sharply reduce backing for the 2010 health care and financial regulatory overhauls. The House Appropriations Committee draft of a $21.2 billion fiscal 2013 Financial Services bill has many of the same funding limitations and policy restrictions that GOP lawmakers previously sought, almost certainly setting up a fight with Democrats. The Financial Services Appropriations Subcommittee is set to consider the measure Wednesday. The appropriations bill finances the Treasury Department and various agencies, including the Securities and Exchange Commission (SEC), Small Business Administration (SBA) and General Services Administration (GSA), as well as the judiciary and the District of Columbia.

Market Talk

Fed’s Bullard Says Job Slump Hasn’t Changed Outlook (Bloomberg)

Federal Reserve Bank of St. Louis President James Bullard said disappointing job creation hasn’t changed the U.S. economic outlook and the Fed should be careful not to prompt borrowing by consumers with excessive debt. “Monetary policy has been ultra-easy during this period, but cannot reasonably encourage additional borrowing by households with too much debt,” Bullard said in remarks today to the Bipartisan Policy Center in St. Louis. “The recent nonfarm payrolls report was disappointing, but not enough to substantially alter the contours of the U.S. outlook.” U.S. job growth slowed to 69,000 last month from a high this year of 275,000 in January even as the Federal Open Market Committee sustained record stimulus, including a pledge to keep the benchmark interest rate near zero until at least late 2014.

Fed Considers More Action Amid New Recovery Doubts (The Wall Street Journal)

Disappointing U.S. economic data, new strains in financial markets and deepening worries about Europe's fiscal crisis have prompted a shift at the Federal Reserve, putting back on the table the possibility of action to spur the recovery. Such action seemed highly unlikely at the central bank's April meeting, when forecasts for growth and employment were brightening. At their policy meeting this month, Fed officials will weigh whether the U.S. economic outlook is deteriorating enough to justify new measures to boost growth, according to interviews and Fed speeches. The Fed's next meeting, June 19 and 20, could be too soon for conclusive decisions. Fed policy makers have many unanswered questions and have had trouble forming consensus in the past. Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn't making progress on bringing down unemployment. Recent disappointing employment reports have raised this possibility, but the data might be a temporary blip. Moreover, the Fed's options for more easing are sure to stir internal resistance at the central bank if they are considered. Their options include doing nothing and continuing to assess the economic outlook—or more strongly signaling a willingness to act later if the outlook more clearly worsens. Fed policy makers could take a small precautionary measure, like extending for a short period its "Operation Twist" program, in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.

Housing: Dude, Where's my inventory? (Calculated Risk Blog)

According to the deptofnumbers.com for (54 metro areas), inventory is off 22.0% compared to the same week last year. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through April (left axis) and the HousingTracker data for the 54 metro areas through early June. Since the NAR released their revisions for sales and inventory, the NAR and HousingTracker inventory numbers have tracked pretty well. On a seasonal basis, housing inventory usually bottoms in December and January and then starts to increase again through the summer. So inventory might increase a little over the next couple of months, but the forecasts for a "surge" in inventory this summer appear to be incorrect.

Editorials & Opinions

US Economy: Something for Everyone (Financial Times)

Who says Wall Street is a bastion of exclusivity? There is something for everyone in the current investment environment. The sky-is-falling-down brigade point to the eurozone, China, weak US economic data and the prospect of further monetary easing. Bulls, on the other hand, are buoyed by robust corporate profits and balance sheets, generally better US economic data and, er, the prospect of further monetary easing. Theoretically, of course, it is always thus. Market levels are determined by buyers and sellers with opposing points of view. But compared with the universal despair during the crisis, for example, or the positivity of the dotcom era, opinion on asset prices has never seemed so polarised. Take US corporate earnings. Yes it is impressive that adjusted net margins at about 9 per cent are back to pre-crisis levels, according to Standard & Poor’s data. But it is the very fact that margins are at cyclical highs (especially as revenue growth slows) that scares the bears.

Big Banks Are Not the Future (Henry Kaufman in The Wall Street Journal)

The halcyon days of large financial conglomerates are over. This assertion may seem surprising in light of the growing power—and profitability—of the leading financial institutions in recent years. The trend toward oligopoly, already in full swing during the 1980s and '90s, only accelerated during the financial crisis of 2008, as faltering firms were absorbed by a handful of burgeoning survivors. Coming out of the crisis, those at the top seemed unassailable. Today, a mere 10 highly diversified financial institutions are responsible for 75% of total financial assets under management. Not only are they too big to fail, if the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act works as intended, they are supposed to become more stable going forward. Many observers therefore assume that these behemoths will dominate into the foreseeable future.

Obama's Debt Boom (The Wall Street Journal Editorial)

Remember a week or two ago, when President Obama was claiming to be a fiscal skinflint because some online columnist said so? That was fun. On Tuesday the Congressional Budget Office released a view more tethered to reality, and let's just say this will not be showing up in one of the President's campaign ads. The CBO's long-term budget outlook notes that federal debt held by the public—the kind we have to pay back—will surge to 70% of the economy by the end of this year. That's the highest share of GDP in U.S. history except World War II, as the nearby chart indicates, higher than during the Civil War or World War I. It's also way up from 40% in 2008 and from the 40-year average of 38%. And it's rising fast. CBO says that on present trend the national debt will hit 90% of GDP by 2022. It then balloons to 109% by 2026—that would be the all-time WWII peak—and approaches almost 200% of GDP by 2037.

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