Illinois Government Consultants Incorporated

The latest economic numbers have not been good. Jobless claims rose last week, the Labor Department said on Thursday. Another report showed that economic growth at the start of the year was no faster than the Commerce Department initially reported — “a real surprise,” said Ian Shepherdson of High Frequency Economics.

Perhaps the most worrisome number was the one Macroeconomic Advisers released on Wednesday. That firm tries to estimate the growth rate of the current quarter in real time, and it now says annualized second-quarter growth is running at only 2.8 percent, up from 1.8 percent in the first quarter. Not so long ago, the firm’s economists thought second-quarter growth would be almost 4 percent.

An economy that is growing this slowly will not add jobs quickly. For the next couple of months, employment growth could slow from about 230,000 recently to something like 150,000 jobs a month, only slightly faster than normal population growth. That is certainly not fast enough to make a big dent in the still huge number of unemployed people.

Are any policy makers paying attention?

When the economy weakened in the first quarter, Ben S. Bernanke, the Federal Reserve chairman, and Obama administration officials said the slowdown was just a blip and growth would soon pick up. Today, many Wall Street economists are saying much the same thing: any day now, things will improve.

Maybe they will. But the history of financial crises shows that they produce weak, uneven recoveries, with unemployment remaining high for years. That history also shows that aggressive government action — the kind of action Washington took in 2008 and 2009, but not for most of 2010 — can make the situation much better than it otherwise would be.

The latest signs of weakness suggest that policy makers remain too sanguine. It is easy to see how the rest of 2011 could end up disappointing, much as 2010 did.

For one thing, there are specific forces holding back growth. Oil prices, though down in the last few weeks, are still 40 percent higher than a year ago and continue to siphon money away from the American economy to overseas economies. When I filled my gas tank last weekend, it cost $74, more than I think I have ever paid.

The housing market also remains in terrible shape. Europe is still struggling with its debt troubles. State and local governments continue to cut jobs.

These specific problems worsen the broader insecurity of both households and business executives — insecurity that is typical in the wake of a financial crisis. Long after the crisis itself is over, businesses are slow to hire and quick to fire. Thursday’s report on new jobless claims showed that they rose by 10,000, to 424,000, which is not a number associated with a solid recovery.

“Labor market gains may be faltering somewhat,” Joshua Shapiro, chief United States economist at MFR, a New York research firm, wrote to clients after the report’s release.

For households, already coping with miserly wage growth, that is another reason not to spend. The Commerce Department’s updated gross domestic product figures showed that consumer spending grew at an annual inflation-adjusted rate of only 2.2 percent in the first quarter, not the 2.7 percent rate the department initially reported.

The economy does still have some bright spots, and they could grow in coming months, just as policy makers and private forecasters are, once again, predicting. If North Africa and the Middle East do not become more chaotic, oil prices may continue falling. Vehicle production will probably pick up as the parts shortages caused by the Japanese earthquake end. The falling dollar will continue to help American exporters, as well as any domestic businesses that compete with foreign importers.

But there is no doubt that the economy has performed considerably worse in the last few months than most policy makers expected. The situation is now uncomfortably similar to last year’s, when the economy sped up in the first few months only to stall in the spring and summer.

The most sensible response for Washington would be to begin thinking more seriously about taking out an insurance policy on the recovery. The Fed could stop worrying so much about inflation, which remains historically low, and look at how else it might encourage spending. As Mr. Bernanke has said before, the Fed “retains considerable power” to lift growth.

The White House and Congress, meanwhile, could begin talking about extending last year’s temporary extension of business tax credits, household tax cuts and jobless benefits beyond Dec. 31. It would be easy enough to pair such an extension with longer-term deficit reduction.

Any temporary measures will eventually need to lapse, of course. But the current moment remains a textbook time to use them — when the economy is struggling to emerge from the aftermath of a terrible recession. The one thing not to do is to turn to deficit reduction too quickly after a crisis, as Europe is painfully learning.

Almost four years after the mortgage market first began to quiver and unemployment began to rise, Americans are understandably eager for good economic news. But wishing for it doesn’t make it so. You have to wonder whether the people in Washington have learned that lesson yet.
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Source: The New York Times

High gasoline prices, government budget cuts and weaker-than-expected consumer spending caused the economy to grow only weakly in the first three months of the year.

The Commerce Department estimated Thursday that the economy grew at an annual rate of 1.8 percent in the January-March quarter. That was the same as its first estimate a month ago.

Consumer spending grew at just half the rate of the previous quarter. And a surge in imports widened the U.S. trade deficit.

Most economists think the economy is growing only slightly better in the current April-June quarter. Consumers remain squeezed by gas prices, scant pay increases and a depressed housing market.

