Tax-Cut Extension May Bolster Economy, Limit Need for Fed to Go Beyond QE2

From Bloomberg.com:

President Barack Obama’s agreement to prolong Bush-era income-tax cuts may reduce pressure on the Federal Reserve to extend its $600 billion bond-purchase program while spurring U.S. economic growth.

Obama’s deal with congressional Republicans may raise gross domestic product next year by as much as half a percentage point to about 3.1 percent, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Tom Porcelli, a senior economist at RBC Capital Markets Corp. in New York, is raising his growth forecast for 2011 by one point, also to 3.1 percent.

The agreement goes beyond what economists were expecting by including a 2 percent cut in payroll taxes, which fund Social Security and Medicare. The proposal also sets the estate tax at a top rate of 35 percent, extends aid for the long-term unemployed by 13 months and would allow companies next year to deduct the full cost of investments in equipment.

“I think it does reduce the odds that the Fed does more purchases,” Feroli said. “You’re going to have a pretty nice increase in disposable income and that should lift consumer spending.”

Stocks rallied after the agreement was announced, sending the Standard & Poor’s 500 Index to the highest level since the financial crisis in September 2008. Gains were erased in the final hour of trading after Obama said he’ll push to overhaul the tax code in two years. Treasuries fell and copper rose to a 31-month high.

CBO: Tax Cuts Were Least Effective Stimulus in Recovery Act

According to a new report from the Congressional Budget Office, the tax breaks provided by the Recovery Act did less to stimulate our economy than government spending, purchasing and transfer payments. You can find the summary of the CBO's report below (Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output From July 2010 Through September 2010P, or download the full PDF here courtesy of the TaxProf Blog.

Center on Budget and Policy Priorities, New CBO Report Finds up to 3.6 Million People Owe Their Jobs to the Recovery Act:

Among ARRA’s most effective provisions for saving and creating jobs, according to CBO’s estimates, are direct purchases of goods and services by the federal government, transfer payments to states (such as extra Medicaid funding), and transfer payments to individuals (such as increased food stamp benefits and additional weeks of unemployment benefits). CBO’s estimates indicate that tax cuts are less effective job producers, and tax cuts for higher-income people and corporations have very low bang for the buck.

Fed Predicts Weak Recovery for Several Years

Yesterday the Federal Reserve slashed its predictions for economic recovery, they are now projecting it could be several years before conditions improve. More than half of the central banks are warning that it could take up to six years for unemployment, and inflation to return to normal levels. Like everyone else in America, I’m left wondering if we can all stand a few more lean years.

CNN Money reports

The much weaker forecast is the major reason that policymakers decided earlier this month to announce a plan to try and jumpstart growth by pumping an additional $600 billion into the economy through the purchase of long-term bonds. That plan, known as quantitative easing, has been criticized by several economists, politicians and foreign central bank officials.

The Fed now expects the economy to grow between 2.4% to 2.5% this year, compared to an earlier forecast of growth between 3.0% and 3.5%.

The Commerce Department reported Tuesday that the economy grew at a 2.5% rate in the third quarter, up from 1.7% in the second quarter but well below the increase of 3.7% in the first three months of the year.

Read more here

What Banks Say About The Economy

Although the economy continues to struggle, and unemployment numbers continue to increase, financial institutions are showing profits. This suggests the worst of the credit crisis is over, as many banks are charging less to cover bad loan losses. Read more from CNNMoney.com.

As the economy goes, so goes the financial sector, which explains why bank shares have taken a hit ever since fears of another slowdown emerged. But you can't just look at stock prices. You have to weigh the performance of the underlying businesses. When you do, you may be in for a bit of a surprise.

With unemployment about as high as it's been in 30 years and the nastiest real estate bust in almost a century still playing out, you'd think that big banks would be having a rough time making money, right?

Actually, they're pretty much printing profits. The big four -- Wells Fargo, Bank of America, Citi-group, and J.P. Morgan Chase -- collectively earned almost $14 billion in the second quarter.

