Tag Archives: Coverage
by Liz Hester
The release of the latest jobs numbers showed that while unemployment declined, the government shutdown would have an affect on the results in the coming months. What was clear from several news stories was that the Federal Reserve Board will likely have to continue its stimulus program.
Here’s the story from the Wall Street Journal:
The delayed September jobs report clouded the outlook for the U.S. economy, creating a new obstacle for the Federal Reserve to wind down its controversial bond-buying program.
U.S. employers added 148,000 jobs during the month, well below the pace of gains seen in the first half of the year. The unemployment rate, obtained from a separate survey of households, ticked down to 7.2% from August’s 7.3% and offered a glimmer of hope as the drop was due to more people finding work rather than leaving the labor force.
The Labor Department’s monthly job report helped assure investors the Fed will leave its bond-buying program unchanged at its meeting next Tuesday and Wednesday. The weak payroll gains also likely raised the bar for action at the Fed’s mid-December meeting, when central-bank officials may be struggling to assess the economy’s course after months of data muddied by the federal government’s 16-day shutdown.
The prospect of the Fed staying the course on its easy-money policies through year’s end sent the Dow Jones Industrial Average to a one-month high, market participants said. The blue-chip index gained 75.46 points, or 0.49%, to 15467.66 and is once again nearing record territory, and the Standard & Poor’s 500 finished at a fresh record close, up 10.01 points, or 0.57%, at 1754.67. Treasury yields sank to a three-month low on the report. The yield on the 10-year Treasury, which moves in the opposite direction of the price, fell to 2.512%.
The New York Times added this context to the numbers and how the government shutdown will likely add to the pain:
While the Fed has been trying to stimulate the economy, fiscal policy has largely worked in the opposite direction, with multiple drags on growth resulting from a payroll tax hike that began in January, the across-the-board budget cuts of the so-called sequestration that began in March, and then the partial government shutdown and debt ceiling crisis in October. Even before the shutdown, the federal government had the lowest number of civilian employees on its payrolls since 1966, according to the September jobs report.
The pace of employment growth in September was slower than the average rate over the previous year, which was 185,000 jobs per month. The unemployment rate ticked down to 7.2 from 7.3 percent the previous month, a change that was not statistically significant, though the unemployment rate has fallen by 0.4 percentage point since June.
Other datapoints were lackluster, with the length of the average workweek and the share of Americans actively engaged in the labor force both remaining flat. Before August, the share of Americans in the labor force had not been this low since 1978, when women were less likely to be working. Economists have been expecting that this so-called labor force participation rate would pick up as workers waiting on the sidelines saw improvements in the job market and started applying for jobs again, but that has not yet happened.
Bloomberg reported that an advisor to President Obama said the shutdown hurt business and consumer confidence, which doesn’t bode well for the economic outlook:
The partial government shutdown this month trimmed 0.25 percentage point from fourth-quarter economic growth and cost the U.S. 120,000 jobs in October, President Barack Obama’s chief economic adviser said.
An analysis of daily and weekly economic data through Oct. 12 showed weakness in such areas as retail sales, economic confidence and mortgage applications, some of which was directly related to the 16-day shutdown, said Jason Furman, head of the Council of Economic Advisers.
“This all just really underscores how unnecessary and harmful the shutdown and the brinkmanship was for the economy, why it’s important to avoid repeating it,” Furman said at a White House briefing today.
The administration released a report on the CEA’s findings today, the same day a separate Labor Department report showed that job growth slowed in the month before the shutdown began. The White House may use the projections to bolster its bargaining position as talks get under way with Congress to meet a December deadline for a revenue and spending plan.
The White House figures “may prove to be a little bit conservative,” said Russell Price, senior economist at Ameriprise Financial Inc. (AMP) in Detroit. He forecast the shutdown would shave as much as 0.5 percentage point from fourth-quarter gross domestic product.
“You had a precipitous decline in business confidence and consumer confidence,” he said.
The decline of consumer and business confidence will likely be the lasting outcome from the government shutdown. By pushing making decisions until 2014, there is no real resolution to the political problems, making it hard for people to get a true gage of where the economy is going. That could make it hard for employers to ramp up hiring in the New Year, keeping unemployment low for the foreseeable future.
by Liz Hester
Congress finally pulled together a deal to reopen the government and raise the debt ceiling, pushing a decision and whatever compromise that might bring to next year. The government will open at current spending levels until Jan. 15, 2014, and the debt ceiling has been extended until Feb. 7.
Here’s the story from the Wall Street Journal:
Furloughed federal employees were set to return to work Thursday following a tense two-week political showdown that kept them home without pay, after President Barack Obama signed into law legislation reopening a partially closed government and averting a widely feared debt-ceiling collision.
National parks, as well as Washington memorials and museums, were also expected to reopen beginning as soon as Thursday, including two popular symbols of the two-week government shutdown and partisan dysfunction: the World War II memorial on the Mall and the National Zoo’s PandaCam. Government services were also expected to begin returning to normal levels of operation.
“In the days ahead, we will work closely with departments and agencies to make the transition back to full operating status as smooth as possible,” said Office of Management and Budget Director Sylvia Mathews Burwell early Thursday.
