Thursday, June 22, 2012

Economic Events of the Week

Thursday – Jobless Claims, Existing Home Survey, Philadelphia Fed Survey

e21 Reaction & Commentary
e21 Commentary: The Fed's Unwinnable War On Unemployment

Washington Update
Health Insurance Plans Owe $1.1 Billion in Rebates (The Washington Post)
Fed Lowers Growth Forecasts (National Journal)
House Financial Services Bill Sets Up Clash With Senate Over SEC, Health Care (CQ)

Market Talk
Fed Expands Operation Twist By $267 Billion Through 2012 (Bloomberg)
Fed Issues Gloomier Forecasts (The Wall Street Journal)
Bernanke Paves the Way for QE3 on August 1st (Calculated Risk Blog)

Editorials & Opinions
The Fiscal Consequences of the Supreme Court's Healthcare Ruling (Charles Blahous & Jakina Debnam in US News)
It’s Not Just the Economy, Stupid (Keith Hennessey Blog)
It's a Single-Issue Election (Daniel Henninger in The Wall Street Journal)

e21 Reaction & Commentary

e21 Commentary: The Fed's Unwinnable War On Unemployment

The Federal Open Market Committee decided to continue its maturity extension program (aka “Operation Twist’) through the end of the year. While this decision represents a victory, of sorts, for proponents of monetary activism, it was well short of what many advocated. The decision was unwelcome news to stock traders (at least at first), who had come to believe something bigger was in store. Stock markets dropped by 0.44% in the 10 minutes following the announcement. In reality, the Fed had a choice between inaction, a pointless gesture, and pointlessness on steroids. They opted for pointlessness. The Fed committed to purchase an additional $267 billion of longer-term Treasury securities through the end of 2012. “Operation Twist” differs from quantitative easing in that the purchases of these securities are financed by the sale and redemption of shorter-term securities currently in the Fed’s portfolio. As a result, the Fed’s balance sheet remains the same size and no new reserve balances are created at member banks (aka “printing money”).

Washington Update

Health Insurance Plans Owe $1.1 Billion in Rebates (The Washington Post)

Millions of consumers and businesses will receive $1.1 billion in rebates this summer from health insurance plans that failed to meet a requirement of the new health-care law, according to the Health and Human Services Department. That Affordable Care Act rule requires insurance companies to spend at least 80 percent of subscriber premiums on health-care claims and quality improvement initiatives. The other 20 percent is left for administrative costs and profits. Health insurance plans that don’t hit that threshold will send a rebate to consumers to cover the difference. There could, however, be one big hitch. If the Supreme Court overturns the health-care law — a decision that could come as early as Thursday morning — experts say those checks are unlikely to hit Americans’ mailboxes. “If [the Supreme Court] says the law is unconstitutional, insurers couldn’t be forced to pay rebates based on unconstitutional laws,” said Tim Jost, a law professor at Washington and Lee University. In a new report, the Obama administration found that 12.8 million Americans will receive rebates this year, with an average value of $151 per household. “The big improvement here is a better value for the premium dollar,” said Mike Hash, interim director of the Center for Consumer Information and Insurance Oversight. “What this standard encourages issuers to do is be prudent in their administrative expenditures, so the bulk of the premium dollar is going to pay for benefits.”

Fed Lowers Growth Forecasts (National Journal)

Members of the Federal Reserve Board’s policy-setting committee cut their economic forecasts for 2012 when they met this week. Federal Open Market Committee members expect the year to bring both slower growth and higher unemployment than they projected in April, the latest round of forecasts, released on Wednesday, reveal. FOMC members' central-tendency expectation is for the gross domestic product to grow between 1.9 percent and 2.4 percent in 2012, down from an earlier forecast of 2.4 percent to 2.9 percent. Members also saw unemployment remaining at or above 8 percent in the most recent round of projections; earlier, they predicted it could fall to 7.8 percent this year. The members' predictions for unemployment over the longer run were unchanged at 5.2 percent to 6 percent. The FOMC meeting followed two months of lackluster economic data. Nonfarm payrolls grew by less than 100,000 in April and May. Unemployment remains elevated at 8.2 percent. Fed Chairman Ben Bernanke, in his most recent appearance on the Hill, suggested that the bank is still exploring two possible reasons for the slowdown in job growth. One, that it may have been “exaggerated” by the winter’s unusually warm weather and issues related to seasonal adjustment in the data. The other, that some of the larger gains the economy experienced in late 2011 and early 2012 were part of a catch-up in employers’ hiring. If that’s the case, more rapid gains in economic activity will be necessary to boost labor-market growth, he said.

