Posts Tagged ‘GDP’
Monday, November 7th, 2011
Are Americans shopping until they drop again? It could be, judging by the latest government report showing that consumer spending rose by a surprisingly vigorous 0.6 percent in September, even as personal incomes barely grew. Adjusting for inflation, after-tax income declined slightly by 0.1 percent, according to the Department of Commerce. The bottom line is a sharp drop in the saving rate in September, to just 3.6 percent. That’s the lowest level since 2007 and a drop from a healthy five to six percent during most of the last two years.
Scott Hoyt, who studies consumer spending for Moody’s Analytics, says it’s possible that the September numbers may have been inflated by spending for repairs and other things after Hurricane Irene. At the same time, other data suggest that people are spending more because lenders are suddenly more willing to give credit and as households — which had deferred buying new cars and other goods — feel more optimistic about the direction of the economy. Consumer spending is perceived as a critical economic component, and is often cited as representing 70 percent of the nation’s GDP.
The improvement in consumer spending helped boost the economy through the 3rd quarter while policymakers ranging from President Barack Obama to the Federal Reserve took additional action to stimulate growth and hiring. Unless paychecks grow, Americans may not be able to continue their spending sprees. “Given the state of consumer sentiment and the savings rate, we should see moderate spending, at best, going forward,” said Sean Incremona, a senior economist at 4Cast Inc., who accurately predicted the consumer spending boom. “The savings rate is just one of those warning signs that says we’re not pulling ourselves out vigorously, so the economy still has a lot of vulnerability.”
Fed policymakers are considering options for additional monetary easing even as the economy improves. Vice Chairman Janet Yellen said that a 3rd round of significant asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”
“Consumers today are still facing inflationary pressures on food, high unemployment, minimal job and income growth and waning consumer confidence,” BJ’s Restaurants, Inc., Chief Financial Officer Gregory Levin said after the chain reported a 6.5 percent increase in sales for the 3rd quarter. “It is difficult to ascertain if the current trends represent the trend we will end up seeing throughout the remainder of this year, or how strong the holiday retail selling season will be.”
“Income growth will have to be watched closely in coming months as the recent trend of spending at the expense of savings is not sustainable,” economists at Nomura Securities wrote. Inflation rose 0.2 percent in September, based on the latest analysis of the personal consumption expenditure price index. The PCE (Personal Consumption Expenditures) grew by 2.9 percent over the past year.
“Sluggish growth in U.S. consumer income in September led households to cut back on saving to increase their spending, casting doubts over the durability of the economy’s third-quarter growth spurt,” Reuters wrote.
According to The Hill, “Purchases of new and used cars drove spending. Clothing sales rose 1.1 percent. Purchases such as utility payments were up 0.2 percent, as consumers paid to cool their homes during a brutally hot summer.
Tags: 4Cast Inc., After-tax income, BJ’s Restaurants, consumer spending, Department of Commerce, Federal Reserve, GDP, Holiday retail selling season, Hurricane Irene, Inc., inflation, Janet Yellen, Moody’s Analytics, PCE Index, President Barack Obama, Saving rate
Posted in Economics, Financing, General | No Comments »
Wednesday, November 2nd, 2011
American companies ordered more heavy machinery, computers and other long-lasting manufactured goods in September, an encouraging sign for the shaky economy. The increase in demand for these durable goods suggests businesses are staying with investment plans, despite slow growth and a lack of consumer confidence.
Durable goods are products expected to last a minimum of three years. Core capital goods are products that have nothing to do with defense or aircraft. The gains are driven by tax breaks given to businesses for investments made this year, an incentive Congress approved last December to boost the lethargic economy.
“Demand for big ticket items seems to be alive and well,” said John Ryding, an analyst at RDQ Economics. “Outside of the volatile transportation sector, the gains in durable orders were broad based in September, and point to a manufacturing sector that continues to expand at a solid rate.”
“Despite the understandable concern about economic growth, businesses are still investing,” said Jennifer Lee, senior economist at BMO Capital Markets.
Robust demand for core capital goods is a strategic reason why economists expect an annual growth rate of 2.4 percent in the 3rd quarter. That would be a major improvement from the first six months of the year, when the economy expanded at just 0.9 percent, the worst growth since the recession ended more than two years ago. A 2.4 percent growth rate could ease fears that the economy is on the verge of sliding back into a recession. Even so, the growth rate needs to nearly double to make a substantial dent in the unemployment rate, which remained stuck at 9.1 percent in September for the third consecutive month.
“Manufacturing is in pretty decent shape, and this ends the quarter on a high note,” said Brian Jones, a senior U.S. economist at Societe Generale, who accurately forecast demand for non-transportation equipment. “We’ve got decent momentum going into the 4th quarter.” Orders for computers and related products jumped as much as six percent. A Commerce Department report is projected to show the world’s largest economy grew at a 2.5 percent annual pace in the 3rd quarter, an increase of the 1.3 percent rate in the previous three months. Societe Generale’s Jones said the gain in durable goods demand has the potential to bring GDP growth for last quarter closer to three percent.
