September 30, 2011
The number of people seeking unemployment benefits fell sharply last week, an encouraging sign that layoffs are easing.
The Labor Department says that weekly applications dropped 37,000 to a seasonally adjusted 391,000, the lowest level since April 2. It’s the first time applications have fallen below 400,000 since Aug. 6.
Applications typically need to fall below 375,000 to signal substantial job growth. They haven’t been that low since February.
A Labor Department spokesman said some of the drop was due to technical difficulties related to seasonally adjusting the figures. The spokesman said some states also reported higher applications in previous weeks due to Hurricane Irene.
The four-week average, a less volatile measure, fell to 417,000, the first drop in six weeks.
Despite the signs of improvement, the job market remains sluggish.
Many businesses have pulled back on hiring in the past few months as the economy has weakened. Consumers are reluctant to spend, with unemployment high, wages stagnant, and gas prices at about $3.50 a gallon.
Consumer confidence plunged in August to recessionary levels, after lawmakers battled over raising the government’s borrowing limit and Standard & Poor’s cut its rating on long-term U.S. debt. That sent the stock market sharply lower, which hurts consumers’ ability to spend.
Retail sales were flat in August, a sign the turmoil caused consumers to pull back.
Businesses also held off on hiring. Employers added no net jobs in August, the worst showing in almost a year. The unemployment rate was stuck at 9.1 percent for the second straight month.
Investors also worried last week that Europe won’t be able to prevent Greece from defaulting and worsening the region’s debt crisis. That sent the U.S. stock market down 6.4 percent, its biggest weekly loss since October 2008, in the midst of the financial crisis.
If Greece defaults, that could destabilize other indebted countries, such as Portugal, Ireland and Italy. It could also harm many of Europe’s banks, which own Greek debt.
If European banks hoard cash to make up for their losses and stop lending to their U.S. counterparts, that could restrict credit in the United States and slow the economy. And a financial crisis in Europe would reduce U.S. companies’ exports and sales to the region.
The slow growth and turmoil have raised fears that the U.S. economy could enter another recession. Some economists put the odds as high as 40 percent.
The economy barely grew in the first six months of this year. Still, economists expect growth will improve a bit in the second half, to 1.5 percent to 2 percent. But that’s not enough to spur much hiring and won’t feel much better than a recession to most Americans.
The latest sign of a weak job market came Wednesday, when the Conference Board said its index of online help-wanted ads fell by 1.1 percent to 3.95 million. Openings have fallen by about 500,000 in the past six months, the group said, after jumping by more than 750,000 in the first three months of the year.
Instead of hiring, companies are spending on new equipment. A key measure of business investment plans rose 1.1 percent in August, the Commerce Department said Wednesday. Companies ordered more machinery, computers and communications equipment.
That’s a good sign, because it shows that businesses are sticking with their investment plans, despite recent signs of economic weakness.
Last week, the Federal Reserve took its latest step to boost the economy. It said it will swap $400 billion of short-term Treasury securities into longer-term notes and bonds. The central bank said it will also reinvest the proceeds from its maturing mortgage-backed securities into new mortgage-backed bonds. Both steps should reduce mortgage rates.
August 2nd, 2011
The US is poised to approve a deal to avoid defaulting on its debt.
The debt ceiling is the legal limit on the total amount of debt the US government can run up in order to pay its bills. Currently it is $14.3tn.
Political wrangling over the debt ceiling has caused much consternation in the financial markets and many will be happy that the deal has been done – even if the outcome pleases nobody.
So how does the deal work?
In the first instance, and perhaps most importantly as far as the markets are concerned, the deal immediately increases the debt ceiling by $400bn.
That gives the US the wiggle room to go on paying its bills – military salaries, interest on existing loans, Medicare, etc – in the short term.
The deal then raises the debt ceiling by another $500bn until February.
In principle, Congress can vote against this increase, but this is designed to be more of a political gesture and a symbolic rejection of the increase by conservatives in Congress.
