February 21, 2012
By Ross Tucker
Gold prices were rising Tuesday after approval of second bailout package for Greece propped up the euro.
Gold for April delivery was rising $30.20 at $1,756.10 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,757.60 and as low as $1,727 an ounce while the spot price was adding $21.20, according to Kitco’s gold index.
Jon Nadler, senior metals analyst at Kitco Metals, noted that market action has hinged on Greek headlines for weeks, with equities and the euro rising on positive news and falling after missed deadlines. With the deal now in place, Nadler believes investors can return their focus to the bigger — and more problematic — picture.
“Now that the red wax seal is drying on the 130 billion euro package and the many strings that are attached to it, the markets can focus on the remaining troublesome items — banking sector problems and Greece’s own inability to avoid coming back to knock on the EU’s door for more assistance, at a later date,” said Nadler. “There appears to be little doubt that in order for the country to bring debt down to 120% of GDP such further help will be necessary. As things stand right now, if Greece is lucky, that ratio might get down to 129% by — 2020 or so.”
February 14, 2012
By John Schoen
As the rebound in the U.S. economy helps boost income and spending among working-aged households, older Americans relying on retirement income are having a hard time paying the bills.
Despite steady belt-tightening as they age, retirees’ incomes just aren’t keeping up, according to a review of the latest data by the Employee Benefits Research Institute. On average, retired households spend about 80 percent of what working households spend, but their earnings are only 57 percent of what working households take home.
Not surprisingly, retired Americans spend a rising portion of their income on medical expenses as they get older. Health care cost consume roughly 13 percent of spending by those 65 and older — more than double the 5.3 percent of spending for those 45 to 54 and just 4.0 percent for those under 25, according to the Bureau of Labor Statistics. That rises to about 20 percent of total spending for those ages 85 and over, according to the EBRI.
With government health care spending soaring, Congress is wrestling with various proposals to contain costs. That doesn’t bode well for retirees who already face higher health care bills than younger households.
September 21st, 2011
Will global financial markets reach a breaking point during the month of October? Right now there are all kinds of signs that the financial world is about to experience a nervous breakdown. Massive amounts of investor money is being pulled out of the stock market and mammoth bets are being made against the S&P 500 in October. The European debt crisis continues to grow even worse and weird financial moves are being made all over the globe. Does all of this unusual activity indicate that something big is about to happen? Let’s hope not. But historically, the biggest stock market crashes have tended to happen in the fall. So are we on the verge of a “Black October”?
The following are 21 signs that something big is about to happen in the financial world and that global financial markets are on the verge of a nervous breakdown….
#1 We are seeing an amazing number of bets against the S&P 500 right now. According to CNN, the number of bets against the S&P 500 rose to the highest level in a year last month. But that was nothing compared to what we are seeing for October. The number of bets against the S&P 500 for the month of October is absolutely astounding. Somebody is going to make a monstrous amount of money if there is a stock market crash next month.
#2 Investors are pulling a huge amount of money out of stocks right now. Do they know something that we don’t? The following is from a report in the Financial Post….
Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks.
About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.
#3 Siemens has pulled more than half a billion euros out of two major French banks and has moved that money to the European Central Bank. Do they know something or are they just getting nervous?
#4 On Monday, Standard & Poor’s cut Italy’s credit rating from A+ to A.
#5 The European Central Bank is purchasing even more Italian and Spanish bonds in an attempt to cool down the burgeoning financial crisis in Europe.
#6 The Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank have announced that they are going to make available an “unlimited” amount of money to European commercial banks in October, November and December.
#7 So far this year, the largest bank in Italy has lost over half of its valueand the second largest bank in Italy is down 44 percent.
#8 Angela Merkel’s coalition is getting embarrassed in local elections in Germany. A recent poll found that an astounding 82 percent of all Germans believe that her government is doing a bad job of handling the crisis in Greece. Right now, public opinion in Germany is very negative toward the bailouts, and that is really bad news for Greece.
#9 Greece is experiencing a full-blown economic collapse at this point. Just consider the following statistics from a recent editorial in the Guardian….
Consider first the scale of the crisis. After contracting in 2009 and 2010, GDP fell by a further 7.3% in the second quarter of 2011. Unemployment is approaching 900,000 and is projected to exceed 1.2 million, in a population of 11 million. These are figures reminiscent of the Great Depression of the 1930s.