The good news: Fewer deadbeat borrowers

This is a reflection that banks are having to charge off less to cover bad loans, which suggests the worst of the credit mess is really behind us. Wells recently trimmed its loan-loss reserves by $500 million, which went straight to its bottom line. Over the next few years, it could release as much as $11 billion more.

Another plus for banks: Funding costs are incredibly low right now. While you may be frustrated with the paltry interest rates you're getting on your CDs, these low rates are manna from heaven for banks.

Continue reading at CNN.com…

Analyst Who Called Recession End Sees Durable Rebound

Economist Thomas Lam accurately predicted the official end of the recession a year and a half ago, and now he is offering his opinion on economic recovery. He predicts that we will see the economy rebound, with less than a 20% chance of a renewed slump.

Bloomberg.com reports:

“The main risk to the U.S. economy today is really a prolonged period of mild growth rather than an imminent recession,” said Lam, the Singapore-based chief economist at OSK-DMG, a joint venture between Malaysian securities firm OSK Holdings Bhd. and Frankfurt-based Deutsche Bank AG.

Lam’s May 2009 call that the U.S. would emerge from recession the following month -- confirmed this week by the National Bureau of Economic Research -- drew “quite a bit of heat because it was a time when things were still uncertain,” the 35-year-old analyst said in a telephone interview with Bloomberg News today. “Some thought the call too optimistic.”

Lam, who published his prediction while working for his previous employer, United Overseas Bank Ltd., studied peaks in the number of U.S. jobless claims using a proprietary weighted- average formula to remove statistical “noise,” and found a correlation with economic turning points.

“The model actually predicted it would be 394 weeks from the prior trough in November 2001” before the economy would begin growing again, Lam said. “It was actually 395 weeks.”

Read more here

Fed Considering Whether More Steps Needed to Fix Economy

From USAToday.com:

Federal Reserve policymakers are wrestling with what additional steps — if any — should be taken to strengthen the plodding economy and drive down near double-digit unemployment.

Lots of debate is expected at today's one-day meeting. But few expect any major programs to be unveiled. Instead, many will be looking to see if the Fed offers clues about the timing of any new aid and what changes in the economy would trigger such a move. A statement from the Fed is expected about 2:15 p.m. ET.

To give the Fed extra time for discussions, the meeting is scheduled to start around 8 a.m. — earlier than when it has two-day sessions.

There are differing views on the Fed's main policymaking group — the Federal Open Markets Committee — about what should be done. And some pressure is off after a few mildly positive economic reports showed the pace of layoffs has slowed, shoppers' appetites to spend has picked up and factory production is growing.

The reports have helped to ease concerns about the economy slipping back into a new recession, giving Fed Chairman Ben Bernanke and his colleagues a little breathing room.

5 Signs the Economy is still Struggling

With the November elections just a few weeks away, some politicians want Americans to believe that the U.S. economy is recovering. However, according to a report from Rutgers University, over half of American taxpayers believe the economy has undergone a fundamental and lasting change. Yesterday, I posted this blog entry taking a look at some of the signs of economic recovery, however, not all signs are good. There are also plenty of reasons to still be concerned about the economy.

Auto Sales

We all know that the three main American automakers have been struggling for years. Despite federal funds, the companies are having ongoing problems. Some economists estimate that U.S. automakers must charge an additional $2,000 per vehicle because of labor costs, and high medical and retirement benefit expenses. With this additional overhead, it has become almost impossible for American automakers to stay competitive. Compared with August of 2009, auto sales have decreased by 21% over the past year, and between July and August of 2010, sales fell by 5%. These disappointing numbers have led many economists to call for another Cash-for-Clunkers program, or another type of financial incentive to purchase a new car.

Unemployment

It is impossible to ignore unemployment problem in this country, with thousands of jobs being lost every month. According to the Labor Department the economy lost 100,000 jobs in August, which increased the unemployment rate from 9.5% to 9.6%. The ongoing unemployment problems are commonly cited as the main delay in economic recovery, and although we might see seasonal job creation over the next few months, many experts predict that we will not see any significant employment gains until 2012.