Analysts estimate that growth has accelerated slightly to around 2.5 percent in the current April-June quarter. For the entire year, they think the economy will grow around 3 percent. That would be little changed from the 2.9 percent growth in 2010.

Also Thursday, the government said more people applied for unemployment benefits last week. It was the first increase in three weeks and evidence that the job market remains sluggish.

The number of people seeking benefits rose by 10,000 to a seasonally adjusted 424,000. Applications are above the 375,000 level that’s consistent with sustainable job growth. Applications peaked at 659,000 during the recession. Employers stepped up hiring this spring, but some economists worry that rising applications indicate hiring is slowing.

Economists had been more optimistic when the year began. They assumed that a cut in workers’ Social Security taxes, which raised take-home pay, would boost consumer spending. And new business tax breaks were thought likely to spur business spending.

But political upheaval in the Middle East and North Africa sent energy prices soaring. The result was that consumers had to pay more for gas, leaving less money to spend on other items.

The government’s revised estimate for gross domestic product — the economy’s total output of goods and services — showed consumer spending growing at an annual rate of just 2.2 percent. That’s sharply down from an initial estimate of 2.7 percent.

Consumer spending, which accounts for 70 percent of economic activity, had grown at a much faster 4 percent rate in the October-December period.

The GDP revision showed that the government sector is dragging on growth. Government spending fell at an annual rate of 5.1 percent. Federal and state and local governments have cut spending to battle budget deficits.

Economists expect government spending to remain weak. They note that Congress will likely slash spending to try to shrink $1 trillion-plus budget deficits.

Exports grew faster than previously estimated last quarter — a brisk 9.2 percent rate. But imports grew even faster — at a 9.5 percent rate — causing the U.S. trade deficit to widen. A higher trade deficit subtracts from growth.

Spending by companies on equipment and software grew at a solid rate of 11.6 percent. Economists expect that to continue as companies take advantage of one-year tax write-offs for such purchases.

David Wyss, chief economist at Standard & Poor’s in New York, said he thinks the economy will grow at an annual rate of 2.5 percent in the current quarter. Wyss said he expects growth to strengthen slightly to around 3 percent in the second half of this year.

In part, that’s because the U.S. manufacturing supply disruptions caused by the Japanese earthquake and nuclear crisis in March should ease. And auto plants and other factories get back to full production.

Still, analysts think the economy may not be able to exceed 3 percent growth for the full year.
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Source: The Washington Post

The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.

“It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.”

Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.

Although sales have picked up a bit in the last few weeks, banks and other lenders remain overwhelmed by the wave of foreclosures. In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one.

Before the housing implosion, the inflow and outflow figures were typically one-to-one.

The reasons for the backlog include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices. The pileup could lead to $40 billion in additional losses for banks and other lenders as they sell houses at steep discounts over the next two years, according to Trepp, a real estate research firm.

“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”

A drive through the sprawling subdivisions outside Phoenix shows the ravages of the real estate collapse. Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors. About 116 lender-owned homes are on the market or under contract in El Mirage, according to local real estate listings.

But that’s just a small fraction of what is to come. An additional 491 houses are either sitting in the lenders’ inventory or are in the foreclosure process. On average, homes in El Mirage sell for $65,300, down 75 percent from the height of the boom in July 2006, according to the Cromford Report, a Phoenix-area real estate data provider. Real estate agents and market analysts say those ultra-cheap prices have recently started attracting first-time buyers as well as investors looking for several properties at once.

Lenders have also been more willing to let distressed borrowers sidestep foreclosure by selling homes for a loss. That has accelerated the pace of sales in the area and even caused prices to slowly rise in the last two months, but realty agents worry about all the distressed homes that are coming down the pike.

“My biggest fear right now is that the supply has been artificially restricted,” said Jayson Meyerovitz, a local broker. “They can’t just sit there forever. If so many houses hit the market, what is going to happen then?”

The major lenders say they are not deliberately holding back any foreclosed homes. They say that a long sales process can stigmatize a property and ratchet up maintenance and other costs. But they also do not want to unload properties in a fire sale.

“If we are out there undercutting prices, we are contributing to the downward spiral in market values,” said Eric Will, who oversees distressed home sales for Freddie Mac. “We want to make sure we are helping stabilize communities.”

The biggest reason for the backlog is that it takes longer to sell foreclosed homes, currently an average of 176 days — and that’s after the 400 days it takes for lenders to foreclose. After drawing government scrutiny over improper foreclosures practices last fall, many big lenders have slowed their operations in order to check the paperwork, and in two dozen or so states they halted them for months.

Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks.

“Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.”

Realty agents and buyers say the lenders are simply overwhelmed. Just as lenders were ill-prepared to handle the flood of foreclosures, they do not have the staff and infrastructure to manage and sell this much property.