The reopening of government came after a bitter fight in the nation’s capital. Finally, late Wednesday, Congress passed legislation to end the political standoff, which had rattled financial markets, splintered the Republican Party and showcased Washington’s deep political differences.
The New York Times had a sidebar about the costs of the government shutdown outlining all the damage to the economy:
Containers of goods idling at ports. Reduced sales at sandwich shops in downtown Washington. Canceled vacations to national parks and to destinations abroad. Reduced corporate earnings forecasts. Higher interest payments on short-term debt.
Even with the shutdown of the United States government and the threat of a default coming to an end, the cost of Congress’s gridlock has already run well into the billions, economists estimate. And the total will continue to grow even after the shutdown ends, partly because of uncertainty about whether lawmakers might reach another deadlock early next year.
A complete accounting will take months once the government reopens and the Treasury resumes adding to the country’s debt. But economists said that the intransigence of House Republicans would take a bite out of fourth-quarter growth, which will affect employment, business earnings and borrowing costs. The ripple from Washington will be felt around the globe.
“We saw huge effects during the summer of 2011, with consumer confidence hitting a 31-year low in August and third-quarter G.D.P. growing just 1.4 percent,” said Beth Ann Bovino, chief United States economist at Standard & Poor’s, referring to earlier brinkmanship over the debt ceiling. “Given that this round of debt ceiling negotiations” took place during a shutdown, she said, “the impact on the economy could be even more severe.”
Economists say the shutdown and near breach of the debt ceiling would be unlikely to derail the recovery, now that Congress is moving toward resolving the impasse. In the weeks after the government reopens, there should be a modest rebound as employees spend their paychecks for the days they were on furlough and the government rushes to process backlogged orders.
Bloomberg reported that the shutdown has taken $24 billion out of the U.S. economy, right as it was beginning to recover:
The Senate accord was unveiled a day after Fitch Ratings put the U.S. AAA credit grade on ratings watch negative, citing the government’s inability to raise the debt ceiling in a timely manner, according to a statement after markets in New York closed yesterday.
U.S. stocks rallied, sending the Standard & Poor’s 500 Index (SPX) toward a record. The benchmark index rose 1.4 percent to 1,721.47 at 4 p.m. in New York after sliding 0.7 percent yesterday. S&P 500 Index futures added 0.1 percent after the gauge closed within 0.3 percent of a record in New York.
The MSCI Asia Pacific Index climbed 0.7 percent, heading for the highest close in five months. The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major peers, was little changed. The yield on 10-year Treasuries dropped one basis point to 2.66 percent following yesterday’s six basis-point decline.
The shutdown took at least $24 billion out of the U.S. economy, S&P said in a report today.
It’s disappointing that the deal is only pushing the problems out until next year. While the reprieve meets the deadline for funding the government by raising the debt ceiling it does nothing to solve the long-term political problems. It looks like in three months, we’ll be writing the same stories about politics holding the economy hostage.
The business media has covered this story from nearly every angle possible, chronicling the toll the government shutdown has taken on people, bankers and confidence in the U.S. economy. What is baffling is how politicians continue to ignore these warnings, even after they’ve been reported over and over.
by Liz Hester
After nearly a year of searching, Apple hired the CEO of Burberry to run its retail and online stores. Angela Ahrendts will be the highest-ranking woman at Apple.
USA Today had this story:
Apple is dipping back into the fashion world for its latest hire, plucking the CEO of luxury brand Burberry to manage its retail and online presence.
The company announced Tuesday that Angela Ahrendts will join the Cupertino, Calif., tech giant as senior vice president of its retail and online stores. Ahrendts will manage the direction and expansion of its stores when she takes over in the spring.
“I have always admired the innovation and impact Apple products and services have on people’s lives, and hope in some small way I can help contribute to the company’s continued success and leadership in changing the world,” said Ahrendts in a statement.
Ahrendts, 53, served as president of Donna Karan International and executive vice president at Liz Claiborne prior to taking over as CEO for Burberry in 2006.
The Wall Street Journal reported that the once innovative Apple stores are in need of revamping as same store sales are falling:
In an intriguing marriage of fashion and technology, she will arrive as Apple seeks to rev up a brand whose devices have become ubiquitous and whose stores have lost some of their initial novelty. Apple has aggressively opened more stores as competitors have mimicked the format of its brightly lit spaces. Rivals such as Samsung Electronics Co. have stolen some of Apple’s flair with distinctive products and glitzy marketing. Samsung’s Galaxy Note 3, an oversize smartphone announced last month, includes a stitched-leather look on its back.
Sales at Apple stores fell in the three months ended June 30 compared with the prior year for the first time since 2009, according to Apple financial disclosures. Apple doesn’t report specific same-store sales figures. For the nine months ended June 30, sales per square foot in Apple’s stores fell 4.5%, according to Customer Growth Partners.
The New York Times chose to focus on the online stores and the work that she’ll need to do there to update an experience that hasn’t changed much recently:
Apple’s over 400 retail stores have been instrumental to the company’s success. With a minimalist design and destination sites in far-flung places like Shanghai and Rome, the stores have become both a retail and marketing channel for the company.