#10 In 2009, Greece had a debt to GDP ratio of about 115%. Today, Greece has a debt to GDP ratio of about 160%. All of the austerity that has been imposed upon them has done nothing to solve their long-term problems.
#11 The yield on 1 year Greek bonds is now over 129 percent. A year ago the yield on those bonds was under 10 percent.
#12 Greek Deputy Finance Minister Filippos Sachinidis says that Greece only has enough cash to continue operating until next month.
#13 Italy now has a debt to GDP ratio of about 120% and their economy is far, far larger than the economy of Greece.
#14 The yield on 2 year Portuguese bonds is now over 17 percent. A year ago the yield on those bonds was about 4 percent.
#15 China seems to be concerned about the stability of European banks. The following is from a recent Reuters report….
A big market-making state bank in China’s onshore foreign exchange market has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, two sources told Reuters on Tuesday.
#16 European central banks are now buying more gold than they are selling. This is the first time that has happened in more than 20 years.
#17 The chief economist at the IMF says that the global economy has entered a “dangerous new phase“.
#18 Israel has dumped 46 percent of its U.S. Treasuries and Russia has dumped 95 percent of its U.S. Treasuries. Do they know something that we don’t?
#19 World financial markets are expecting that the Federal Reserve will announce a new bond-buying plan this week that will be designed to push long-term interest rates lower.
#20 If some wealthy investors believe that the Obama tax plan has a chance of getting through Congress, they may start dumping stocks before the end of this year in order to avoid getting taxed at a much higher rate in 2012.
#21 According to a study that was recently released by Merrill Lynch, the U.S. economy has an 80% chance of going into another recession.
When financial markets get really jumpy like this, all it takes is one really big spark to set the dominoes in motion.
Hopefully nothing really big will happen in October.
Hopefully global financial markets will not experience a nervous breakdown.
But right now things look a little bit more like 2008 every single day.
None of the problems that caused the financial crisis of 2008 have been fixed, and the world financial system is more vulnerable today than it ever has been since the end of World War II.
As I wrote about yesterday, the U.S. economy has never really recovered from the last financial crisis.
If we see another major financial crash in the coming months, the consequences would be absolutely devastating.
We have been softened up and we are ready for the knockout blow.
Let’s just hope that the financial world can keep it together.
We don’t need more economic pain right about now.
September 19th, 2011
The Huffington Post
By: Jim Kuhnhenn
Drawing a bright line with congressional Republicans, President Barack Obama is proposing $1.5 trillion in new tax revenue as part of his long-term deficit reduction plan, according to senior administration officials.
The president on Monday will announce a proposal that includes repeal of Bush-era tax cuts for the wealthiest taxpayers, nearly $250 billion in reductions in Medicare spending, $330 billion in cuts in other mandatory benefit programs, and savings of $1 trillion from the withdrawal of troops from Iraq and Afghanistan, the officials said.
The plan includes no changes in Social Security and does not include an increase in the Medicare eligibility age, which the president had considered this summer.
The officials briefed reporters Sunday evening, but spoke on the condition of anonymity in advance of the president’s announcement.
All in all, the president’s plan is as much an opening bid as it is a political statement designed to draw contrasts with Republicans, who control the House of Representatives.
As such, it was not intended as a compromise and did not include agreements Obama had reached with House Speaker John Boehner during failed deficit reduction negotiations this summer.
The new taxes in particular have little or no chance of passing Congress as proposed. Republicans were already lining up against the president’s tax proposal before they even knew the magnitude of what he intended to recommend.
Key features of the proposal:
_$1.5 trillion in new revenue, which would include about $800 billion realized over 10 years from repealing the Bush-era tax rates for couples making more than $250,000. It also would place limits on deductions for wealthy filers and end certain corporate loopholes and subsidies for oil and gas companies.
_$580 billion in cuts in mandatory benefit programs, including $248 billion in Medicare and $72 billion in Medicaid and other health programs. Other mandatory benefit programs include farm subsidies.
_$430 billion in savings from lower interest payment on the national debt.
By adding about $1 trillion in spending cuts already enacted by Congress and counting about $1 trillion in savings from the drawdown of military forces from Iraq and Afghanistan, the combined deficit reduction would total more than $4 trillion over 10 years, senior administration officials said.
Obama backed away from proposing sweeping changes to Medicare, following the advice of fellow Democrats that it would only give political cover to a privatization plan supported by House Republicans that turned to be unpopular with older Americans.