Boeing, the largest American aircraft maker, received 59 airplane orders in September, compared with 127 the preceding month. September’s decline came on the heels of a 25 percent gain in August. Orders for non-defense capital goods excluding aircraft jumped 17 percent at an annualized rate compared with an 11 percent increase in the previous three months, an indication that business investment is picking up.
Additional indicators show that manufacturing, which accounts for approximately 12 percent of the economy, continues to grow. The Institute for Supply Management’s factory index rose a full point to 51.6 in September, compared with 50.6 in August. A level greater than 50 indicates that expansion is taking place. Industrial production advanced in September on demand for items such as cars and computers, according to the Federal Reserve.
According to Mike Shea, Managing Partner and Trader at Direct Access Partners LLC, “The number wasn’t bad, and having a decent number in durables is far better than having a bad number, since with the overhang of Europe, if we were getting lousy data here, then we wouldn’t have anything to hang our hats on. If not for what was going on in Europe, this market would be running on all cylinders. The summit in Europe is the tradable event. We could have one hundred percent earnings positive surprises today, we could have great economic data come out, all of that could come in rosy domestically, but if the news out of Europe is judged to be bad, none of what happens in the U.S. will matter. This market will not shrug off a lousy plan coming out of Europe. It will not shrug off any plan that is not fundamentally based in reality.”
Tags: Auto parts, Autos, BMO Capital Markets, Boeing, Commercial aircraft, computers, congress, Core capital goods, Department of Commerce, Durable goods, Durable goods orders, Europe, Federal Reserve, GDP, Heavy machinery, Institute for Supply Management, RDQ Economics, recession, Societe Generale, unemployment rate
Posted in Development, Economics, General | No Comments »
Tuesday, November 1st, 2011
The midnight oil burned in Brussels as European finance ministers, heads of state, bankers and the International Monetary Fund (IMF) try to reach an agreement to restructure Greek debt. In the deal, private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to reduce Athens’ immense debt load to sustainable levels. Although it required more than eight hours of negotiations that did not end until 4 a.m., the deal also anticipates a recapitalization of hard-hit European banks and a leveraging of the bloc’s rescue fund, the European Financial Stability Facility (EFSF), to give it €1 trillion ($1.4 trillion).
Significant work remains to be done to assure that the rescue works as envisioned. Several aspects of the deal, including the technicalities of boosting the EFSF and providing Greek debt relief, could take weeks to firm up; the plan to rebuild confidence after two years of crisis could unravel over the details. “I see the main risk is that we are left waiting too long again for the implementation of these agreements,” European Central Bank (ECB) policymaker Ewald Nowotny said. “Speed is very important here.” According to Greek Prime Minister George Papandreou, “The debt is absolutely sustainable now. Greece can settle its accounts from the past now, once and for all.”
European Union (EU) President Herman Van Rompuy said that the deal will slash Greece’s debt to 120 percent of its GDP by 2020. Under current conditions, it would have soared to 180 percent. Achieving this will require that banks assume 50 percent losses on their Greek bond holdings — a hard-to-swallow pact that negotiators now must sell to individual bondholders. According to Van Rompuy, the eurozone and IMF — which have both propped up Greece with loans since May of 2010 — will give the country another €100 billion ($140 billion). That’s slightly less than amount agreed in July, primarily because the banks now must pick up more of the slack. “These are exceptional measures for exceptional times. Europe must never find itself in this situation again,” European Commission President Jose Manuel Barros said.
While some question whether Greece will be able to meet its debt obligations by the drop-dead date, the fact that leaders were able to finally put concrete numbers to what had previously been little more than vague promises represents an important step forward. “It’s great news that we’ve got an agreement,” said Deutsche Bank economist Gilles Moec. “When Europe puts its heads together, they do actually begin to cooperate.”
Greece, whose crippling debt load has in principle been cut in half in the deal that Papandreou says marks “a new day for Europe and for Greece,” emerges as the biggest winner. Although the necessary austerity measures will be tough for the Greek people to live with, the new plan has set the country on a sustainable debt trajectory, according to Moec. “At least the deal gives Greece a fighting chance. It’s not great, it would be much better if we could get the debt below 100 percent…but it’s doable.”
Germany, which had been the driving force behind compelling the banks to take a bigger “haircut” or write down on Greek debt, is another winner. “If you look at the vote in German parliament outlining what Germany was going to ask for at the summit, and then you see the results of the summit, it’s basically identical,” Moec said. German Chancellor Angela Merkel believes that the deal is a victory for Europe in general. “Everybody was aware that the whole world was looking at this meeting,” she said. “I think that tonight we Europeans have taken the right measures.”