In the last few years, Apple has added many upgrades to make its stores more high-tech, like the ability to pay for a product with an iPhone. But its online store has not changed much — Apple usually brings the store offline temporarily whenever it adds new products, an approach that seems dated.
Ms. Ahrendts will probably be expected to make shopping online and in stores more seamless, and help make the customer service experience similar whether consumers are walking in or logging on to an Apple store.
She will bring with her a deep knowledge of retailing. Under her watch, Burberry put technology in the forefront of its brand strategy. The company established a strong presence on Facebook and other social media and built a unified experience for its online marketplace and store.
People in the fashion industry credit Ms. Ahrendts with expanding Burberry into an international fashion brand while maintaining its heritage, and said Apple could use some of that magic.
NPR pointed out that Ahrendts plans to focus on customer service and she has experience in China, a target growth area for the company:
In a statement accompanying a news release, Ahrendts said she would work to improve customer service at the company’s stores. Browett had taken criticism for moving to cut staffing costs at Apple’s storefront operations.
Ahrendts “also has experience expanding into China — where Burberry now has more than 70 stores in the country against Apple’s eight,” reports Britain’s Telegraph. “Slow growth in Apple’s Chinese retail operations was pinned as another reason for Mr Browett’s departure.”
This summer, Ahrendts made headlines when it was revealed that she earned more than $26 million — far more than any other top executive at Britain’s largest companies. A large part of the payout, as The Daily Mail reported, came from selling accrued shares of Burberry’s stock.
The move could mark a shift in strategy, the New York Times said. After introducing lower priced phones this year, hiring a luxury retailer to run the stores could mean that Apple is planning to move to higher-end goods. It will be interesting to see how she chooses to redesign and reposition Apple’s stores – both retail and online.
by Liz Hester
Three U.S. economists will share the Nobel Prize for economics for work that’s altered the way assets are priced and portfolios are managed. Given poor pricing information and other problems that led to the financial crisis, the award seems well deserved, especially if it can prevent another stumble.
Here’s the story from the Wall Street Journal:
Three American scholars won the Nobel Prize in economics for pioneering work in financial markets that has transformed portfolio management and asset pricing and launched the study of how emotions affect investment decisions.
The Royal Swedish Academy of Sciences on Monday honored Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University, citing their complementary but independent breakthroughs on “empirical analysis of asset prices.”
The laureates focused on how prices are set for stocks and bonds, but their findings have implications far beyond financial markets. Every corner of the macroeconomy is affected by the risk tolerance—as well as rational and irrational acts—that spur individuals and corporations to invest or save.
The Reuters story focused on Robert Shiller and his comments about the current state of the U.S. housing market:
One of three American economists who won the 2013 economics Nobel prize on Monday for research into market prices and asset bubbles expressed alarm at the rapid rise in global housing prices.
Robert Shiller, who shared the 8 million Swedish crown ($1.25 million) prize with fellow laureates Eugene Fama and Lars Peter Hansen, said the U.S. Federal Reserve’s economic stimulus and growing market speculation were creating a “bubbly” property boom.
The Royal Swedish Academy of Sciences lauded the economists’ research on the prices of stocks, bonds and other assets, saying “mispricing of assets may contribute to financial crises and, as the recent global recession illustrates, such crises can damage the overall economy.”
This was the case in the collapse of the U.S. housing market, which helped trigger the 2008-2009 global financial crisis. Markets are at risk of committing the same error now, Shiller told Reuters after learning he had won the Nobel prize.
“This financial crisis that we’ve been going through in the last five years has been one that seems to reveal the failure to understand price movements,” Shiller said.
Bubbles are created when investors fail to recognize when rising asset prices become detached from underlying fundamentals.
Shiller and other economists warn that prices in some markets have risen too far, too fast due to the Fed’s ultra-easy monetary policy. The benchmark U.S. Standard & Poor’s 500 index hit a record in September, though it is generally not considered overvalued based on expectations for corporate earnings results or economic growth.
The Associated Press story focused on the differences in the researchers’ work and the insights they gleaned. Excerpts are below:
Fama’s research revealed the efficiency of financial markets: They absorb information so fast that individual investors can’t outperform the markets as a whole. His work helped popularize index funds, which reflect an entire market of assets, such as the Standard & Poor’s 500 stock index.
Shiller’s research examined asset prices from a contrasting angle. He showed that in the long run, stock and bond markets can behave irrationally, reaching prices that are out of whack with economic fundamentals.
Shiller, 67, predicted the dot-com crash of the early 2000s and the implosion of home prices in 2007. He has also been a pioneer in the field of behavioral economics, or how human emotions, biases and preferences can collectively influence financial markets.
Using mathematical tools like the well-known Case-Shiller index of home prices, Shiller has expanded the available information on asset prices.
Hansen has focused on statistical models, creating ways to test competing theories of why asset prices move as they do.
Fama and Shiller “provide the ends of the spectrum” between those who believe financial markets are efficient and those who think them deeply flawed, with Hansen “in the middle doing the math,” said Allen Sanderson, a University of Chicago lecturer in economics.