Administration officials said 90 percent of the $248 billion in 10-year Medicare cuts would be squeezed from service providers. The plan does shift some additional costs to beneficiaries, but those changes would not start until 2017, and administration officials made clear as well that Obama would veto any Medicare cuts that aren’t paired with tax increases on upper-income people.
The deficit reduction plan represents an economic bookend to the $447 billion in tax cuts and new public works spending that Obama has proposed as a short-term measure to stimulate the economy and create jobs. He’s submitting his deficit fighting plan to a special joint committee of Congress that is charged with recommending how to reduce deficits by $1.2 trillion to $1.5 trillion over 10 years.
Republicans have ridiculed the war savings as gimmicky, but House Republicans included them in their budget proposal this year and House Speaker John Boehner, R-Ohio, had agreed to count them as savings during debt ceiling negotiations with Obama this summer.
But the Republicans’ biggest objections will be with the president’s tax increases.
“Class warfare may make for really good politics but it makes for rotten economics,” GOP Rep. Paul Ryan of Wisconsin, the House Budget Committee chairman, told “Fox News Sunday.”
Ryan was commenting on Obama’s plan to propose a new minimum tax rate for taxpayers earning more than $1 million.
The measure – Obama is going to call it the “Buffett Rule” for billionaire investor Warren Buffett – is designed to prevent millionaires from taking advantage of lower tax rates on investment earnings than what middle-income taxpayers pay on their wages. At issue is the difference between a taxpayer’s tax bracket and the effective tax rate that taxpayer pays. Millionaires face a 35 percent tax bracket, while middle income filers fall in the 15 or 25 percent bracket. But investment income is taxed at 15 percent and Buffett has complained that he and other wealthy people have been “coddled long enough” and shouldn’t be paying a smaller share of their income in federal taxes than middle-class taxpayers.
Still, the White House considers passing the jobs bill far more pressing and Obama has been looking for every opportunity to bring it to the public’s attention.
In his Saturday radio and Internet address, Obama said he would lay down a plan that would show how to pay down the nation’s debt and pay for his employment legislation.
“But right now,” he said, “we’ve got to get Congress to pass this jobs bill.”
To that end, Obama on Thursday will be at a bridge linking Ohio and Kentucky – home states to Boehner and Senate Republican leader Mitch McConnell. He will use the bridge as a prop to call for increased spending on infrastructure.
September 14th, 2011
By: Sheryl Nance-Nash
For many households, it’s a personal finance dilemma: Should they try to pay down debt first, or build up savings? In the aftermath of the Great Recession, opinions have clearly tipped toward the ditch-your-debt side.
According to the August poll by the National Foundation for Credit Counseling, Americans are choosing to deal with what they owe: 89% of those surveyed said they value paying down debt over saving money; just 11% chose saving first.
America has a new aversion to debt, and with a national revolving debt tab of $798 billion as of June, and household debt averaging around $11,000, who can blame us? According to the NFCC, new purchases are more likely to be paid for with debit cards than credit.
A Question of Opportunity Cost
At face value, paying down debt sounds like it’s always a good thing, but if it comes at the expense of saving, it’s a bit more complicated.
“It is a good idea to pay down debt over savings if you have already started a savings account,” says Harrine Freeman, author of How to Get Out of Debt: Get an “A” Credit Rating for Free.
Making your debt demon the top priority also makes sense if you are someone who loses sleep over debt, if you’re trying to reshape your debt ratios and credit scores, or if you will benefit more from better cash flow later than today, says Rich Arzaga, founder of Cornerstone Wealth Management.
Then too, the value of paying down debt is directly proportional to the interest charged, says certified financial planner Michael Kresh.
Credit card debt, which can often exceed 20% interest, should always be a priority to pay down, he says. But all questions regarding how you allocate your money should be looked at through the lens of opportunity cost.
For example, is the interest you’re paying on money you owe greater or less than the return on an alternative investment you could make with the funds?
If you have credit card debt at 14%, paying it off is like earning 14% on those funds — a better profit than you are likely to make leaving the money elsewhere. And if the money you’d use is sitting in a low-interest bank account, you net much more by paying off that plastic. On the other hand, if you can refinance your mortgage to 3.5% – 4% (the lowest rates in our lifetimes), keeping a low-interest loan active while putting money into other investments can garner you a net profit, says Kresh.
Paying down debt also might not be the best move if you’re likely squander the cash surplus once the debt is paid; if you’re getting the benefit of an interest write-off to help offset your income taxes; or if you have the ability to manage debt in the short term or long term, says Arzaga.