Writing for Reuters, Global Economics Correspondent Alan Wheatley sees some reason for skepticism. “Greece, however, has become something of a sideshow. Investors long ago judged that it was not just illiquid, but insolvent. Much more critical is what the eurozone could do to prevent the debt rot from spreading to bigger, systemically important but stagnant economies, notably Italy. Markets will have to wait for details as to how the EFSF will be scaled up; whether the likes of China will top up the bailout fund; and how operationally it will enhance the credit of member states’ new bonds. But some analysts are skeptical. Economists at Royal Bank of Scotland said they expected markets to re-price sovereign debt across the euro area given the size of the losses imposed on Greece. Expressed as the ‘net present value’ of the bonds, the proposed loss will be close to 70 percent, much more than the 40 percent hit that banks had volunteered to take, RBS said. What’s more, the EFSF will be too small to offer help to any country that might need it for any length of time. And a promise by governments to help banks regain access to long-term bond market funding implies they will have to assume extra contingent liabilities, thus adding to their debt burdens.”
Time’s Bruce Crumley is more hopeful. According to Crumley, “Let’s hope that upbeat attitude persists, but let’s not be stunned if it doesn’t. Because let’s be honest about another reality of Thursday’s development: it was only the most recent play by governments in a global confidence game that’s certain to shift and surge again before it’s all over. That’s not ‘confidence game’ in the usual, illicit ‘con’ sense. Instead it more literally describes attempts by EU leaders to inspire confidence and calm in financial markets so they’ll cease the doubt-inspired dumping of bonds, and bets against iffy sovereign debt that severely complicates efforts by eurozone officials to overcome current crisis. To that end, the relatively timid action taken earlier by European leaders was subsumed by the far more dramatic measures adopted – an emphatic upward ratcheting designed to prove their determination to tackle the evolving catastrophe once and for all.”
Tags: Angela Merkel, Austerity measures, Brussels, China, Deutsche Bank, euro, European Central Bank, European Commission, European Financial Stability Facility, European Union, Eurozone, GDP, Greece, Greek debt, Herman Van Rompuy, International Monetary Fund, Italy, Jose Manuel Barros, Royal Bank of Scotland, Sovereign debt
Posted in Economics, Financing, General | No Comments »
Wednesday, October 5th, 2011
Federal Reserve Chairman Ben Bernanke, in a long-awaited speech in Jackson Hole, WY, announced no new steps the Fed will take to prop up the shaky U.S. economy. Rather, he expressed optimism that the economy will continue to recover, based on its inherent strength and from assistance provided by the central bank. Bernanke restated the Fed’s determination to keep the federal funds rate “exceptionally low” for a minimum of two years. He did not say what many had been hoping to hear: that the Fed would begin another round of quantitative easing – usually referred to as QE3.
Bernanke said that he expected inflation to remain at or below two percent. Additionally, he acknowledged that the recent downgrade of the nation’s AAA credit rating had undermined both “household and business confidence.” He implied that there was only so much more the Fed can do to stimulate the economy, and that the time has come for Congress and the Obama administration to create “policies that support robust economic growth in the long term,” to reform the nation’s tax structure and to control spending.
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September,” Bernanke said. He went on to clarify the Fed’s guidance about how long interest rates will remain exceptionally low. “In what the committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.”
As Bernanke delivered his remarks, the government cut its estimated 2nd quarter GDP growth to a paltry rate of one percent, a revision from the 1.3 percent previously reported. The revision was expected and primarily due to weaker exports. In more positive news, private spending and investment in April through June were slightly higher than initially estimated. The GDP grew by an annual rate of just 0.4 percent in the 1st quarter. The 2nd half of 2011 is expected to be somewhat stronger, but a major driver of the economy — consumer spending — remains weak amid slow hiring and sluggish income gains.
“This economic healing will take a while, and there may be setbacks along the way,” Bernanke said. “Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said. “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”
“Economic performance is clearly subpar, and from that standpoint the case for some sort of further economic-policy assistance is just being made by the poor performance,” said Keith Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management. Although Bernanke said the Fed has stimulus tools left, “the threshold to utilizing them is going to require fairly different conditions than what we have today,” such as lower inflation or a return of financial instability, Hembre said.
Bernanke also used the occasion to scold Congress for its tardiness in resolving the deficit debate. “The country would be well served by a better process for making fiscal decisions,” Bernanke said at the Federal Reserve Bank of Kansas City’s annual economic symposium. “The negotiations that took place over the summer disrupted financial markets and probably the economy, as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.” Bernanke implied that a return to economic prosperity is at stake. “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome,” he said. The budget process, according to Bernanke, would be more effective if negotiators set “clear and transparent budget goals” and established “the credibility of those goals.”
Bernanke reassured investors that United States prospects for growth are sound over the long term and that the Fed has tools to aid the recovery if needed, even though he is not planning another stimulus at this time. “What no action will do is give confidence to investors that things are not as bad as many people perceive, otherwise he would’ve acted,” Keith Springer, president of Springer Financial Advisors in Sacramento, CA, said. “Investors will eventually see the positives.”