Home sales

Earlier in the year the housing market was showing some signs of improvement, but after the housing credit expired in June, home sales decreased quickly. In July, home sales were down over 25% compared with July of 2009. To make matters worse, home values are also continuing to plummet. Experts are even predicting another 5 to 10% decline in house prices over the next few months. Fortunately, as Neil Irwin or the Washington Post explains, housing activity has already decreased so much that it would be hard for it to hurt future economic recovery. Between 2006 and 2009 home sales fell from 2.3 million annually to under 500,000. This sudden drop was a major strain on the economy, but even if construction levels decrease further it is very unlikely to have the same impact on our economy as the collapse between 2006 and 2009.

Local Double Dips

One of the largest fears about the U.S. economy is the possibility of a double-dip recession. Most economists agree that this is unlikely on the national level. However, many state and local governments are at a serious risk of slipping into a second, more severe recession. Several government agencies across the country are facing unbalanced budgets, and have turned to drastic tax increases to generate revenue. Many economists suggest that these tax hikes could have a negative impact as consumers are left with less money to spend in their local economy.

Bank Failures

Last month the Federal Deposit Insurance Corporation (FDIC) announced that 829 financial institutions (or 1/10th of the banks in this country) were on their problem list. These banks are on the edge of going under, and there have already been 118 bank failures this year. There were 140 total bank failures in 2009, and it does not look like this trend is going to stop anytime soon. The problems facing financial institutions in the U.S. has a significant impact on the overall economy. When banks are struggling lending becomes more difficult, between April and June loan and lease balances fell another 1.3%. Until businesses have easier access to credit, unemployment problems will persist and the economy will continue to struggle.

5 Positive Signs of Economic Recovery

Since the banking crisis and housing collapse, the U.S. economy has showed little significant signs of improvement. Many economists have even warned of a looming double dip recession. However, the month of September has started off with a couple of reports suggesting that the economy is still improving, although not nearly as quickly as one would hope.

Consumer Confidence

Over the summer there have been a couple of signs signaling an increase in consumer confidence. Specifically, there was a 0.4% rise in consumer spending in July. This number goes hand in hand with the 0.3% salary increase from the same month, which followed a 0.1% drop in June. Although these are relatively small increases, and consumer confidence and spending are not at an all time high, experts suggest that consumer spending accounts for nearly two-thirds of U.S. economic activity. Therefore, even slight gains are a good sign for the overall economy.

Saving Activities

During the majority of 2009, and the first few months of 2010, consumer spending was disappointing because Americans were putting more of their money into savings. At the beginning of the recession in 2008 the savings rate – or percentage of disposable income that is not spent on goods or services for individual consumption – was only at 2.7%. In June the savings rate was up to 6.2%, but it dropped to 5.9% in July. This data, along with the numbers showing increased consumer confidence suggests that spending will continue to increase with incomes.

Loan Defaults

According to the Federal Deposit Insurance Corporation, loan recovery has actually showed slight signs of improvement this summer. The total number of loans in the United States with past due amounts of 90 days or more have decreased to the lowest level in four years. Overall loan balances have also been on the decline. Some economists suggest that these improvements are a result of the Wall Street Reform bill that tightened lending laws and forced banks to cut down on risky loans. For more information on the reform legislation, check out this article I posted last month.

Divorce and Birth Rates

Another interesting gauge of the economy is the number of divorces and childbirths in the country. Getting a divorce is expensive and time consuming. Therefore some couples have been forced to hold off on filing for divorce due to financial limitations. Over the past few years divorce rates have been declining, but so far in 2010 the rates have increased. This may not seem like a significant sign of economic improvement, but it does show that unhappy couples are willing to spend more than they had been in 2009 or 2008. Additionally, the number of families who had a new child increased this year. We had seen the largest decline in births since the Great Depression as families held off on having children because of the expense. However, these numbers are finally starting to improve.

Stock Market

One of the most accurate indicators of economic strength is the stock market. Although the stock market saw a temporary slump in August, when the Standard & Poor’s 500 Index lost 4.7%, this month has been off to a good start. On the first day of September the Down Jones jumped 255 points. Many experts attribute the rise to better than expected manufacturing growth in both the U.S. and China. Other international reports also had an impact on the stock market, such as the announcement from Australia that their economy grew at the fastest pace in three years.