Most of the major lenders outsourced almost every part of the process, be it sales or repairs. Some agents complain that lender-owned home listings are routinely out of date, that properties are overpriced by as much as 10 percent, and that lenders take days or longer to accept an offer.

The silver lining for home lenders, however, is that the number of new foreclosures and recent borrowers falling behind on their payments by three months or longer is shrinking.

“If they are able to manage through the next 12 to 18 months,” said Mr. Zandi, the Moody’s Analytics economist, “they will be in really good shape.”
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Source: The New York Times

Illinois in 2011 is on pace to provide much more money in financial incentive programs to businesses to retain and add jobs, with the total through early May exceeding $230 million pledged to 27 companies.

That is nearly the amount pledged all of last year by Illinois to keep corporations from leaving the state or to attract businesses to relocate or expand here, the Tribune has learned.

Gov. Pat Quinn is turning to the incentives, which include tax credits, training funds and grants, as Illinois copes with a moribund economy and battles other states to woo companies that have shown a willingness to move — or stay put, if the price is right.

Last year, the state pledged about $236 million in similar programs to 53 companies; the figure was about $116 million to 47 companies in 2009.

Some of this year’s biggest incentive deals have come with high-profile announcements, such as the agreement with Motorola Mobility to keep its headquarters in Libertyville in exchange for more than $117 million in incentives. But other deals haven’t been announced.

The identities of 21 of the 27 companies receiving a total $53.1 million were not disclosed in a list provided to the Tribune on Tuesday by the state’s Department of Commerce and Economic Opportunity.

The company names weren’t released because of nondisclosure agreements with the companies, because contracts have not been finalized or because employees had not been told of plans at the companies in question, department spokeswoman Marcelyn Love said in a statement.

The state’s packages include corporate income tax credits from the state’s cornerstone program, Economic Development for a Growing Economy, or EDGE. Some companies also received training funds and grants. The packages come with stipulations that a business must agree to maintain or increase employment for a set period and make a certain investment in Illinois.

In Motorola Mobility’s case, the company pledged to spend more than $500 million on research and development over the next three years, essentially what the company already had planned to spend, in exchange for the largest package Quinn has offered.

Quinn said he believes the incentive programs are crucial to bucking up the struggling Illinois economy.

“(The EDGE tax credits) have encouraged companies like Mitsubishi, Chrysler and Navistar to grow in Illinois, creating and retaining thousands of jobs for working families across our state. Last year, Illinois was fourth in the nation in job creation,” Quinn told the Tribune in a statement earlier this year.

Economic development officials in Illinois support the programs, but critics, including some experts, question whether the incentives really pay off.

“Quinn is playing favorites with big businesses at the expense of small businesses,” Rep. Jack Franks, D-Marengo, said Tuesday. Franks said that while the big companies are important, the state can’t continue to throw money at them.

Quinn’s efforts come at a time when the state is in fiscal crisis and recently raised corporate taxes to 7 percent from 4.8. However, many larger companies pay little, if any, taxes, and recent legislation signed by the governor allows certain companies getting incentives, including Motorola Mobility and Mitsubishi, to collect taxes its employees would have paid the state.

“(The state) has a finite amount of funds,” Franks said.

Franks said the state should be working with small to midsize companies and focusing on removing the bureaucracy businesses have deal with to get basic permits instead of paying big firms to stay.

A Tribune report this year revealed that the EDGE program does not always pay out. During the program’s first nine years, companies failed to qualify for the credits about half of the time.

Meanwhile, the battles among states to retain or lure companies has intensified. Several states are trying to lure Sears Holdings Corp., parent of both Sears and Kmart stores, and Quinn has indicated he will try to keep the company headquartered in Hoffman Estates.

Neighboring states Indiana and Wisconsin have become more aggressive in trying to lure companies. Indiana has an ad campaign that aims specifically at trying to pull Illinois companies over the border. In addition, Indiana is reducing its corporate tax rate to 6.5 percent over a four-year period. Both Indiana and Wisconsin shot up in rankings of business-friendly states in a survey conducted by CEO magazine. Illinois had fallen near the bottom in the same survey.

Fighting back, Illinois has boosted its incentive offerings. The most recent list of packages was disclosed by the state in response to requests from the Tribune.

The list included several high-profile deals, including a package valued at more than $117 million to Motorola Mobility Holdings Inc. to keep the technology company from moving its headquarters and operations to Texas or California; a package of nearly $30 million to retain a Mitsubishi Motors Corp. production plant in Normal; and a $22 million package to help Continental Tire expand its plant and North American headquarters in Mount Vernon.

Other packages include $4.3 million to steel-maker Evraz Inc. NA to move its headquarters from Portland, Ore., to the Aon Center in late June; and $2.3 million to Full-Fill Industries to add 150 workers and expand production of cooking oil spray, including Pam for ConAgra Foods.
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Source: The Chicago Tribune

By summer’s end, buyers and sellers in some of the country’s most upscale housing markets are slated to lose one their biggest benefactors: the deep pockets of the federal government. In this seaside community of pricey homes, the dread of yet another housing shock is already spreading.