Tags: Ben Bernanke, congress, consumer spending, Debt-ceiling battle, economic stimulus, exports, Federal Reserve, Federal Reserve Bank of Kansas City, GDP, interest rates, Jackson Hole, Nuveen Asset Management, Obama administration, QE3, Springer Financial Advisors, WY
Posted in Economics, General | No Comments »
Monday, October 3rd, 2011
ADP, a leading payroll services company, is reporting that private companies added 114,000 jobs in July.
Many analysts had projected an increase in hiring from June, but it is not likely that the unemployment rate will decline even if job growth rose sharply. ADP’s forecasts are frequently used to measure how the labor economy is performing, but the firm has had its share of missteps, with some estimates on target and others varying sharply from actual government-issued data. In June, ADP projected that more than 140,000 jobs were added. The official government report showed that the labor economy had experienced anemic growth during the month, with a net total of only 18,000 jobs created. Many economists and industry believe that private employers likely added more jobs than previously projected during July.
Not all the news was good, however. Employers announced 66,414 planned layoffs in July, an increase of 60.3 percent over the 41,432 announced in June, according to a report from consultants Challenger, Gray & Christmas, Inc.
Any gain or loss in jobs above 100,000 is considered statistically noteworthy by economists. Expectations were rather low, however, given the recent bad news about GDP, consumer spending and manufacturing recently. “We still expect that actual payrolls may have risen by around 50,000 in July,” according to Capital Economics. “That would be better than the previous two months, but hardly reason for cheer.” “This pace of job creation usually implies a steady unemployment rate,” according to ADP’s employment report. Capital Economics said that the latest job gains would not reduce the unemployment rate. “We are in a process of discovery over whether the slowdown we have seen since March in the U.S. is over and we are entering a new phase of faster growth or that we are in a slump,” said Francisco Torralba, economist at Morningstar Investment Management.
Recently released Institute of Supply Management (ISM) numbers indicate an economy that continues to move barely at a snail’s pace. The non-manufacturing ISM report showed expanding business activity, new orders and employment, but at a slowing pace. Planned layoffs reached a 16-month high while the private sector added 114,000 jobs in June, most of them in the small business and the services sector. “Today’s report shows modest job creation for the month of July at a rate of half what is needed for meaningful employment and economic recovery,” said Gary C. Butler, Chief Executive Officer of ADP. Approximately half of June’s private sector job additions came from small business, which added 58,000 employees, and medium businesses (+47,000). These statistics mesh with the Challenger, Gray & Christmas job-cuts report, which showed planned layoffs hitting a 16-month high on a “sudden and unexpected burst” in downsizing by large companies. Merck, Borders, Cisco, Lockheed Martin, and Boston Scientific announced plans to cut 38,000 jobs in July, 58 percent of the 66,414 announced. According to Dave Rosenberg, who is viewed by many as a perma-bear, it will be really hard for a self-sustaining recovery to pick up. “The overhang of excessive debt burdens is still with us today and the problem with the government stimulus programs that were put into place is that they were not designed properly; the multiplier impacts never did kick in,” said Rosenberg. “So we can’t ‘grow’ our way out. Now government sectors in nearly every jurisdiction are tightening their fiscal belts. Companies and banks retain their extreme stash of cash, if we dare suggest, because they see the economic environment that we do and want to survive the next downturn.”
In the meantime, 400,000 Americans filed for first time unemployment claims in the last week of July, according to the Department of Labor. Coupled with a revision of initial claims in the previous week to 401,000, the latest update means claims have yet to dip below the 400,000 mark for 17 weeks.
Writing for The Hill, Vicki Needham says that “Economists say these figures are in line with the economy’s slowing expansion and are expecting growth to accelerate through the second half of the year as temporary factors such as high gas prices fade. While companies aren’t hiring, consumers are being cautious with their money, spending less for the first time in 20 months. Consumer spending rose only 0.1 percent in the 2nd quarter and households tucked away more savings.”
Tags: ADP, Borders, Boston Scientific, Capital Economics, Challenger, Cisco, consumer spending, Department of Labor, GDP, Gray & Christmas, Inc., Institute of Supply Management, jobs, July Jobs Numbers Disappoint, layoffs, Lockheed Martin, manufacturing, Merck, Morningstar Investment Management, unemployment
Posted in Economics, General | No Comments »
Tuesday, September 13th, 2011
Home prices revived somewhat during the 2nd quarter, but the housing market is still struggling. Prices climbed an impressive 3.6 percent, compared during the three months ending March 31. Despite the upbeat news, home prices are still down 5.9 percent compared with the 2nd quarter of 2010. The rise in home prices came after three straight quarters of drops, the S&P/Case-Shiller national index — a recognized gauge of residential real-estate markets — reported. The year-over-year decline was slightly more than the than the 4.7 percent drop that had been forecast by a consensus of experts at Briefing.com. A separate monthly index of home prices in 20 major metro areas reported a month-over-month gain of 1.1 percent for June, and a 4.5 percent decline compared with last year.