President Barack Obama is expected to veto any such vote.
Decisions by committee
In the meantime, the deal puts in place measures to cut the US deficit by at least $2.1tn over 10 years.
From October, $917bn worth of spending cuts kicks in.
In November, a special joint committee of 12 people from the House of Representatives and the Senate comes back with its recommendations for up to $1.5tn in deficit reduction actions.
The panel cannot consider increasing taxes, it seems, but it can change the tax code to show additional revenues.
Congressional leaders are hopeful the compromise will win the backing of both houses, but some Republicans and Democrats in the House of Representatives remain opposed for different reasons.
By Christmas, Congress has to vote on the committee’s plan – with no amendments allowed.
The idea is that the recommendations should be accepted.
If Congress rejects the plan, then a series of automatic spending cuts – thrashed out by Democrats and Republicans over the past few days – take effect.
The cuts are designed to make both sides balk – thereby forcing them in advance to consider seriously the committee’s recommendations.
If the recommendations are rejected, cuts begin in January.
About half the spending cuts would come from defence, although Republican negotiators have managed to broaden the definition from just the military to other areas, such as the Department of Homeland Security.
Medicare – the US’s federally-funded system of pensioner healthcare – would face some cuts, though healthcare for the poorest and pension payments would be spared cuts.
The last part of the deal also has to take place before the end of the year.
Both the House and Senate must hold a vote on adding a balanced budget amendment to the constitution – a rule requiring that future federal spending cannot exceed revenues.
To begin, this requires a two-thirds majority in both houses and is again seen as a political gesture on the part of fiscal conservatives ahead of an election year.
If the amendment does somehow pass, then Mr Obama can ask for a further increase in the debt ceiling of $1.5tn.
If the amendment does not pass, Mr Obama can request an increase of $1.2tn.
A key point for Mr Obama is that the bill would raise the debt ceiling into 2013, meaning he would not face another congressional showdown on spending in the middle of his re-election campaign next year.
All very straightforward, no?
April 19th, 2011
A warning from Standard & Poor’s that the agency might lower its rating on U.S. government debt sent stocks on their steepest slide in a month Monday.
S&P said there is a 33 percent chance it would lower the country’s credit rating from AAA in the next two years if Washington fails to pare the country’s debts.
The Dow Jones industrial average, the S&P 500 index and the Nasdaq composite all had their sharpest falls since March 16.
The Dow fell 140.24 points, or 1.1 percent, to close at 12,201.59. The Standard & Poor’s 500 fell 14.54, or 1.1 percent, to 1,305.14. The Nasdaq composite fell 29.27, also 1.1 percent, to 2,735.38.
S&P reaffirmed the U.S. government’s top credit rating of AAA but expressed doubts that Washington would move quickly to curb the country’s mounting budget deficits.
U.S. government bonds are widely seen as the benchmark for the safest kind of debt. The highly unusual move by the ratings agency to lower its outlook for U.S. debt to “negative” from “stable” caught investors off guard.
“This is a wake-up call,” said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc. “The government is now going to have to do something to cut the budget. That is a long-term positive for the stock market, though it might not be in the near term.”
The change means that S&P could lower its rating on U.S. government debt in the future. If that were to happen, the U.S. government would have to pay more to borrow money when it issues bonds.
Since the government’s borrowing rates are used as a benchmark for nearly all kinds of debt, many borrowers would also pay higher rates, including companies, homeowners and credit card users. That would have a negative impact on spending in general and the overall economy.
“The credit worthiness of the country is the underpinning on which all other asset classes are valued,” said Jack Ablin, chief investment officer at Harris Private Bank. “If all of a sudden the credit quality of U.S. Treasurys isn’t as high as people perceive, we could see (an) erosion of confidence and values decline.”