Jobless Claims Rise Highlights Economy's Ills

New reports have come out that jobless claims increased again last week. The news come just days after the Federal Reserve lowered their expectations for the economy. All of this new information has experts worried about the economic recovery.

Reuters reports:

The number of U.S. workers filing new claims for jobless benefits unexpectedly rose last week to the highest level in close to six months, the latest evidence the economy's recovery is faltering.

Thursday's data came two days after the Federal Reserve spooked investors by downgrading its assessment of the economy. The increase in jobless claims added to worries in the stock market, which has failed to make any gains this year.

The number of new claims for state unemployment insurance rose by 2,000 to 484,000 in the week ended August 7, the second straight increase, the Labor Department said. Economists had expected claims to edge down to 469,000.

"This is not a good number," said John Brady, an analyst at MF Global in Chicago. "Claims are going the wrong way. That has the market concerned."

U.S. stocks closed down for a third straight day, pressured by the data and a disappointing revenue forecast from tech bellwether Cisco Systems Inc (CSCO.O).

Read more here

What Would Happen if the Bush Tax Cuts Expire

From the Wall Street Journal.com:

What would it actually mean for you if they let the Bush tax cuts expire at the end of this year, and we went back to the old Bill Clinton tax rates adjusted for inflation?

This is a thought experiment, not a prediction or a recommendation.

The tax cuts, passed in 2001 and 2003, are front and center now and will be a hot issue going into the elections this fall. Unless something is done by the end of the year, they'll expire. With the economic recovery looking shaky, expiration is particularly controversial.

Most of the attention has understandably focused on highest earners, who are likely to be most affected by whatever happens. But as the debate has gathered pace I have been wondering what it might mean for everyone else. After all, according to the IRS just 4% of Americans earn more than $200,000 a year.

How high were taxes back in the 1990s? How would those rates seem now? The American Institute of CPAs supplied me with the numbers. I updated the tax brackets to account for inflation.

Sure, everyone's taxes are different, and the U.S. tax code is so horrendously Byzantine that the moment you say anything you run into a thicket of caveats. But let's run some numbers. And let's take a very broad brush approach to this. Let's assume you're a typical filer, you take the standard deduction, and let's just look at the biggest tax issues.

Fed To Keep Rates Low To Support Weak Recovery

The federal reserved resumed a two-day meeting today to discuss their optimism in the counties economic recovery, as well as fears for a possible relapse. According to Forbes.com, experts are expecting that interest rates will remain low to support the struggling economy.

The Fed resumed its two-day meeting Wednesday with policymakers having cause for optimism as well as caution. The economy has been growing again for nearly a year. Manufacturing activity is picking up. Businesses are spending more. And Fed Chairman Ben Bernanke has expressed confidence that the nation won't fall back into a "double dip" recession.

At the same time, the recovery remains vulnerable to threats: Europe's debt crisis, an edgy Wall Street, cautious consumers, a fragile housing market and high unemployment.

"The effect of European developments on the U.S. economy is likely to be modest, so we expect the tone will be cautious but certainly not dire," said Michael Feroli, economist at JPMorgan Chase (JPM - news - people ) Bank.

The Fed is certain to leave its key bank lending rate at between zero and 0.25 percent. An afternoon announcement is expected. The rate has remained at that level since December 2008.

Double dip recession: What are the odds?

Have you been hearing the term “double dip recession” lately? Do you know what it means? It refers to a recession followed by a short-lived recovery that then slides back into a second recession. That said, do you think we are in for one? With a plunging stock market as I write this due to the Gulf oil spill and unemployment at an all time high, it’s not difficult to imagine. In an article on CNN.com, it is explained that a chance for a double dip can be measured by fluctuations in gross domestic product, or GDP, one of the broadest measures of economic activity. They explain that GDP would have to go into negative numbers again for us to fall into a double dip recession. Although growth might not be as high as the GDP growth in 2009, it’s not likely it will turn negative again. David Wyss, chief economist with Standard & Poor’s said the odds have shrunk to a 20% chance. I’ll bet on those odds.