The quarter-over-quarter price increase may be the last one for a while, said Stan Humphries, chief economist for the real estate website Zillow. He expects prices will weaken again. “The August turmoil of credit rating downgrades, negative GDP revisions, stock oscillations and European debt woes are likely to leave a mark on both August home sales and home value appreciation,” according to Humphries. “Monthly home value appreciation in June may mark the last hurrah before beginning to weaken in the back half of this year,” Humphries said.
Foreclosures still constituted a higher proportion of sales throughout the winter and spring as families took a break from home shopping; cash-rich investors dominate the market. Nationally, home prices have returned to their 2003 levels.
Chicago, Minneapolis, Washington and Boston saw the largest monthly increases. Cities hit hardest by the housing crisis, such as Las Vegas and Phoenix, reported small seasonal increases. Housing has remained a drag on the economy and is one of the most important reasons why it is still struggling to recover two years after the recession officially ended. Home sales in 2011 are likely to be at the lowest level in 14 years. Home prices in many cities have reached their lowest points since the market bubble burst more than four years ago. Home prices in Cleveland, Detroit, Las Vegas, Phoenix and Tampa are at 2000 levels. “These shifts suggest that we are back to regional housing markets, rather than a national housing market where everything rose and fell together,” said David M. Blitzer, chairman of the S&P’s index committee. “This month’s report showed mixed signals for recovery in home prices. No cities made new lows in June 2011, and the majority of cities are seeing improved annual rates,” Blitzer said. “Looking across the cities, eight bottomed in 2009 and have remained above their lows. These include all the California cities plus Dallas, Denver and Washington D.C., all relatively strong markets.”
“There’s no theoretical floor for prices. If the economy worsens, housing will get into a vicious cycle of falling prices and foreclosures,” said Mark Zandi, chief economist at Moody’s Analytics. “When prices fall, confidence wanes.”
Foreclosures and short sales — when a lender sells for less than what is owed on a mortgage – accounted for approximately 30 percent of all home sales in July, an increase from about 10 percent reported in normal years. Nearly 1.7 million potential foreclosures are being delayed, according to real estate firm CoreLogic, either by backlogged courts or lenders waiting for the conclusion of state and federal investigations into questionable foreclosure practices.
“Prices aren’t going to rebound back rapidly,” said Paul Dales, a senior U.S. economist at Capital Economics Ltd. in Toronto. “Most people think that when the downturn ends the recovery will be pretty good, but that’s not going to be the case at all.”
“Consumer confidence is still weak, and the housing sector remains in a fragile state,” According to Robert Toll, chairman of Toll Brothers, Inc. the nation’s largest luxury homebuilder. “The nation’s economy continues to suffer from the lack of jobs in housing construction and the related manufacturing and service sectors that a decent new-home market would typically generate.”
Federal Reserve Chairman Ben Bernanke said “an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines” are hurting the housing market.
Lawrence Yun, chief economist at the National Association of Realtors, described the activity as “underperforming. The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy,” he said. “We also need to be mindful that not all sales contracts are leading to closed existing-home sales. Other market frictions need to be addressed, such as assuring that proper comparables are used in appraisal valuations, and streamlining the short sales process.”
Tags: Ben Bernanke, Briefing.com, Capital Economics Ltd., CoreLogic, Credit-rating downgrades, European debt woes, Federal Reserve, foreclosures, GDP, home prices, Inc., Moody’s Analytics, mortgages, National Association of Realtors, recession, S&P/Case-Shiller National Index, short sales, Toll Brothers, Zillow
Posted in Economics, Financing, General, Residential | No Comments »
Monday, August 22nd, 2011
Standard & Poor’s may have downgraded the United States credit rating from AAA to AA+ and the bears may have taken over Wall Street, but the Berkshire Hathaway chairman and billionaire Warren Buffett believes that the nation deserves a AAAA rating.
In a recent appearance on CNBC, Buffett said that he still believes that the United States’ debt is AAA and that he’s not changing his mind about Treasuries based on Standard & Poor’s downgrade. “If anything, it may change my opinion on S&P,” according to the Oracle of Omaha. “I wouldn’t dream of putting it anywhere else,” Buffett said, noting that at Berkshire, the only reason he’s sold Treasuries in the past is to purchase stocks or make acquisitions. Berkshire is still buying T-bills, even though yields have declined. “If I have to buy (Treasuries) at a zero percent yield, I will,” he said. “I don’t like it, but we’ll do it.”
Buffett has something of a vested interest in criticizing Standard & Poor’s. Berkshire Hathaway is one of the biggest shareholders in Standard & Poor’s main competitor Moody’s with about 28 million shares. But the billionaire has long urged people to make their own decisions about an investment’s prospects without relying on credit rating agencies. Buffett said the action doesn’t change his view on the soundness of U.S. Treasury bills. At least $40 billion of Berkshire Hathaway’s approximately $48 billion cash and equivalents is in U.S. Treasury bills, and Buffett won’t consider investing it elsewhere.