The lead of the New York Times story focused on the conflict between Fama and Shiller’s theories:
The economist Robert J. Shiller in 2005 described the rapid rise of housing prices as a bubble and warned that prices could fall by 40 percent.
Five years later, with home prices well on the way to fulfilling Mr. Shiller’s prediction, the economist Eugene F. Fama said he still did not believe there had been a bubble.
“I don’t even know what a bubble means,” said Mr. Fama, the author of the theory that asset prices perfectly reflect all available information. “These words have become popular. I don’t think they have any meaning.”
The two men, leading proponents of opposing views about the rationality of financial markets — a dispute with important implications for investment strategy, financial regulation and economic policy — were joined in unlikely union Monday as winners of the Nobel Memorial Prize in Economic Science.
Mr. Fama’s seminal theory of rational, efficient markets inspired the rise of index funds and contributed to the decline of financial regulation. Mr. Shiller, perhaps his most influential critic, carefully assembled evidence of irrational, inefficient behavior and gained a measure of fame by predicting the fall of stock prices in 2000 as well as the housing crash that began in 2006.
They will share the award with a third American economist, Lars Peter Hansen, who developed a method of statistical analysis to evaluate theories about price movements that is now widely used by other social scientists.
The three economists, who worked independently, were described as collectively illuminating the workings of financial markets by showing that stock and bond prices move unpredictably in the short term but with greater predictability over longer periods. The prize committee said these findings showed that markets were moved by a mix of rational calculus and irrational behavior.
No matter if they agree with each other or not, collectively the work is being used across the globe for better risk management, market predictions and insight into price movements. It’s easy to see why these three deserve the prize given recent history. Here’s hoping that bankers, portfolio managers and traders are able to use the information to create a more stable system.
by Liz Hester
With most people talking about what would happen if the U.S. defaulted on its debt, the coverage of different scenarios is taking on more importance. Some conservatives are advocating that it wouldn’t be too hard on the economy, while others are predicting financial Armageddon.
NPR outlined three main groups that would be affected by the default – China, pension funds and Social Security. Here’s what it said about pension funds:
If you have a pension plan or a retirement account, there’s a very good chance you are lending money to the U.S. government.
And some big funds are taking precautions right now. PIMCO, which manages a lot of retirement money, doesn’t own any Treasuries that are supposed to pay out money between Oct. 17 (the Treasury’s deadline for raising the debt ceiling) and the beginning of December. “We’ve been avoiding them,” Tony Crescenzi, a strategist and portfolio manager at PIMCO, told me.
A lot of PIMCO’s clients can’t risk getting paid late. Some need the money to pay employees. Others need to send out pension checks. “There is de minimis risk of not getting paid on time, but it exists,” he said. “Why take the chance?”
Bloomberg Businessweek wrote a piece looking at the nuance of timing of the default, saying that how long it might last would be critical in determining what the fallout might be:
A default would without question be both harmful and stupid. But the sky would probably not fall the minute it happened. Roger Altman, chairman of New York-based investment bank Evercore Partners (EVR), told Bloomberg News’ Yalman Onaran that a default would mean “higher interest costs over some considerable period of time for the U.S. and for U.S. taxpayers.”
“If you missed an interest payment by two hours, the markets might look entirely beyond that and forgive you,” Altman added. “If you miss an interest payment by two days, four days, six days, that’s a different story. It’s very difficult to be scientific about this.”
In other words, how long it lasts is crucial. If the federal government defaults and the financial markets’ initial reaction is muted, a lot of people who made over-the-top warnings about generation-long consequences will have to change their tunes—and the public will become even more cynical. Congress will cease to take the debt ceiling seriously and it will lose its value as what House Budget Committee Chairman Paul Ryan calls a “forcing mechanism.”
This is not by any means an optimistic scenario. A soft market response may be the worst possible outcome—even worse than a swift, scary market reaction that finally galvanizes Washington into action. Here’s why: If a default doesn’t cause chaos on Day One, Congress and the White House will be tempted to prolong their game of brinkmanship into Day Two, Three, or Four, just as they have allowed the partial government shutdown to drag on for more than a week so far.
Markets and rating agencies that treat, say, an hour-long default as a forgivable glitch will lose their forgiving mood if a default drags on. Treasury debt will gradually lose its reputation as a safe harbor for investors and there could be growing dislocations in parts of finance that use Treasuries, such as repo financing and money markets. The federal government could wind up like the mythical frog that jumps to safety if put in a pot of boiling water but dies if the temperature is raised gradually.
NBC News outlined seven different outcomes ranging from a depression to a freeze in banking operations. In this section they quote Dick Bove, long-time banking analyst:
One chilling data point: American banks own $1.85 trillion in various government-backed debt, Bove calculated.
The effect, then, of a default on that debt would be devastating.
“If the Treasury and related securities were in default, one does not know what they would be worth,” Bove said. “Assume a Latin American valuation of 10 to 20 cents on the dollar and an estimated $1.28 trillion in U.S. banking equity would be wiped out.”
The potential result?
“It is my strong belief that a true default by the United States Treasury would wipe out bank equity,” he said. “All bank lending to the private sector in the United States would stop, immediately. Existing loans would not be rolled over. Immediate repayment would be demanded.”