Advocating for Saving
Not everyone agrees on the question of putting debt first.
To pay off debt before you have an emergency fund in place makes no sense, says Kevin Lynch, an assistant professor at The American College. Getting a cash cushion in place should be the first order of business, he feels.
Generally, people should be saving 10% of their income, says Thomas Fox, community outreach director at Cambridge Credit Counseling. “Although with the recession people began to save again, and it’s now around 5% of income, in countries like Japan, the savings rate is 25%, and it’s 50% in China.”
In this uncertain economy, you should be looking to have money to cover at least 10 months of expenses where you can readily put your hands on it, says Fox.
If you do choose to focus on debt, don’t get too relaxed once it’s paid off. Instead, reallocate the amount you had been spending each month on freeing yourself from debt toward another major financial goal, such as retirement, education, buying a new car, or whatever tops your list.
In the best of worlds, we would split the difference: “Pay down debt and contribute to a savings account at the same time,” says Freeman. “That way you will have an emergency fund and pay down debt which increases your credit score, reduces credit card usage and improves your financial life.”
September 13th, 2011
The Bottom Line
The number of Americans who have fallen into poverty rose to 15.1 percent in 2010, the third consecutive increase in the poverty rate, according to a new report issued Tuesday by the U.S. Census Bureau.
That puts the poverty rate at a 27-year high, Reuters reported.
There were 46.2 million people in poverty in 2010, up from 43.6 million in 2009 ─ the fourth consecutive annual increase and the largest number in the 52 years for which poverty estimates have been published, according to the new data.
In a report that covers the first full calendar year after the Great Recession, the bureau also said the real median income dropped for the third year in a row.
Real median household income in the United States in 2010 was $49,445, a 2.3 percent decline from the 2009 median. Separately, the Census Bureau said the nation’s official poverty rate in 2010 was 15.1 percent, up from 14.3 percent in 2009 ─ the third consecutive annual increase in the rate.
The percentage of Americans without health insurance coverage was not statistically different from the previous year, the bureau said.
September 2nd, 2011
The Wall Street Journal
By: Luca Di Leo and Jeff Bater
The U.S. economy failed to add jobs for the first time in almost a year, raising the odds of a return to recession and putting more pressure on President Barack Obama and the Federal Reserve to revive a moribund labor market.
Nonfarm payrolls were unchanged last month—the worst result since a small decline in September 2010—as the government sector continued to shed jobs, the Labor Department said Friday. The private sector added only 17,000 jobs.
About 45,000 telecom jobs were off company payrolls because of a strike at Verizon Communications Inc., contributing to the worst private-sector performance since February 2010. But payrolls were weak even without the one-off Verizon impact.
Data for the previous two months were revised down by a total 58,000 to show payroll increases of 85,000 jobs in July and only 20,000 in June, the government report showed.
The unemployment rate, which is obtained from a separate household survey, was unchanged at 9.1% last month. About 14 million Americans who would like to work can’t get a job.
And the average private-sector workweek fell to 34.2 hours from 34.3 hours, a sign of a greater slowdown in activity than economists had expected.
The results were worse than expected, and stocks fell on the news. Treasury prices rose, pushing yields down. Economists surveyed by Dow Jones Newswires had forecast payrolls would rise by 80,000 last month, with the unemployment rate unchanged.
Citing the nation’s wobbly recovery, Mr. Obama on Friday asked the Environmental Protection Agency to withdraw a proposed regulation for ozone air-quality standards. Republicans and industry groups have attacked the air-quality rule for months, saying it could cost tens of billions of dollars a year or more and kill thousands of jobs.
Mr. Obama is due to unveil new measures Thursday aimed at resuscitating the jobs market, but budget constraints and sharp divisions between Democrats and Republicans make it unlikely Congress will pass a substantive package. The Federal Reserve may therefore end up taking new steps to try to spur growth. The economy slowed sharply in the first half, heightening concerns it could fall back into recession only two years after the end of the severe downturn of 2008 and 2009.
The jobs report is worrying because it is in line with the weak trend seen in recent months, but it doesn’t spell recession yet, the commissioner of the Bureau of Labor Statistics said in an interview Friday.
Keith Hall said that, while the zero payroll figure for last month “is a little bit shocking,” the more concerning aspect is that job gains have only averaged 40,000 over the past four months. Monthly employment gains of at least 130,000 are likely needed just to keep the unemployment rate steady, he warned.