Read the full article here.

Bernanke Says the Federal Debt Is ‘Unsustainable’

The chairman of the Federal Reserve, Ben S. Bernanke, offered little comfort to Democrats or Republicans on policy recommendations, the New York Times is reporting. Mr. Bernanke warned everyone on Wednesday that “the federal budget appears to be on an unsustainable path.” He did, however, recognize that the “exceptional increase” in the deficit had been necessary to ease the recession. Mr. Bernanke also was quoted in the New York Times as saying, that he felt "increased taxes, cuts in spending that are too large, would be a negative, a drag on recovery."

Basically, Mr. Bernanke was telling the House Budget Committee so that everyone will understand they need to formulate a plan. He confirmed on Monday in a question –and –answer broadcast that, he, like Congress, was waiting for the outcome of a bipartisan fiscal commission appointed by President Obama before making policy recommendations.

Read the full article here.

Economic Outlook Is Cautious Even With Spending Up

From The Associated Press:

Factories are churning out more goods. Consumers are spending. Government aid is fueling construction activity. But stagnant pay and weak hiring will likely restrain the economic rebound in coming months.

That cautionary picture emerged from a series of economic reports Monday.

Consumers stepped up their spending in March by the largest amount in five months. Yet the increase was financed out of savings. Incomes rose only slightly.

Unless employers boost pay and ramp up hiring, economists say consumer spending will likely taper off and dampen the recovery.

The construction industry remains a concern, too. Industry spending rose 0.2 percent in March, the first increase in five months, Commerce said. But all the strength came from government activity — much of it related to temporary stimulus money that's expected to run out soon. By contrast, construction by the private sector fell to the lowest level in a decade.

One sector that's helping drive the recovery is manufacturing. Factory activity in April grew at the fastest pace in nearly six years, according to the Institute for Supply Management, representing purchasing executives. Its manufacturing index rose to 60.4 in April from 59.6 in March — the ninth straight month of growth. A level above 50 indicates expansion.

Auto Industry on Road to Recovery but Pace Slows

From MSNMoney.com:

The U.S. auto industry stayed on the road to recovery in April, but it eased up on the gas pedal a bit.

Ford Motor Co. saw last month's sales rise 25 percent from a year earlier, while General Motors Co. climbed 6.4 percent. Hyundai, Subaru and others also continued to see gains from last year.

All automakers report their U.S. sales on Monday, and together they're expected to outpace last April, when the industry was hurt by the economic downturn.

But the industry overall may not be able to maintain the pace of March, when big sales promotions led by Toyota Motor Corp. fueled higher sales. The Japanese automaker needed to lure buyers after suffering a series of safety recalls beginning last fall.

As buyers' expectations for even better deals grew, demand slowed from March and some automakers eased up on promotions.

Turnaround for Big Three automakers? Not so fast

From CNNMoney.com:

One year ago, the U.S. auto industry faced the worst crisis in its history.

Chrysler Group filed for bankruptcy on April 30, the same week that GM announced a plan that put it on the path toward its own bankruptcy a month later. Ford Motor (F, Fortune 500) had just reported huge losses.

So by comparison, conditions for Detroit's Big Three today represent an almost shocking turnaround.

Ford just reported a profit of $2.1 billion. While GM has yet to report a profit, the company managed to cough up enough cash to make an early repayment of $5.8 billion in loans to the U.S. Treasury.

And Chrysler Group just reported that despite another loss, it is no longer burning through its cash reserves.

But many experts still think it's too soon to call a turnaround in the domestic auto industry.

Consumers Step Up Spending, Bolstering Growth

The U.S economy grew in the first quarter, as consumers finally started spending again. Since consumer spending accounts for about 70% of economic activity, increased spending always means a boost for the economy. According to this MSN Money.com article, the economy expanded at a 3.2 percent annual rate, the strongest sign yet of economic recovery.

While growth slowed from the fourth quarter's rapid 5.6 percent pace and was a touch weaker than economists expected, the details of the report from the Commerce Department on Friday were fairly upbeat.