The BBC wrote an explainer about the basic facts and what a default could mean to global markets. The Q&A had this to say about how a default could be avoided if politicians can’t agree:
US Treasury Secretary Jack Lew has warned that if a deal to increase the nation’s borrowing isn’t reached, the Treasury will exhaust the current extraordinary measures being used to pay the nation’s bills by 17 October. These bills include not just the interest on bonds but things like Social Security and veteran benefits.
Mr Lew has insisted no one really knows what will happen if and when the money runs out.
The US Treasury will still be taking in revenue in the form of tax receipts, so it could pay some bills, but possibly not all of them.
The most obvious option – to prioritise payments to bondholders so that the US would not be in default – has been ruled out by the Obama administration, and might technically be illegal, according to a study by Columbia Law professors.
Ideally, though, the Treasury would use the money from tax receipts – which would still be flowing into its coffers after the debt ceiling is breached – to pay only the interest it owes on bonds that have already been issue
While no one knows what exactly will happen in event of a default, most agree, it likely won’t be good. But the media is doing a thorough job looking at different scenarios and trying to explain them. Looks like some politicians should be paying more attention to the coverage.
by Chris Roush
Andrew Keatts of the Voice of San Diego writes about his plan to cover the business beat in the California city.
Keatts writes, “It’ll force me to really rely on the basic narrative concept we’ve tried to establish at Voice of San Diego. It’s impossible for us to cover everything, so instead we choose a handful of things to cover really well.
“I realize how absurd it sounds to have one person spend only some of his time on something as huge as ‘business in San Diego.’
“But how much crazier is it than thinking a group of five reporters can investigate the entire region?
“So I’ll need to be selective. We’ll pick out a few narratives at a time and cover them as completely as possible. Then we’ll find some more.
“Hopefully, you’ll play a big part in helping me figure out what to look into.
“Are there certain industries in San Diego you’ve never understood? Is there a major issue facing an industry you work in that no one knows about? What blind spots are there in the region’s current business coverage?”
Read more here.
by Liz Hester
Janet Yellen, the vice chairman of the Federal Reserve Board, was nominated by President Obama to head the organization. While the move was expected, it was greeted as good news by the markets and other watchers who wanted Obama to put her in the position. And, she’s the first woman to head the organization. Let’s look at some of the extensive coverage.
USA Today had a straightforward story:
President Obama formally nominated Janet Yellen on Wednesday to chair the Federal Reserve board, calling her “one of the nation’s foremost economists and policy makers.”
Saying she understands “the human costs” of a struggling economy, Obama said during a White House ceremony that “America’s workers and their families will have a champion in Janet Yellen.”
If confirmed by the Senate, Yellen would be the first woman to lead the nation’s central bank, a key player in the global economy — and “a role model for a lot of folks out there,” Obama said.
She would also be the first Democrat to lead the Fed since President Jimmy Carter nominated Paul Volcker in 1979.
In brief remarks, Yellen said that economy is recovering, but more needs to be done, “particularly for those hardest hit by the Great Recession” that began in 2008.
The Wall Street Journal chose to lead with the fact that Yellen will be faced with deciding when to pull back on the Federal Reserve’s economic stimulus and how to communicate that to the markets well in advance:
Janet Yellen‘s job as the Federal Reserve’s next leader would be to define the stopping point of an expansive central bank after Ben Bernanke spent the past six years stretching its monetary powers in service to a crisis-racked economy.
President Barack Obama said Wednesday that Ms. Yellen, beaming at his side during the announcement, was his nominee to become chairwoman of the central bank when Mr. Bernanke’s term ends in January. Her nomination is subject to Senate confirmation.
The selection of the 67-year-old Ms. Yellen was historic on many levels. In one stroke, Ms. Yellen has a chance to become the first woman to run the Fed since its founding in 1913, the most powerful economic policy maker on the globe and one of the most influential women in U.S. history.
It also puts her in a position to place her stamp on one of the most inscrutable but influential institutions in the U.S. government. The Fed was established after a financial crisis in the early 20th century to provide emergency lending to banks during economic panics. Its role and powers have grown since, to regulating banks, stabilizing inflation and softening the blows of a volatile economy on the nation’s workforce. According to a law passed in 1977, the Fed is assigned to achieve what’s known as a “dual mandate” of maximum employment and stable prices.
Tested by the 2008 financial crisis, Mr. Bernanke pushed the Fed’s boundaries in his efforts to stabilize an ailing economy. But the wisdom and effectiveness of his signature programs remain subjects of intense debate inside the Fed, on Wall Street trading floors, in the boardrooms of foreign central banks and in the halls of Congress. Most hotly debated is a bond-buying program often called quantitative easing, or QE, which has vastly expanded the Fed’s holdings of securities.
Ms. Yellen now gets to put her own postscript on programs she helped to write. Her big decisions in the next four years will involve deciding when to pull back from these efforts.
Reuters led with the angle that Yellen will have to focus on jobs and growth in her new job:
At a White House ceremony where Obama announced her nomination, Yellen said she would promote maximum employment, stable prices, and a sound financial system as the top U.S. central banker and noted there was more to do to ensure people who were out of work could find jobs.