In Friday’s report, several major industries showed weakness beyond the 48,000 employment decline in the information industry, which includes telecom jobs.
Manufacturing, a big creator of jobs for most of the recovery, saw employment decline by 3,000 in August. The battered construction sector showed 5,000 job losses last month. The housing sector remains a big drag on the economy. The retail sector lost nearly 8,000 jobs.
Meanwhile, government employment continued to fall—by 17,000—for the 10th month in a row. Government jobs are expected to continue struggling as administrations try to cut the huge budget gaps accumulated to fight the recession.
Facing re-election in just over a year, Mr. Obama is next week expected to call for more investments in the country’s creaking infrastructure and a possible extension to the 2011 payroll-tax credit to boost consumer spending. But Republican opposition to more spending makes the president’s job harder. The White House Thursday downgraded its outlook for the economy, saying unemployment could still be at 9% in 2012.
Fed Chairman Ben Bernanke a week ago said the nation’s challenges—including long-term unemployment and weakness in housing—are largely beyond the central bank’s control, indicating it is mainly up to Mr. Obama and Congress to fix the economy. Even so, the Fed is likely to step in if it feels the economy is at risk because of government paralysis. Some officials signaled readiness to enact a third round of the Fed’s controversial asset purchases at their latest meeting Aug. 9.
With fiscal policy options “locked up as we roll into an election year, Ben Bernanke will come under tremendous pressure to act,” said Jason Schenker, president of forecasting company Prestige economics.
The jobs report Friday showed 42.9% of unemployed Americans, or six million people, were out of work for more than six months. The longer someone is without a job, the harder it is to find work.
Yet the fact that a large number of Americans have been out of work for several months means that more expansive monetary policy won’t be as effective in helping the labor market, three economists argue in a new paper from the Federal Reserve Bank of Richmond.
“After a long period of unemployment, affected workers may become effectively unemployable,” says the paper, by Andreas Hornstein, Thomas A. Lubik and Jessie Romero. “This suggests that the natural rate of unemployment may have increased.”
Some said the news wasn’t altogether unexpected. “In summary, this report is not good news, but it is not inconsistent with other recent indicators,” said Chad Moutray, chief economist for the National Association of Manufacturers, in a statement. He said the jobs report would “embolden those who argue for new initiatives to stimulate economic growth.”
July 13th, 2011
By: Steven C. Johnson
The dollar fell against most major currencies on Wednesday after Federal Reserve Chairman Ben Bernanke said the central bank could resort to more monetary stimulus if a sluggish U.S. economy weakens further.
That pushed the euro near $1.42, moving it further from the prior session’s four-month low beneath $1.39 and on track for its best day since mid-January.
Surprisingly swift Chinese growth data also helped divert attention, at least temporarily, from a worsening euro zone debt crisis after Fitch Ratings said an ambitious Italian deficit reduction plan would help stabilize its credit rating.
“The comments from Bernanke and Fitch amount to a double whammy for the dollar and a boost for the euro and riskier assets. It’s all positive for risk,” said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.
In testimony before a House of Representatives committee, Bernanke said: “The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support.
The Fed ended its most recent asset-purchase program in June. Traders said another round of easing would flood the financial system with more money and encourage investors to reach for higher-yielding currencies and assets.
Major U.S. stock indexes rose more than 1 percent and gold hit a record high. The euro was last at $1.4177, up 1.4 percent, after touching $1.4193 on trading platform EBS. It also rose 1.8 percent against the yen.
The high-yielding, commodity-sensitive Australian and New Zealand dollars rose sharply.
Fitch’s remarks eased worries about Italy, which saw its borrowing costs soar this week for fear a default in Greece would hurt European banks and strain other countries’ finances.
Italy is considered especially vulnerable, as it has the euro zone’s second-largest debt-to-output ratio, which would become harder to finance with higher borrowing costs.
Still, some analysts said markets remained anxious. European leaders, set to convene an emergency meeting on Friday, have yet to agree on a second Greek bailout.
“I’d call this a short-term respite,” said Firas Askari, head of FX trading at BMO Capital Markets. “If we don’t hear anything substantial from Europe by the weekend, people will be back to shorting the euro next week.”
In the options market, one-month risk reversals were elevated in favor of euro puts — options to sell the currency, with plenty of event risks ahead, including the results of stress tests on euro zone banks due on Friday.
Reflecting that unease, the yen soared against the euro and hit its highest level against the dollar since Japan’s March earthquake as investors unwound risky trades funded with yen.