“We’re looking at more price drops, more foreclosures,” said Rick Del Pozzo, a loan broker. “This snowball that’s been rolling downhill is going to pick up some speed.”

For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to a substantial degree.

But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.

Michael S. Barr, a former assistant Treasury secretary, said the federal government’s retrenchment would be painful for many communities. “There’s always going to be a line, and for the person just over it it’s always going to be an arbitrary line,” said Mr. Barr, who teaches at the University of Michigan Law School. “But there is no entitlement to living in a home that costs $750,000.”

As the housing market braces for more trouble, homeowners everywhere have been reduced to hoping things will someday stop getting worse. In some areas, foreclosures are the only thing selling. New home construction is nearly nonexistent. And CoreLogic, a data company, said Tuesday that house prices fell 7.5 percent over the last year.

The federal government last year backed nine out of 10 new mortgages nationwide, and losses from soured loans are still mounting. Fannie Mae, which buys mortgages from lenders and packages them for investors, said last week it needed an additional $6.2 billion in aid, bringing the cost of its rescue to nearly $100 billion.

Getting the government out of the mortgage business, however, is proving much more difficult than doling out new benefits. As regulators prepare to drop the level at which they will guarantee loans — here in Monterey County, the level will drop by a third to $483,000 — buyers and sellers are wondering why they should be punished simply for living in an expensive region.

Sellers worry that the pool of potential buyers will shrink. “I’m glad to see they’re trying to rein in Fannie Mae, but I think I’m being disproportionately penalized,” said Rayn Random, who is trying to sell her house in the hills for $849,000 so she can move to Florida.

Buyers might face less competition in the fall but are likely to see more demands from lenders, including higher credit scores and larger down payments. Steve McNally, a hotel manager from Vancouver, said he had only about 20 percent to put down on a new home in Monterey County.

If a bigger deposit were required, Mr. McNally said, “I’d wait and rent.”

Even those who bought ahead of the changes, scheduled to take effect Sept. 30, worry about the effect on values. Greg Peterson recently purchased a house in Monterey for $700,000. “That doesn’t get you a palace,” said Mr. Peterson, a flight attendant.

He qualified for government insurance, which meant he needed only a small down payment. If that option is not available in the future, he said, “home prices all around me will plummet.”

The National Association of Realtors, 8,000 of whom have gathered in Washington this week for their midyear legislative meeting, is making an extension of the loan guarantees a top lobbying priority.

“Reducing the limits will put more downward pressure on prices,” said the N.A.R. president, Ron Phipps. “I just don’t think it makes a lot of sense.” But he said that in contrast to last year, when a one-year extension of the higher limits sailed through Congress, “there’s more resistance.”

Federal regulators acknowledge that mortgages will get more expensive in upscale neighborhoods but say the effect of the smaller guarantees on the overall housing market will be muted.

A Federal Housing Administration spokeswoman declined to comment but pointed to the Obama administration’s position paper on reforming the housing market. “Larger loans for more expensive homes will once again be funded only through the private market,” it declares.

Brokers and agents here in Monterey said terms were much tougher for nonguaranteed loans since lenders were so wary. Borrowers are required to come up with down payments of 30 percent or more while showing greater assets, higher credit ratings and lower debt-to-income ratios.

In the Federal Reserve’s quarterly survey of lenders, released last week, only two of the 53 banks said their credit standards for prime residential mortgages had eased. Another two said they had tightened. The other 49 said their standards were the same — tough.

The Mortgage Bankers Association has opposed letting the limits drop, although a spokesman said its members were studying the issue.

“I don’t want to sugarcoat this,” said Mr. Barr, the former Treasury official. “The housing finance system of the future will be one in which borrowers pay more.”

The loan limits were $417,000 everywhere in the country before the economy swooned in 2008. The new limits will be determined by various formulas, including the median price in the county, but will not fall back to their precrisis levels. In many affected counties, the loan limit will fall about 15 percent, to $625,500.

Monterey County, however, will see a much greater drop. The county is really two housing markets: the farming city of Salinas and the more affluent Monterey and Carmel.

Real estate records show that 462 loans were made in Monterey County between the current limit and the new ceiling since the beginning of 2009, according to the research firm DataQuick. That was only about 1 percent of the loans made in the county. But it was a much higher percentage for Monterey and Carmel — about a quarter of their sales.

Heidi Daunt, with Treehouse Mortgage, said loans too large for a government guarantee currently carried interest rates of at least 6 percent, more than a point higher than government-backed loans.