According to Buffett, America’s leaders may have a difficult time agreeing on the country’s financial future and the value of the dollar may slide, but that won’t keep the world’s richest nation from paying its debts. The United States has a GDP of about $48,000 per person, and the Federal Reserve can always print more money. “Our currency is not AAA, and in recent months the performance of our government has not been AAA, but our debt is AAA,” Buffett said.
Writing on the InvestorPlace.com website, Jeff Reeves says that “Before you scoff that Buffett is just a bygone relic of an era during which stocks like General Electric truly did have bulletproof dividends and it would have been unfathomable for stocks like General Motors to go bankrupt, consider this: In September 2008, the depths of the financial crisis when nobody knew which bank would fail next, Buffett and Berkshire dumped $5 billion into preferred stock of Goldman Sachs. Thanks to the 10 percent interest on those shares, Berkshire Hathaway earned a cool $500 million per year in dividends before Goldman bought back the stock several months ago. What’s more, the investment bank paid a hefty 10 percent premium to buy back those preferred shares. Maybe it was crazy to jump into banks headfirst when the market was going haywire in 2008. But it was awfully profitable for Buffett. You might think it’s crazy to stick to your buy-and-hold strategy now, or to continue to rely on U.S. Treasury Bonds. But take a deep breath and remember that not everyone is screaming and running for the hills. Yes, persistent problems with unemployment, the political bickering in Congress and the flatlining of our American economy are serious issues. But they are hardly new.”
Not everyone agrees with Buffett. According to the Equity Master website, “We must say that we do not agree with Mr. Buffett. We are not arguing with the credibility of S&P, whose reputation admittedly became tainted when it gave the highest rating to many mortgaged backed securities in the months leading up to the demise of Lehman. But that does not mean that the U.S. is without some serious problems. Indeed, the U.S.’ mounting debt is a huge cause for concern and the government’s latest move to raise the debt ceiling is only likely to postpone an eventual default and not entirely extinguish it. Moreover, the claim that the U.S. can pay its debt because it can print more money is a dangerous one to make. Printing money never really solved America’s problems. The two big quantitative easing programs and their failure to revive the sagging U.S. economy is testimonial to the fact. One thing that it will certainly do is bring down the value of the dollar and cause inflation to accelerate posing a fresh set of problems for the U.S. So, while criticisms can be piled on S&P, downgrading of the U.S.’ credit rating is something that the world’s largest economy had a long time coming.”
Firstpost agrees that Buffett is wrong. “Among other things, he said that the U.S. deserved a AAA credit rating when the S&P decided to bring it down to AA+. He also believes the U.S. will avert a double-dip recession. Well, Mr. Buffett, you are already half-wrong. A slow-growing nation with a 100 percent debt-to-GDP ratio cannot be AAA by any stretch of economic logic. It makes India’s 70-72 percent debt-GDP ratio look like the epitome of prudence. As for the other half of your prediction – that the U.S. will avoid a double-dip recession – the jury is out on that one, but the recession wasn’t the reason for the S&P downgrade anyway. There are two reasons, or maybe three, why the U.S. is in a mess. One is that it is overleveraged – in deep debt – both at the level of government and the common people. Two, the law that the U.S. can indefinitely live beyond its means has a flaw. It was built on the assumption that dollar debts can be paid off by printing more of the green stuff forever.”
Tags: AAA credit rating, Bear market, Berkshire Hathaway, Buy-and-hold strategy, CNBC, congress, Double-dip recession, Federal Reserve, financial crisis, GDP, General Electric, General Motors, Goldman Sachs, Lehman Brothers, Moody’s, Political bickering, Quantitative easing, Standard & Poor’s, T-bills, The Oracle of Omaha, Treasuries, unemployment, Wall Street, Warren Buffett
Posted in Economics, General | 1 Comment »
Monday, August 8th, 2011
The popular image of French men and women spending their time in sidewalk cafes sipping aperitifs, smoking Gauloises and watching the world go by belies the fact that the nation’s residents work the least amount of hours in the world, yet are among the most productive. According to a recent UBS survey, people globally work an average of 1,902 hours annually. The work day is even longer for people in Asian and Middle Eastern cities. By contrast, residents of Paris and Lyon have the shortest workday at 1,582 and 1,594 hours annually, respectively.
In 2010, France’s GDP totaled $2.113 trillion; that represented a 1.6 percent growth rate and a GDP per capita of $38,016. The French achieve their high standard of living while working 16 percent fewer hours than the average person, and nearly 25 percent less than their Asian peers. Visit France and you’ll see that their standard of living is probably significantly higher than the GDP numbers indicate. If you divide France’s GDP per capita by actual hours worked, you’d probably learn that the French are achieving some of the highest returns on work-hours invested.