The dollar was last at 78.98 yen, up 0.3 percent, not far from its 78.481 four-month low hit on EBS earlier in the global session.
That brought warnings from top Japanese officials worried that a strengthening yen will hurt Japan’s fragile economy, raising the possibility authorities could intervene to weaken the currency.
The dollar fell to a fresh record trough of 0.81939 Swiss francs after Bernanke’s testimony, and Askari said markets were also on edge about a pending deadline to lift the U.S. debt ceiling.
“We still have not seen the political will in either Europe or the United States to resolve the key issues,” Askari said, which makes positioning for currency investors difficult.
“With currencies, it’s hard to be short everything. The Swiss franc is appreciated, but even Swiss banks won’t be immune from a meltdown in Europe,” he said.
June 1st, 2011
By: Margo D. Beller
Wall Street is having a hard time figuring out what to do now that the U.S. economy appears to be sputtering and yields are so low, Peter Yastrow, market strategist for Yastrow Origer, told CNBC.
“What we’ve got right now is almost near panic going on with money managers and people who are responsible for money,” he said. “They can not find a yield and you just don’t want to be putting your money into commodities or things that are punts that might work out or they might not depending on what happens with the economy.
“We need to find real yield and real returns on these assets. You see bad data, you see Treasurys rally, you see all bonds and all fixed-income rally and then the people who are betting against the U.S. economy start getting bearish on stocks. That’s a huge mistake.”
Stocks extended losses after the manufacturing fell below expectations in May and the private sector added only 38,000 jobs during the month.
“Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything,” Yastrow said. “We’re on the verge of a great, great depression. The [Federal Reserve] knows it.
“We have many, many homeowners that are totally underwater here and cannot get out from under. The technology frontier is limited right now. We definitely have an innovation slowdown and the economy’s gonna suffer.”
However, he said he wouldn’t sell stocks.
“Any bears out there better be careful because the dividend yields on these stocks look awesome relative to all the other investment vehicles out there,” Yastrow said. “So bears are going to have to find a new way to express their discontent with the U.S. economy.”
March 2nd, 2011
By: Chris Isidore
Just when the U.S. economy seemed to be getting its footing, a number of new obstacles risk tripping it up.
A spike in oil prices due to spreading unrest in the Middle East is the highest profile problem, but not the only one.
Economists are also worried about the push to cut government spending, the end of stimulus from the Federal Reserve and the bull market in stocks running its course.
While none of these factors might be enough to tip the economy back into a recession individually, “pile up enough headwinds and you’re going backwards,” said David Wyss, chief economist with Standard & Poor’s.
Danger #1: Rising oil prices: The spike in oil prices has not only sparked a sell-off in stocks, it’s made economists far less bullish about the strength of the recovery.
But most believe that oil prices at $100 a barrel isn’t high enough to cause a problem.
“At $100, it’s a significant problem, but it’s not a killer,” said Wyss.
Wyss said $150-a-barrel oil would be the problem level. Others put the tipping point closer to $120 or $125 a barrel. And uncertainty in the Middle East has many wondering how high it will go.
“The big geopolitical changes we’ve been seeing didn’t stop with Tunisia, and didn’t stop with Egypt. So maybe it’s not a good idea to assume it’s all going to stop with Libya, either,” said James Hamilton, economics professor at the University of California-San Diego. “If there is a disruption for Saudi Arabia, it would be off the charts in its impact on the world economy.”
But it is possible that oil is already at a level that will cause a new recession, although it could take months to know for sure, according to David Rosenberg, chief economist with Guskin Sheff. He believes the problem with this oil spike is that the economy, while growing, is still weak.
“When oil prices were ratcheting up to record levels a few years ago, unemployment was at 5%, not 9%,” he said. “The Fed had ammunition left. There was still appetite for fiscal stimulus. There’s nothing in the cookie jar today as an offset.”
Danger #2: Sharp spending cuts: The push to cut government spending is another cause for concern.
Goldman Sachs put out a note Tuesday estimating that Republican spending proposals which would cut $61 billion between March and Sept. 30 could reduce economic growth by 1.5 to 2 percentage points in the second and third quarters.
And it said if there is a shutdown of the federal government, gross domestic product could be reduced by 0.2% for each week it lasts. A government shutdown is possible if there is no budget agreement by March 4.
“A shutdown lasting more than a week could be meaningful,” said the note.
State and local budgets are also being slashed and that could hit growth hard in the second half of this year when new fiscal years start in most jurisdictions.