“That can definitely blow a lot of people out of the water,” Ms. Daunt said.
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Source: The New York Times

The United States economy added far more jobs than expected in April, but with more than 13 million people still out of work, analysts cautioned that it was too early to say whether the momentum could be sustained for a full recovery in the labor market.

The Labor Department said Friday that 244,000 jobs were added last month after a gain of a revised 221,000 in March. The unemployment rate rose to 9 percent in April from 8.8 percent in March.

“There are yellow warning flags that are popping up,” Joshua Shapiro, the chief United States economist for MFR Inc. “It remains to be seen whether this nascent recovery we are seeing is going to peter out or not.”

As has been the case for several months, all of the increase came from private employers, which added another 268,000 jobs last month on top of the revised 231,000 in March, the monthly report said. Results of the previous two months were revised to show another 46,000 jobs were added.

Governments, struggling to balance budgets as they deal with shrinking revenues and growing deficits, cut 24,000 jobs last month. Most of the drop came at the local level, where 14,000 jobs were lost in April after a decline of 15,000 in March.

April’s numbers exceeded the forecasts of analysts, who had expected a gain of 185,000 jobs over all, with the change in private payrolls of 200,000. The uptick in the unemployment rate that came even as employers were adding jobs was an indication that more people were entering the work force as hopes for hiring increased.

While better than expected, Friday’s numbers offered a few cautionary signs that the national economy had a long way to go. Though down from its peak of 10.1 percent in late 2009, April’s unemployment rate reflects only those Americans who are still actively looking for work.

As such, economists said the data in this month’s report was part of a larger picture of the economy that is mixed. Recent data on initial jobless claims and other employment indicators have been weak, Mr. Shapiro said.

“Millions of people are unemployed and many have left the labor market and given up,” Mr. Shapiro said. “Against that we are maybe creating 244,000 jobs. That is all well and good but it just shows you how much further we have to go to make a dent into what has happened in the labor market.”

“It gets the basic debate out there about the economy,” he added. “Is all we have seen the product of government stimulus, and are all the problems coming back or not?”

Austan Goolsbee, chairman of President Obama’s Council of Economic Advisers, noted that the economy had added 2.1 million private sector jobs in the last 14 months, including more than 800,000 this year. The last three months of private jobs gains have been the strongest in five years, he said, despite the “headwinds” from higher energy prices and the Japan disaster.

But Mr. Goolsbee added a note of caution. “While the solid pace of employment growth in recent months is encouraging, faster growth is needed to replace the jobs lost in the downturn,” he said.

The latest snapshot covered a period when several indicators pointed to signs of weakness. The American economy grew at a tepid 1.8 percent in the first quarter, according to the government’s estimate for the first quarter. Personal consumption has slowed and construction remains weak, though winter weather was cited as a reason.

Turmoil in the Middle East and North Africa has sent crude oil prices higher, pushing up the cost of gasoline, which in turn has taken a larger share of the money consumers have to spend. Supply disruptions in the aftermath of the earthquake and tsunami in Japan have rippled through American industries, especially the automobile sector where plants have reduced production and idled workers.

John Canally, economist for LPL Financial, said that there was a marked difference between the April report of last year, when the economy was riven with uncertainty over the oil spill in the Gulf of Mexico and the European debt crisis.

“I think it is a sign that the economic recovery can continue. It is stronger than it was a year ago when we hit a wall,” Mr. Canally said. “This spring it looks like we went right through the wall, despite higher oil prices, and despite the Japan slowdown.”

There were bright spots. Temporary jobs declined as permanent were added, while those in leisure and hospitality were up, meaning that people were spending, said Nigel Gault, the chief United States economist for IHS Global Insight. But Mr. Canally said that the decline in temporary help jobs could be interpreted as a negative because it is a leading indicator that could signal companies are taking the first step toward permanent employment.

“This is by no means a booming report,” said Mr. Canally. “But you’re chipping away at it.”

He and other economists said there were other offsetting factors, like falling government employment numbers, poor construction figures, no expansion in average weekly hours, and a small rise in average hourly earnings.

“This is simply not good enough to support consumption on a secular basis and while we keep waiting for income gains to following payroll growth, such gains have yet to materialize in any significant manner,” said Dan Greenhaus, the chief economic strategist for Miller Tabak & Company, in a research note.

About 13.7 million people were out of work in April, among them 5.8 million people who have been jobless for six months or longer. In March, the number of people who were unemployed was 13.5 million, with 6.1 million of them considered the long-term unemployed. In April, about 64.2 percent of adults were either in the work force or looking for a job, the fourth consecutive month it has been at that level, which is the lowest labor participation rate in a quarter-century.

The Labor Department’s report on Friday showed that most of the increases in nonfarm jobs came in retail trade, while jobs in services , health care, and leisure and hospitality also grew. An additional 29,000 manufacturing jobs were added in April, compared with 17,000 in March. Analysts had forecast a rise of 20,000 manufacturing jobs in April.