Because healthcare and education are virtually free, the French have the ability to put more emphasis on family and pleasure rather than making a profit. Additionally, the French have 11 national holidays every year and many workers take extra time off if those holidays occur on a Tuesday or Thursday. Then there’s France’s legendary vacation time – which can range from five to eight weeks a year. Despite this and with an unemployment rate of 9.5 percent as of May 2011, France remains the world’s fifth largest economy. And the French achieve all that with a 35-hour workweek, which was adopted in 1998 in an effort to create more jobs for the unemployed. The early retirement age is 62, although most French opt to retire at 65.
France scores among the top 10 in International Living magazine’s “Best Quality of Life” survey. According to the article on the results of the 2011 survey, “Still, it can be useful to step back and see how each nation fares relative to others when we do consider these categories. To come out ahead, a country must be an all-around good pick, not just a standout in one area or two. And that explains why the top finishers are developed nations like the U.S. and the rest of our top 10 — New Zealand, Malta, France, Monaco, Belgium, Japan, United Kingdom, Austria, and Germany. None is among the most affordable nations on the planet. But they all offer other benefits. These nations are home to plenty of expats who are thrilled with life in their chosen havens.”
Writing on Truthout.com, Nobel Prize-winning economist Paul Krugman says that “It’s true that French GDP per capita (output divided by the number of people in the nation), for example, is only about three-quarters of the American level, when adjusted for purchasing power. But when you look closely at that number, the story is certainly more complex than many people think. Let’s look at data released by the Bureau of Labor Statistics in the United States — at data on France in particular, since that’s the country Americans have strong feelings about, right? I’m going to focus on the data from 2008, not 2009. In 2009, businesses in the United States laid off a lot of workers, while European firms did not. That produced a divergence in productivity that had more to do with short-run business cycle events than with fundamental trends. Data from 2008 allows for a better sense of the underlying differences. GDP, per capita, per person, France produces 73 percent of what the United States produces in a year. GDP per hour worked: A French worker produces about 99 percent of what an American worker produces in one hour. Number of workers: For every 100 workers in the United States, France has about 84 workers. Hours per worker: For every 100 hours an American works, a French person works about 88. So French workers are roughly as productive as American workers.”
At present, France is the fastest growing economy in the European Union. According to Ken Hurst of Works Management, “New productivity data published today (4 February) highlights a further rise in labor productivity across the European Union, thereby extending the current period of improvement to 21 months. Furthermore, the pace of increase accelerated since December to a five-month high and put France in first place in the growth league. Broken down by nation, the latest data highlighted gains across the EU’s four largest economies, the strongest of which was recorded in France – where output per employee rose at the strongest pace since last July. Marked gains were recorded in both the manufacturing and service sectors.”
Tags: Asia, Bureau of Labor Statistics, education, European Union, France, GDP, Healthcare, International Living. Quality of life, Ken Hurst, Lyon, Middle East, Paris, Paul Krugman, Per capita income, Truthout, UBS, Worker productivity, Works Management
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Wednesday, July 13th, 2011
Guess which state’s economy grew at a significantly faster pace than the nation’s measly 2.9 percent? According to a report from the Department of Commerce, it’s North Dakota, whose economy expanded a robust 7.1 percent in 2010.The key driver behind both North Dakota’s success is drilling for oil. Historically, North Dakota’s mining sector — which includes oil — was quite small compared to its overall economy. That has undergone change in recent years due to new technology that makes it possible to tap billions of barrels of oil in a remote area of North Dakota known as Bakken. American oil demand was relatively flat last year — but that made no difference in North Dakota. Mining surged 59 percent, primarily because businesses were working to build the infrastructure to support this young industry in the Bakken region. “North Dakota has a lot of untapped shale oil, and developing that field may have attracted a lot of investment and a lot of employment into the state,” said Luke Popovich, a spokesman for the National Mining Association.
By 2015, the new fields could yield as much as two million barrels of oil a day — more than the entire Gulf of Mexico produces now. This new drilling is expected to raise American production by a minimum of 20 percent over the next five years. Within 10 years, it could reduce oil imports by more than half. “That’s a significant contribution to energy security,” said Ed Morse, head of commodities research at Credit Suisse.
Among the other states, one of the prevailing themes impacting growth is the ongoing housing slump – which was most evident in Nevada and Arizona. Several states — including Indiana, Massachusetts and Oregon — saw a manufacturing comeback for autos, high-tech equipment and machinery.
The states seeing the greatest growth in 2010 after North Dakota include New York at 5.1 percent; Indiana at 4.6 percent; Massachusetts at 4.2 percent; and West Virginia at 4.0 percent.
Wyoming was the loser with its $34 million GDP falling 0.3 percent in 2010. It’s because the majority of Wyoming’s coal is used to generate electricity — and when demand for energy declined. last year, it was a setback for Wyoming’s mining industry. With the energy sector rebounding and coal prices soaring, Wyoming is likely to fare better in 2011. Wyoming performed very differently from North Dakota in 2010. Mining is a well established segment of the economy, accounting for approximately one third of the entire state’s GDP. When energy demand fell and oil prices barely picked up in 2010, Wyoming’s GDP was badly hurt. “When the economy is just flat or just limping along, you can expect a state like Wyoming to really take it hard,” Popovich said.