“While we have made progress, we have farther to go. The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they’ll pay their bills and provide for their families,” the 67-year-old former professor said.
The New York Times story talked about the timing of the nomination.
Ms. Yellen’s nomination comes amid one of the most rancorous and fraught battles in years between the political parties over the course of the economy. The federal government is already in partial shutdown because of an impasse over funding in the fiscal year that began Oct. 1, and the Treasury Department is approaching the debt limit next week, jeopardizing its authority to borrow to pay the nation’s bills and forcing emergency actions that could be financially destabilizing at best and provoke a global crisis at worst.
The nomination adds a wild card to the mix, and the need for Senate hearings, debate and votes adds to Congress’s already complicated mix of year-end business. A few Senate Republicans, like Senator Bob Corker of Tennessee, have spoken out against her as too dovish on monetary policy, but Ms. Yellen is widely expected to be confirmed.
Administration officials say the timing of her pick is mostly a coincidence, but it could serve Mr. Obama’s interests in the current budget fight.
It’s nice to see at least part of the government moving forward and hopefully having some continuity at the helm of the Fed will help calm markets in the next week leading up to the deadline for extending the debt limit. While no one wants to see the government default, at least there is someone who’s been privy to all of the Fed’s policy moves lined up to take the role.
by Liz Hester
The International Monetary Fund joined the chorus of warnings against a potential U.S. default. The international banking organization lowered its global growth expectations amid the uncertainty as well as weakening economic conditions across the globe.
The Wall Street Journal had this story:
The International Monetary Fund cut its world growth forecast Tuesday amid deteriorating emerging-market prospects, urging authorities to shore up their economies as the U.S. prepares to exit its easy-money policies and wrestles with a budget impasse that threatens to derail the global recovery.
In its sixth consecutive downward revision, the IMF cut its growth forecast for this year by 0.3 percentage point to 2.9% and next year by 0.2 percentage point to 3.6%, compared with the fund’s last assessment in July.
“Two recent developments will likely shape the path of the global economy in the near term,” the fund said in its latest World Economic Outlook.
First, the pace of the Federal Reserve’s exit from its easy-money policies meant to spur growth can make or break growth. If the Fed withdraws its stimulus too fast, it could stall global growth as borrowing costs rise too quickly for many economies and fuel further emerging-market volatility as investors pull out their capital en masse.
Second, “there is strengthening conviction that China will grow more slowly over the medium term than in the recent past,” particularly as Beijing has indicated it can live with lower growth as a way to foster healthier long-term expansion of the economy. The fund cut China’s 2014 outlook nearly half a percentage point from its last forecast to 7.3%.
The WSJ story continued to discuss the state of emerging markets, offering a global and less political perspective to the coverage. It went on to detail the effects the Federal Reserve’s actions had as well as a peak in expansion for several of these countries. While emerging economies may be struggling, the New York Times story decided to focus on the American political contribution to slowing global growth:
Over all, developed economies have strengthened whereas emerging economies have weakened, the fund said. The private sector in the United States has posted better numbers, and some European countries have stopped contracting, though growth across the Continent remains weak.
“Growth is looking up, financial stability is returning and fiscal accounts are looking healthier,” Christine Lagarde, the fund’s managing director, said of developed economies at a speech this month in Washington. “Nowhere is this clearer than the United States. We see it all around us,” she said, citing improvements in housing and household finances.
Yet growth in those wealthier countries remains anemic — just 1.6 percent in the United States and 1.4 percent in Britain, with a 0.4 percent contraction in the euro area. Financial problems and recessions in Europe continue to weigh down the rest of the world, the fund said.
In Washington, budgetary turmoil has introduced new strains, including the partial government shutdown and fears that the United States might default on its debt. If the Federal Reserve pulls back, or tapers, its major bond-buying program, the global economy may also be at risk.
“U.S. monetary policy is reaching a turning point, and this has led to an unexpectedly large increase in long-term yields in the United States and many other economies,” the fund said. “This change could pose risks for emerging market economies, where activity is slowing and asset quality weakening.”
It is against the backdrop of a deadlocked Congress and shutdown federal government that the world’s finance ministers and central bankers are gathering in Washington this week. The stalemate has already led to the biggest drop in consumer confidence since Lehman Brothers collapsed, according to some measures.
Bloomberg’s story devoted about the same amount of space to talking about the Fed’s moves, China, Europe and currency volatility:
The IMF raised its forecast for the 17-country euro area to a contraction of 0.4 percent this year compared with a 0.6 percent decline in July. It now expects an expansion of 1 percent next year instead of 0.9 percent three months ago. While Italy and Spain are expected to shrink this year, Spain’s forecast contraction of 1.3 percent is an improvement from a 1.6 percent prediction three months ago.
Still, the region’s financial industry remains fragile and next year’s planned assessment of the banks’ balance sheets by the European Central Bank “provides a critical opportunity to put the system on a sounder footing,” the IMF said.
The euro-area’s central bank should also consider giving additional monetary support through lower interest rates, forward guidance on future rates or negative deposit rates, it said.