The average workweek was 34.3 hours in April, the same as in March, while average hourly earnings rose by 3 cents to $22.95, compared with a revised $22.92 in March.

The outlook for the near-term job growth remains murky.

The housing downturn, high oil and commodity prices, government austerity measures and limited consumer spending will prevent gross domestic product growth from being more robust, and unemployment is likely to remain above 8 percent through 2012, according to Gad Levanon, associate director of macroeconomic research at the Conference Board.

“Longer-term prospects are more promising, however,” Mr. Levanon said in a statement. “In the last six months, employment outside of construction, finance and state and local government has already been growing faster than nearly any other six-month period in the last decade. Once constraints in these hard-hit sectors loosen, overall job recovery is likely to pick up pace.”
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Source: The New York Times

The federal government will not run short of money to pay its bills on May 16, when the federal debt reaches the legal maximum of $14.3 trillion.

Even after Aug. 2, the deadline the Treasury Department set this week for Congress to lift the borrowing limit, the government might be able to delay a crisis, perhaps even for a few months, through extraordinary measures such as asset sales.

But with every passing week of stalemate over the debt ceiling, the risk increases that investors will start to fret that the United States will not pay its debts, and demand higher interest rates for loans to the federal government.

Should that happen, the cost could be vast and the damage difficult to reverse.

Debates over the debt ceiling are a regular feature of political life in Washington. Congress has lifted the ceiling more than once a year, on average, over the last half-century — often right before the deadline. But the debt has never been so large, and the political climate has rarely been as contentious.

Republicans and some Democrats insist that an increase in the debt ceiling must be accompanied by concrete limits on future spending, entangling an issue that requires urgent attention with a debate unlikely to be resolved before the 2012 elections.

Vice President Joseph R. Biden Jr. and lawmakers are scheduled to begin discussions on the national debt on Thursday at Blair House in Washington.

“When I talk to investors, their general reaction is they’ve seen this movie before. They expect that Congress will increase the debt ceiling,” said Mary Miller, assistant Treasury secretary for financial markets. “But I’m concerned because the stakes are higher here and the amount of time we can buy with extraordinary measures is smaller.”

The debt ceiling basically is the limit on the national credit card, the maximum amount that can be owed at any one time. The government hits the limit with some regularity because federal spending vastly exceeds revenue. Over the years, Congress, which controls federal spending, has always raised the limit.

When the current limit is reached on May 16, after the Treasury completes its latest round of borrowing, the government will need to find $125 billion a month to pay its bills.

The Treasury estimates that it can avoid a crisis until early August with few if any lasting consequences by spending about $100 billion in cash that it keeps on deposit with the Federal Reserve, the nation’s central bank, and by temporarily suspending $232 billion in special-purpose borrowing programs so it can instead borrow money to finance general operations.

The Treasury secretary, Timothy F. Geithner, warned Congress in April that once those resources were exhausted, the government would have to default.

“A broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds,” he wrote.

A range of experts, including the Federal Reserve chairman, Ben S. Bernanke; former Treasury officials from both political parties; and economists from across the ideological spectrum, warn that missing payments would be catastrophic. In particular, they say, investors would view Treasury debt as risky and Washington would be forced to pay higher interest rates.

The government plans to borrow $405 billion during the second half of 2011. If rates rose even a tenth of a percentage point, the added cost on those borrowings would be $405 million a year.

Many Republicans dismiss these warnings. They argue that the government could maintain the confidence of investors by prioritizing interest payments. There is ample revenue to make those payments, and the Republicans — also backed by economists and financial experts — say investors would not punish the government for failing to fulfill other financial obligations.

“I think the important thing to do would be to make it clear to markets that the government is not going to default on its debt,” said Senator Patrick Toomey, Republican of Pennsylvania, whose bill assigns priority to interest payments. “It would be easy, I think, to make it clear to the markets that they don’t have to worry about this.”

Treasury officials respond that the failure to pay any obligations would set off a crisis.

“What participant in the market would want to buy our debt as we are defaulting on other obligations?” asked Ms. Miller. “I think the markets would be completely spooked.”

Prioritizing interest payments would also require cutting spending immediately by much more than either party has ever proposed. The Congressional Research Service reported in February that the government would need to stop all discretionary spending and reduce payments under programs like Social Security.

So far, investors have shown no signs of concern. Moreover, the market reaction to past standoffs suggests that investors have learned over time to ignore the theatrics in Washington.

Investors demanded risk premiums of as much as half a percentage point during a heated confrontation in 1995 and 1996 between House Republicans and the Clinton administration. They demanded smaller risk premiums during standoffs in 2002 and 2003, according to research by Pu Liu, a finance professor at the University of Arkansas. But during more recent standoffs in 2005 and 2006, Professor Liu found no evidence of any risk premium.