House Financial Services Bill Sets Up Clash With Senate Over SEC, Health Care (CQ)

The House Appropriations Committee approved an amended fiscal 2013 spending bill on Wednesday that puts them on a collision course with their Senate counterparts, particularly over funding to implement the 2010 financial regulatory and health care overhauls. The draft bill would provide a total of $21.2 billion in discretionary spending — a cut of 1.7 percent from fiscal 2012 — for the Treasury Department and various regulatory agencies, including the Securities and Exchange Commission (SEC), the Small Business Administration (SBA), the judiciary and the District of Columbia. The Senate Appropriations Committee last week approved a Financial Services spending bill that would provide $23 billion. Democrats on the House panel said the bill underfunds the SEC, which is tasked with implementing portions of the Dodd-Frank financial regulatory overhaul. The bill, approved by voice vote, would give the SEC $1.37 billion, a $50 million increase from the current level but less than the $195 million increase that President Obama sought. The Senate bill would provide $1.57 billion.

Market Talk

Fed Expands Operation Twist By $267 Billion Through 2012 (Bloomberg)

The Federal Reserve will expand its Operation Twist program to extend the maturities of assets on its balance sheet and said it stands ready to take further action to put unemployed Americans back to work. The central bank will prolong the program through the end of the year, selling $267 billion of shorter-term securities and buying the same amount of longer-term debt in a bid to reduce borrowing costs and spur the economy. “If we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate,” Fed Chairman Ben S. Bernanke said at a news conference in Washington following a two-day meeting of the Federal Open Market Committee. “Additional asset purchases would be among the things that we would certainly consider.” Policy makers moved to shore up the world’s largest economy as faltering growth leaves it vulnerable to fallout from the European debt crisis and looming fiscal tightening in the U.S. Fed officials today lowered their outlook for growth and employment, foreseeing a jobless rate of at least 7.5 percent at the end of 2013. The yield on the 10-year Treasury note rose to 1.65 percent at 4:35 p.m. in New York from 1.62 percent late yesterday. The Standard & Poor’s 500 Index fell 0.2 percent to 1,355.69 after declining as much as 0.9 percent.

Fed Issues Gloomier Forecasts (The Wall Street Journal)

Economic projections released by the Federal Reserve on Wednesday saw officials expecting weaker growth, higher unemployment and softer inflation over the next few years. The Fed’s “central tendency” for the U.S. gross domestic product now ranges from 1.9% to 2.4% this year, compared with the 2.4% to 2.9% gain predicted in April. Growth is seen between 2.2% and 2.8% in 2013, from the April view of 2.7% to 3.1%. U.S. GDP growth is seen between 3.0% to 3.5% in 2014. The Fed’s outlook on hiring was also gloomier. It now sees the unemployment rate this year as coming in between 8.0% to 8.2%, from April’s projection of 7.8% to 8.0%. Next year the Fed sees the unemployment rate coming in between 7.5% to 8.0%, versus April’s projection of 7.3% to 7.7%. The Fed’s 2014 unemployment forecast is 7.0% to 7.7%. On the prices front, Fed officials see a reduced inflation threat. In terms of overall price pressures this year, Fed officials expect the core personal consumption expenditures index to rise 1.2% to 1.7%, versus the April estimate of 1.9% to 2.0%. In 2013 inflation is seen between 1.5% to 2.0%, from the previous projection of 1.6% to 2%. The core PCE price index, which is stripped of food and energy, is seen rising 1.7% to 2.0% this year, and by 1.6% to 2.0% in 2013.