Consumer spending, which normally accounts for about 70 percent of U.S. economic activity, added nearly 2.6 percentage points to U.S. gross domestic product last quarter, the biggest contribution since the fourth quarter of 2006.

"Once you take a quick look under the hood you see some very positive signs there," said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. "This is just the latest piece of evidence to suggest that the recovery is sustainable."

Still, markets showed some disappointment. U.S. stock markets were lower, while prices for U.S. government debt edged up. The dollar was little changed.

Economists: The Stimulus Didn't Help

Although the economy appears to be recovering, a new survey was released yesterday asserting that a majority of the economists in the country believe the economic recovery had little to do with President Obama’s stimulus efforts. According to this CNN Money article, the latest quarterly survey by the National Association for Business Economics showed job growth for the first time in nearly two years.

NABE conducted the study by polling 68 of its members who work in economic roles at private-sector firms. About 73% of those surveyed said employment at their company is neither higher nor lower as a result of the $787 billion Recovery Act, which the White House's Council of Economic Advisers says is on track to create or save 3.5 million jobs by the end of the year.

That sentiment is shared for the recently passed $17.7 billion jobs bill that calls for tax breaks for businesses that hire and additional infrastructure spending. More than two-thirds of those polled believe the measure won't affect payrolls, while 30% expect it to boost hiring "moderately."

But the economists see conditions improving. More than half of respondents -- 57% -- say industrial demand is rising, while just 6% see it declining. A growing number also said their firms are increasing spending and profit margins are widening.

Continue reading at CNN.com…

Economy Not Likely To Reprise '09 Year-End Growth

From NPR News:

The economy grew at a 5.6 percent pace in the fourth quarter of last year, the Commerce Department reported Friday. Although the growth was slightly lower than expected, it was the economy's best showing in six years.

Most economists had expected no revision in the government's third and final estimate. Last month, the department put the growth rate for output of goods and services at 5.9 percent for the October-to-December period. That's up from third-quarter gross domestic product of 2.2 percent.

The latest announcement puts the GDP closer to the 5.7 percent in the initial advance estimate at the beginning of February.

The department's Bureau of Economic Analysis chalked up the downward revision to slower consumer spending and weakness in the commercial real-estate market.

Economists had reason to question whether the economy could sustain such a steep upward trend. Much of the growth comes from businesses restocking empty shelves after months of tepid consumer demand, which is expected to improve slightly — but not significantly — in the current quarter.

New Home Sales Fall to Record Low

A government report released Wednesday showed that the sales of new homes at fell to a record low in February. It is believed to be the outcome from all of the foreclosed homes and a weak economy with high unemployment.

New-home sales fell 2.2% to a seasonally adjusted rate of 308,000 last month, compared to an upwardly revised annual rate of 315,000 in January, the Census Bureau said. What’s crazy is that “this is the lowest rate since the government began keeping records in 1963 and marked the fourth straight month of declines.”

Economists expected February sales to rise to an annual rate of 315,000. New-home sales were down 13% from February 2009. New-home sales fell in every region of the United States, except the West region, which saw a 20.8% jump in new-home sales. The Northeast was hardest hit, with a 20% decline in February. Most likely effected by weather.

A stubborn job market is what is said to of kept pressure on the housing market. The U.S. unemployment rate stood at 9.7% last month, after unexpectedly falling in January, suggesting that the economic recovery could be gaining steam. But, "the economy, while recovering, is still not full speed ahead," said Hoffman.

In regards to new homes, the Census Bureau estimated that 236,000 new homes hit the market in February.

In November, Congress extended and expanded an $8,000 tax credit for first-time home buyers, which also allows some repeat buyers to qualify for a $6,500 credit. Buyers have until April 30 to qualify for the credit.
New-home sales saw a surge of activity when home buyers thought the November tax credit would expire, but retreated after the extension.

Although February's data was "a bit disappointing," Hoffman says the real test will come during peak home buying season in the spring.

"The real story will be if no one knocks at the door for a new-home in an environment of record low mortgage rates, a home buyer's tax credit and a recovering economy," said Hoffman. "If they don't, then it's lights out." Read the full article here: New-home sales fall to record low from CNNMoney.com.