Investors, he wrote, have taken to treating Washington “like the boy that cried wolf.”

Of course, investors were more sanguine about risk in 2006 than they are now. But even if markets do remain calm, the cost of a standoff will rise sharply when Treasury exhausts its current measures around Aug. 2.

Then the government could stave off default for a time by selling assets at fire sale prices. The United States owns about $402 billion in gold at Monday’s prices and about $81 billion in oil. It holds a portfolio of loans estimated to total $923 billion by September, including more than $100 billion in mortgage-backed securities it is selling slowly to investors, and more than $400 billion in college student loans.

Administration officials, however, say such a move would amount to a modest grace period bought at extravagant and wasteful expense. It would not change the fundamental need for Congress to raise the debt ceiling.

A more likely approach would borrow a page from the Clinton administration, which threatened in early 1996 to suspend Social Security payments for a month.

Congress immediately passed special legislation permitting the government to borrow the necessary money without counting it against the debt ceiling for one month. One day shy of a month later, Congress permanently raised the ceiling.
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Source: The New York Times

The Treasury Department says it will proceed with a $72 billion auction of new debt next week, the final quarterly auctions until Congress raises the government’s borrowing limit.

Treasury officials say the government will hit its $14.3 trillion borrowing limit on May 16. The government conducts four major debt auctions each year to finance operations. But once it reaches the debt limit, it must suspend those auctions.

The Treasury will continue weekly and other regular auctions through Aug. 2. Treasury Secretary Timothy Geithner has said that as long as the government can continue normal debt-financing operations. At that time, it will have to delay most debt sales or alter the scope if the government has yet to raise the borrowing limit.
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Source: The Washington Post

Americans earned and spent more in March, but much of the extra money went toward more expensive gasoline.

Personal incomes rose 0.5 percent last month and consumer spending increased 0.6 percent, the Commerce Department reported Friday. But after adjusting for inflation, spending rose a much more subdued 0.2 percent and after-tax incomes were essentially flat.

Consumer spending had been expected to post solid gains this year, helped by stronger employment growth and a 2 percentage-point cut in Social Security payroll taxes. But Americans are paying more for gas, prompting economists to scale back their growth forecasts.

The national average at the pump on Friday was $3.90 a gallon— 31 cents higher than a month ago and more than $1 than what consumers paid a year ago.

Less growth in consumer spending was a big reason the overall economy slowed sharply in the first three months of the year. The 1.8 percent growth rate was weaker than the 3.1 percent growth in the previous quarter. Consumer spending is important because it accounts for roughly 70 percent of economic activity.

“The increase in prices is absorbing pretty much all of the windfall from the payroll tax cut,” said Paul Dales, an economist with Capital Economics. “If gasoline prices were to stop rising, real consumption could bounce back in the second quarter. But even then, jobs growth and wage growth are not strong enough to result in a significant and sustained acceleration in consumption growth. This economic recovery is going to continue to disappoint both this year and next.”

The rise in spending was heavily concentrated in nondurable goods, which includes gasoline. Spending in this category jumped 0.9 percent while spending on longer-lasting manufactured goods, such as autos, was essentially flat. Spending on services rose 0.5 percent.

The savings rate remained unchanged at 5.5 percent of after-tax incomes in March. Americans saved just 2.1 percent in 2007 before the recession. The bursting of the housing bubble has made them more cautious with their finances.

A key inflation gauge that is closely watched by the Federal Reserve showed prices rising 0.4 percent in March, the same as February. Excluding food and energy, prices were up a more subdued 0.1 percent in March and are 1.8 percent higher than a year ago, well within the Fed’s comfort zone.
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Source: The Chicago Sun-Times

The White House is warning that catastrophe will strike if Congress fails to raise the limit on the national debt: With too little cash to pay creditors, the U.S. government would default. Interest rates would skyrocket. And the economic recovery would collapse.

But behind the scenes, Treasury Secretary Timothy F. Geithner has already begun juggling the books to conserve cash, draining a special account at the Federal Reserve. And with the debt forecast to hit the legal limit of $14.3 trillion in just a few weeks, he has a range of tools at his disposal, including borrowing money from a pension fund for federal workers.

Geithner also has authority to pay investors first for interest they’re owed on the debt, according to a decades-old legal opinion. A growing number of conservatives argue that by making interest payments first, the government could avoid default and the Obama administration’s predictions of economic Armageddon.

But the nation could pay a substantial price in the form of higher interest rates if it relied for long on such evasive maneuvers, the Government Accountability Office said in a recent study. And financial analysts say market confidence could be shattered if Geithner had to cut off pay to combat troops or stop writing Social Security checks — even if he never missed an interest payment.