After Wyoming, the slowest growing states are Nevada at -0.2 percent; Arizona at 0.7 percent; Oklahoma at 0.7 percent; and Montana at 1.1 percent. States like Delaware, which rely heavily on manufacturing of soft goods such as plastic, struggled due to weak consumer demand and competition from producers overseas.
“It’s only been fleshed out over the last 12 months just how consequential this can be,” said Mark Papa, chief executive of EOG Resources, the first company to use horizontal drilling to tap shale oil. “And there will be several additional plays that will come about in the next 12 to 18 months. We’re not done yet.”
Tags: Arizona, Autos, Bakken, California, Colorado, Credit Suisse, Delaware, Department of Commerce, EOG Resources, GDP, Gulf of Mexico, High-tech equipment, Indiana, Machinery, Massachusetts, Montana, National Mining Association, Nevada, North Dakota, Oil drilling, Oklahoma, Oregon, Plastic, Shale oil, Soft goods, Texas, Wyoming
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Monday, July 11th, 2011
American households’ net worth moved up a bit as the year began, with rising stock prices, increased savings and debt reductions outpacing an ongoing decline in real-estate prices. According to the Federal Reserve, average household wealth in stocks, bonds, homes and other assets — minus mortgages and other debts — rose 1.2 percent to $58.1 trillion during the 1st quarter. The increase is likely to boost the economy, because as peoples’ net worth increases, they tend to become more confident about their financial future and more willing to spend. Noting the recent decline in stock prices, “in general, financial wealth has been increasing, which would tend to increase consumer spending,” said Goldman Sachs economist Andrew Tilton.
Even though Americans’ net worth rose to its highest level since the middle of 2008, it remained significantly below the peak of $65.8 trillion in June 2007. Additionally, the upsurge has been driven primarily by stock prices, which benefit people who have invested their money. The significantly larger percentage of Americans who have the majority of their wealth in their homes is still feeling the continuing real-estate slump.
Paul Ashworth, who owns Ashworth Drugs, a pharmacy in Cary, NC, says his retirement portfolio has recovered somewhat in recent years, but still is more than 20 percent less than its level when the recession began. The Ashworth family has curtailed dining out and scrapped its subscriptions to the ballet and symphony. “The bounce hasn’t really made me feel better at all,” Ashworth said. “I still have a job, but I don’t feel as secure. We don’t feel as good about getting out and spending as we used to.”
The Fed’s quarterly overview of American household, business, bank and government finances showed that companies are accumulating profits rather than spending them. Cash holdings and other liquid assets rose 2.6 percent to $1.91 trillion. At 6.8 percent of total assets, the level of cash reached its highest level in nearly 50 years. Debt levels in budget-crunched state and local governments showed slight declines, but that was outpaced by an increase in federal debt. Government debt rose two percent to $12.1 trillion during the 1st quarter.
Meanwhile, the value of real-estate assets continued their decline, falling 1.9 percent to $18.1 trillion. The ongoing decline in housing is hurting consumer spending. During the housing boom of the last 10 years, many homeowners extracted wealth from their houses through mortgage refinancing and home-equity loans, which spurred spending. Now, with many homeowners owing more on their mortgages than their properties are worth, that is no longer occurring. Instead, many consumers are skeptical about the recovery’s strength and are still not spending on home improvements.
Writing on the Reason.com blog, Tim Cavanaugh says that “You know what you almost never hear about anymore? How the American consumer will lead the way to an economic recovery. Just a year ago learned pundits were holding out hope for another consumer-led recovery. The New York Times was still clinging to the consumerist wreckage as recently as May. In December, the remarkably durable idea that U.S. consumers will restore prosperity was still generating such brilliantly tautological news as ‘Consumers give boost to holiday sales.’ But the mirage of the consumer-led recovery has been fading for years. Retail sales rose 0.6 percent in the month of December, an increase that fell well below expectations of 0.8-0.9 percent, and a letdown after a Festivus season filled with tales of confident, resurgent shoppers.”
The 1st quarter of 2011 is not the only time during the Great Recession when household wealth grew. John Ryding, chief economist at RDQ Economics, notes that household net worth grew by $5 trillion between the 1st and 3rd quarters of 2009, after declining sharply earlier in the recession. Additional spending generated by the rebound helped keep the savings rate from climbing to seven or eight percent. Household savings encourage long-term economic vitality, but a rapid upward adjustment makes consumer-spending growth more difficult to achieve in the near term — a phenomenon known as the “paradox of thrift.” If the savings rate remains relatively static or rises slowly, it would remove one of the headwinds to consumer-spending growth in the near future. That would be a bullish sign for the economy, because consumer spending accounts for roughly 70 percent of GDP.
Tags: Ben Bernanke, Cash, Federal Reserve, Festivus, GDP, Government debt, Great Recession, home equity loans, Home improvements, household income, Mortgage refinancing, Reason.com, Stocks
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