Bernanke Paves the Way for QE3 on August 1st (Calculated Risk Blog)

At the January press conference, Fed Chairman Ben Bernanke hinted at further accommodation (QE3) based on incoming data. Then the January and February employment reports were above expectations, and inflation also picked up a little due to the surge in oil and gasoline prices. In April, based on the stronger data, the FOMC participants revised up their projections for GDP and inflation, and revised down their projections for the unemployment rate - and QE3 was put on hold. Compare the current projections released today (below) not just with the April projections, but with the January projections. GDP is below the projections in January, and inflation is also below the January projection. Only the unemployment rate is slightly improved from the January projections - and then only for 2012 - 2013 and 2014 are now worse. As Tim Duy wrote, the projections are "shocking". “[T]his is a significant downward revision to the forecast for not just this year, but next year as well. Moreover, they expect no meaningful progress on the unemployment rate and the PCE inflation forecast remains centered well below 2%.”

Editorials & Opinions

The Fiscal Consequences of the Supreme Court's Healthcare Ruling (Charles Blahous & Jakina Debnam in US News)

The Supreme Court's decision on the 2010 healthcare law may result in what appears to be a fiscal windfall for the federal government. But it would be a grave mistake for lawmakers to react to illusory savings with real new spending. To illustrate this point, let's look at a few of the possible Supreme Court rulings—and their projected fiscal consequences. The simplest decisions would be for the court to either uphold the legislation in its entirety, or to completely overturn it. In the case of full implementation, federal spending is projected to increase by $1.15 trillion in the next 10 years and deficits to increase by at least $340 billion. Accordingly, in the case of the law being wholly struck down, spending will be $1.15 trillion lower over the next 10 years, and deficits would be $340 billion lower than if the law had been allowed to go into full effect. This is not universally understood because of frequent press references to a Congressional Budget Office scoring that some have misinterpreted as meaning that the 2010 health law would reduce federal deficits. But as the Congressional Budget Office is always diligent about disclosing, this score does not evaluate the actual change in law under the 2010 statute. The effect of the actual change in law passed in 2010 is to increase deficits.

It’s Not Just the Economy, Stupid (Keith Hennessey Blog)

What do these four things have in common? The short-term path of the U.S. economy; The Supreme Court’s upcoming decisions on the Affordable Care Act; The economic and financial mess in Europe; A possible Israeli attack on Iran and whatever Iranian response that provokes. I see four commonalities: Each has a moderate chance of going wrong before Election Day; The short-term domestic economic policy effects of each are significant; Each could change the agenda and course of the U.S. election; Each is largely outside the President’s control. James Carville’s line from the 1992 campaign, “The economy, stupid,” may be too narrow this year. Yes, the domestic economy is the most important subject for the election.  But the U.S. economy may not be the only subject this fall, and if we drill down further we can find complexities beyond the simplistic political analysis of “Economy bad, incumbent loses.” President Obama’s economic campaign challenge is multidimensional.

It's a Single-Issue Election (Daniel Henninger in The Wall Street Journal)

The terms on which the 2012 U.S. election will be contested have been set, appropriately by the incumbent president speaking recently at a community college in Ohio. Mr. President, the microphone is yours: "Yes, foreign policy matters. Social issues matter. But more than anything else, this election presents a choice between two fundamentally different visions of how to create strong, sustained growth."  The Obama speech at Cuyahoga Community College in Cleveland produced carping and sneering from left to right. Reflecting the attention deficit disorders of a constantly tweeting world, his critics said the speech was too long at 53 minutes, and that it was a rehash of what Mr. Obama himself often calls "stuff." Days before the speech, the Democratic wizards James Carville and Stan Greenberg pleaded with Mr. Obama to admit the economy smells and explain "how are you going to make things better over the next four years." The New York Times warned, "The president has less than five months to find a way to make a vital message sink in."

e21: Economic Policies for the 21st Century is a nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century. Drawing on the expertise of practitioners, policymakers, and academics, we aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.

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