U.S. government debt prices fell after the S&P warning came out but soon recovered. The yield on the 10-year Treasury note, which rises when the note’s price falls, jumped as high 3.47 percent after the S&P’s warning, from 3.38 percent just before. By late afternoon the yield was back at 3.38 percent.
The euro fell against the dollar as Europe’s debt problems spread. Spain had to pay a much higher interest rate on new debt. There was speculation of a possible default by Greece, and a nationalist party in Finland made big gains in an election Sunday.
The euro was worth $1.4235 in late trading, down from $1.4436 Friday.
Citigroup Inc. closed flat at $4.42 after reporting earnings that came in just above analysts’ expectations. The bank’s net income fell 32 percent but it was able to set aside less money to cover losses from loan defaults as more customers made payments on time.
Several other big banks are due to report earnings this week. Traders are keen to find out if banks are lending more. Upcoming reports from Goldman Sachs Group Inc. and Wells Fargo & Co. this week are “crucial for the markets,” says Quincy Krosby, a market strategist for Prudential Financial.
Industrial supply company W.W. Grainger rose 1.7 percent. The company’s first-quarter net income soared after it began offering new products and pushed into Mexico, Colombia and Japan.
Four stocks fell for every one that rose on the New York Stock Exchange. Trading volume was 4.6 billion shares.
March 1st, 2011
China’s holdings of US bonds reached $1.16 trillion at the end of December, almost $270 billion more than previously estimated, new data showed Monday.
Beijing, which has converted much of a huge trade surplus with the United States over the past two decades into buying up US treasuries and other securities, held 26.1 percent of the total of $4.44 trillion held by foreigners, the Treasury said.
The figures came as the US government recalculated its data on foreign holdings of US securities from June 2010.
Chinese-held Treasuries have fallen since hitting a high of $1.18 trillion in October, under the revised figures. Japan remained by far the second largest holder of US government debt, with $882 billion in December, around $1.3 billion less than original estimates.
Britain was third at $272.1 billion.
January 12th, 2011
The Wall Street Journal
By: Meena Thiruvengadam and Jeffrey Sparshott
The U.S. could reach its debt limit of nearly $14.3 trillion as early as March 31, Treasury Secretary Timothy Geithner said Thursday.
Geithner in a letter to lawmakers said failure to raise the debt limit could “precipitate a default by the United States” and have catastrophic economic consequences–potentially more harmful than the financial crisis in 2008 and 2009.
The letter received a cool reception on Capitol Hill.
“The American people will not stand for such an increase unless it is accompanied by meaningful action by the President and Congress to cut spending and end the job-killing spending binge in Washington,” Republican Speaker of the House John Boehner said.
Boehner, leading a new Republican majority in the House, said spending cuts remained a top priority lawmakers.
The Treasury Department estimates that the U.S. could reach its debt limit as soon as March 31 and probably no later than May 16. The exact date depends on the rate of economic growth, tax receipts and other factors.
“This means it is necessary for Congress to act by the end of the first quarter of 2011,” Geithner said in the letter.
Geithner is pushing lawmakers to lift that ceiling for the sixth time in less than four years. Lawmakers last increased the debt ceiling almost a year ago.
But by Monday, the federal debt subject to that ceiling stood at around $13.95 trillion, giving the government just $355 billion before it would be legally prohibited from borrowing to pay its financial obligations.
A Treasury official said the administration is hoping to separate the debt ceiling increase from the debate on spending. And in his letter, Geithner said deep spending cuts would delay reaching the ceiling by no more than two weeks.
Boehner, though, emphasized the importance of spending cuts.
“While America cannot default on its debt, we also cannot continue to borrow recklessly, dig ourselves deeper into this hole, and mortgage the future of our children and grandchildren,” he said.
Failure to raise the U.S. debt ceiling could cast doubt on the U.S. government’s ability to meet its obligations and send shockwaves through the bond market.
“Default would have prolonged and far-reaching negative consequences on the safe-haven status of Treasurys and the dollar’s dominant role in the international financial system,” Geithner said.