The prospect of higher U.S. long-term interest rates and a partial reversal of capital flows is leaving emerging markets with weak fiscal positions or higher inflation particularly exposed, the fund said.
USA Today led with the debt ceiling issue, pointing out the damage to the global economy:
A failure by Congress to raise the nation’s borrowing limit “could severely damage the global economy,” the International Monetary Fund said Tuesday as it trimmed its global economic forecast due to slowing growth in emerging markets.
If Congress doesn’t increase the nation’s borrowing authority this month, “It would probably lead to a lot of financial turmoil,” IMF chief economist Olivier Blanchard said at the annual meeting of the IMF and World Bank. “It would be an issue for all credit markets, including China.”
Blanchard added that the current federal government shutdown — resulting from a separate standoff over funding the government — would hurt the U.S. economy and, in turn, the global economy, only if it persisted for several weeks.
“Our assumption is that the shutdown will end and there’ll be no problem raising the debt ceiling,” Blanchard said.
Let’s hope that Blanchard is right. One thing is for certain, the U.S.-based media outlets aren’t missing a chance to tell anyone who will listen that not raising the debt ceiling will cause problems with the entire global economy. Hopefully some of the politicians are listening.
by Liz Hester
While the federal government partial shutdown continues into a second week with no deal in site, many are turning their attention to the looming debt crisis. If Congress doesn’t agree to extend the debt ceiling, or the amount the government can borrow, by mid-October then the U.S. may plunge the entire global economy into the dumps.
The Wall Street Journal had a story Monday saying that top bankers were warning about a potential plan to pay bond interest might backfire:
Top Wall Street executives are warning that any effort to pay interest on U.S. debt before other obligations such as Social Security, a strategy some lawmakers think would placate bond investors if the government breaches its borrowing limit, would pose severe risks to financial markets and the economy.
In recent meetings with Republican lawmakers and Obama administration officials, chief executives of the nation’s largest financial institutions said putting some payments ahead of others would create insurmountable uncertainty for investors, drive up borrowing costs and cause market disruptions, according to people familiar with the meetings.
The Wall Street pushback against an idea backed by the House GOP is part of an effort to force a resolution on raising the nation’s borrowing limit, which the Treasury has said it expects to reach by mid-October. If no deal is reached, many outside observers, including debt-ratings firms, assume the government would begin prioritizing payments to bondholders over others, such as Social Security recipients or veterans, rather than risk defaulting on U.S. debt.
Market participants say while the U.S. might not technically default on its debt, missing any type of payment would likely harm the economy. “This is going to be permanently damaging for business and consumer confidence if this happens. People will never look at the United States Treasury the same ever again,” said Tom Simons, money-market economist at Jefferies Group LLC, an investment bank.
The fast-approaching deadline, paired with the inability of Republicans and Democrats to make headway in resolving it, is starting to ripple through global markets that until recently had appeared blasé.
Stocks fell Monday, with the Dow Jones Industrial Average down 136.34 points, or 0.9%, to 14936.24. U.S. Treasury notes, seen as a haven in times of volatility, rose, as did the price of gold. The Chicago Board Options Exchange’s Volatility Index, a gauge of fear in the stock market, rose 15%.
The New York Times wrote a piece saying that Wall Street continued to brush off fears that the government would actually default:
Wall Street is showing few signs so far that it is fearing the financial panic it has been predicting should the government default on its debt.
The fiscal impasse in Washington continued to weigh on stock prices on Monday, as the market’s “fear gauge,” the C.B.O.E. volatility index, jumped 15.95 percent to its highest level since June. Nonetheless, the market reaction to date has been muted compared with past crises.
“We all tell ourselves, ‘This is something that is not going to happen,’ ” said David Coard, the head of fixed-income trading at the Williams Capital Group. “This would be like a black swan event — it’s not something that you would have thought that the U.S. could do in a million years.”
But the relative calm on Wall Street is worrying some investors, who fear the markets will not signal to politicians the true danger of hitting the debt ceiling until it is too late.
“The markets are sending this complacent message, and I think the politicians are interpreting it incorrectly and they have no sense of urgency,” said Douglas Kass, the owner of the hedge fund firm Seabreeze Partners Management.
There are certainly signs that nervousness on trading desks is growing as the nation draws closer to Oct. 17, when the Treasury Department has said it will run out of emergency measures to borrow more money. Soon afterward, the government could run out of money to make payments on its bonds — the much-dreaded default that has Washington buzzing.
But the NYT’s Dealbook editor, Andrew Ross Sorkin, wrote a column claiming that a default is possible:
“The United States government is not going to default, ever.”
That’s what Vincent Reinhart, former head of the Federal Reserve’s monetary division and now managing director and chief United States economist for Morgan Stanley, said late last week.
“As political theater,” he said, “the debt ceiling is not a useful threat, because politicians are basically threatening to shoot themselves, as they will rightly shoulder the blame for the serious global economic consequences of a default.”
Mr. Reinhart’s view has become conventional wisdom on Wall Street when it comes to whether the country will hit the debt ceiling limit on Oct. 17. Warren Buffett put it this way: “We’ll go right up to the point of extreme idiocy, but we won’t cross it.”
Nobody believes the country will actually exceed the debt limit — which is exactly why it might.
Oddly enough, despite all the predictions of panic, the stock market was down only marginally over the last couple of sessions.
Here’s the perversity of Wall Street’s psychology: The more Wall Street is convinced that Washington will act rationally and raise the debt ceiling, most likely at the 11th hour, the less pressure there will be on lawmakers to reach an agreement. That will make it more likely a deal isn’t reached.
That just can’t be good. Since the markets aren’t reacting to the potential default, the conventional wisdom is that it may give politicians a false sense of security. And if that’s the case, we’re all in trouble. Let’s hope someone blinks first.
by Liz Hester
Two days into the partial U.S. government shutdown, the media began to chronicle the effects being felt by various businesses. While it’s early to tell the full economic repercussions of the continued shuttering of government services, those with contracts are already feeling the pinch.
The Wall Street Journal had this story:
The partial shutdown of the federal government is leading to layoffs and production disruptions at defense contractors and some manufacturing companies.
United Technologies Corp. said on Wednesday that it is preparing to furlough nearly 2,000 workers at its Sikorsky unit, which makes Black Hawk helicopters for the Defense Department, and may have to idle several thousand more workers at its Pratt & Whitney and UTC Aerospace units if the shutdown drags on for weeks.
Government workers deemed nonessential were furloughed starting on Tuesday after Congress failed to meet a Sept. 30 deadline for extending government spending authority, and the cuts have spilled over to government suppliers and the companies that cater to them.
The impasse compounds the situation for U.S. manufacturers already nervous about the new health-care law and a wobbly U.S. economy. After hitting a low of about 11.5 million in early 2010, U.S. manufacturing employment recovered to nearly 12 million in mid-2012 but since then has stagnated.
Reuters pointed out that companies that rely on government workers to approve systems and contracts are also hurting:
The U.S. government shutdown is beginning to hit the factory floor, with major manufacturers like Boeing Co (BA.N) and United Technologies Corp (UTX.N) warning of delays and employee furloughs in the thousands if the budget impasse persists.
Companies that rely on federal workers to inspect and approve their products or on government money to fund their operations said they are preparing to slow or stop work if the first government shutdown in 17 years continues into next week.
United Technologies said nearly 2,000 workers in its Sikorsky Aircraft division, which makes the Black Hawk military helicopter, would be placed on furlough Monday if the shutdown continues. That number would climb to more than 5,000 and include employees at its Pratt & Whitney engine unit and Aerospace Systems unit if the shutdown continues into November, the company said in a statement.
UTC relies on the government’s Defense Contract Management Agency to audit and approve manufacturing processes for its military products. The DCMA inspectors were deemed non-essential federal employees and are on furlough, UTC said.
Aircraft maker Boeing said it is taking steps to deal with possible delays in jetliner deliveries, including its new 787 Dreamliner, because thousands of U.S. aviation officials needed to certify the planes have been idled.
The Los Angeles Times had a story saying that this shutdown could be more damaging to the economy than the last one in 1995:
The last time the federal government shut down, for three weeks in the winter of 1995-96, the American economy felt a jolt but recovered quickly.
Things don’t look anywhere near as promising this time around.
The nation is currently more than four years into an economic expansion with some momentum behind it. That also was the case in 1995. But this time, things are a lot more fragile.
Americans continue to suffer from a relatively high unemployment rate of 7.3%, which is about 2 percentage points higher than in December 1995. Back then, job growth was stronger, the economy was starting to benefit from the tech boom, and baby boomers were entering their prime earning years, not preparing for retirement.
The recovery from the Great Recession has been sluggish and repeatedly held back by political budget battles, but many had been hoping the economy would pick up steam heading into next year. Housing and stock markets have been growing, and consumers have cut their debts and are feeling more confident.
Businesses are going to start to post lower revenues, which caused some investors to begin to sell stocks, according to an Associated Press story:
Wall Street had a message for Washington on Wednesday: end the shutdown and move on.
The markets ended lower as traders, Europe’s central banker and Wall Street chief executives urged Congress to stop the two-day partial government shutdown that has closed national parks, put hundreds of thousands of federal employees on furlough and forced President Obama to cancel an overseas trip.
Wall Street made clear that the longer the budget fight dragged on, the more its bankers worried about significant damage to the economy and the possibility that Congress will not allow the government to borrow more. The financial market says that would be a disastrous move that could send the country into recession.
On Wednesday, the major indexes opened sharply lower, with American lawmakers appearing unwilling to yield in their entrenched positions. After Mr. Obama summoned Congressional leaders to the White House later in the morning, the market started to recoup some of its losses, but the recovery faded in the afternoon.
“The markets are sending a loud message to Washington lawmakers to get their act together and resolve the budget crisis,” said Peter Cardillo, chief market economist at Rockwell Global Capital.
Lawmakers should take businesses, contracts and the overall health of the economy into consideration as they allow the shutdown to drag on. While it’s only been a couple of days, hurting the confidence of global investors could also have long-lasting implications for the U.S. economic recovery. Already we’re likely to see manufacturing loose steam and issues in the defense sector. It would be nice if everyone could just get back to business (and government) as normal.