“I think the failure to meet any commitment would be viewed by the markets as default and would be deeply unnerving,” said Robert Rubin, who, as Treasury secretary in the mid-1990s, prevented the debt from breaching the limit during the longest battle over the issue on record.

“We don’t know” what would happen in the event of default, Rubin said. “But I think it is totally irresponsible to take the risk of trying to find out.”

Markets are already uneasy about the looming battle over the debt ceiling, which promises to consume Congress when lawmakers return next week from their Easter break. Republican leaders are demanding strict controls on spending as a condition for raising the ceiling; Demo­cratic leaders want a deficit-reduction trigger, which would automatically cut outlays and raise taxes if certain budget goals aren’t met.

The debt is forecast to hit the limit in mid-May. Geithner has said he can keep the wolf from the door until early July.

So far, the Treasury has nearly drained a $200 billion cash-management account at the Fed, providing a cushion of money to pay bills without new borrowing. Next, Geithner is likely to take a series of “extraordinary actions,” such as suspending the issuance of special securities that help state and local governments manage their own finances. Once the debt hits the limit, Geithner may declare a “debt issuance suspension period,” permitting him to borrow from the pension fund for federal workers.

Rubin pioneered these strategies in 1995, at the start of the budget battles between President Bill Clinton and Republicans led by House Speaker Newt Gingrich (R-Ga.). As the fight dragged on through two government shutdowns, Rubin had to juggle the nation’s bills for 135 days. Finally, Clinton threatened to delay Social Security checks, spurring Congress to approve more borrowing to make sure the checks went out on time.

Then, as now, a new GOP House majority was pressing a Democratic president to shrink the government. Congress grudgingly raised the debt limit six times between 1995 and the loss of GOP control in 2007, while the Treasury repeatedly resorted to extraordinary measures.

Geithner can use the same tactics, Rubin said, but “the trouble is the numbers are much bigger this time.” In November 1995, the debt stood just under $5 trillion, and the government was spending less than half what it does today. The measures Rubin used to stay under the debt limit for more than four months would now last “a few days to a few weeks,” according to GAO auditors.

The Treasury also has on occasion curbed borrowing to stay under the debt limit, postponing scheduled auctions of government bonds and trimming the total value sold.

The GAO found that “general uncertainty” forced the Treasury to pay millions of dollars in higher interest rates in the months leading up to debt-limit increases in the early 2000s and again last year.

As Geithner readies his cash-management tools, some Republicans are pressing him to prepare for a lengthy battle that could force Treasury for the first time since the debt limit was established in 1917 to stop borrowing and make do with tax revenue. The government is forecast to collect $2.2 trillion in taxes this year and obligated to spend $3.7 trillion. That means Geithner could cover about 60 percent of the bills.

Last month, all 47 Senate Republicans voted for a measure sponsored by Sen. Patrick J. Toomey (R-Pa.) that would require Geithner to pay interest on the debt first. At $225 billion this year, the payments would be easily affordable, said Toomey, a former bond trader who headed the anti-tax Club for Growth until his election last year. While it would be “traumatic” to slash other obligations, Toomey said, keeping interest payments current would avoid default and preserve the nation’s sterling credit rating.

“The administration has been exaggerating the consequences of all this,” Toomey said in an interview. “If we didn’t raise the debt limit when we reached it, we’d have the equivalent of a partial government shutdown, and the market knows very well that furloughing workers and suspending purchases of materials are not the same thing as defaulting on our bonds.”

During a 1985 debt-limit fight, the GAO concluded that the Treasury secretary “does have the authority to choose the order in which to pay obligations of the United States.” But Treasury officials, who declined to comment on the record for this story, have discouraged talk about prioritizing the nation’s expenses.

In addition to being politically risky, the task presents huge logistical challenges. The Treasury makes hundreds of thousands of payments each day, most processed automatically by the Federal Reserve. Interrupting payments to manage daily cash flow would be far more complex than simply cutting off, say, payments to education programs.

More to the point, Treasury officials say, prioritizing payments would not avoid default. In a January blog post, Deputy Treasury Secretary Neal S. Wolin argued that failing to meet any obligation — whether interest payments or Medicare bills — would trigger a loss of market confidence. “Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name,” Wolin wrote.

What are the consequences of default? There’s disagreement about that, too.

Last week, in a paper titled “The Case for Default,” a Bank of America-Merrill Lynch analyst argued that hitting the debt limit might actually be a good thing, especially if the suspension of borrowing were brief and the political battle produced a plan to balance the nation’s books.

But most analysts take a darker view. Bill Gross, who runs Pimco, the world’s biggest bond fund, said in an e-mail that failure to raise the debt ceiling would be “catastrophic — global investors would move money at the margin to countries which have their act together, interest rates might rise by 50 basis points overnight, the stock market would plunge.”

Already, some traders have begun hoarding Treasury bills and other short-term assets in case the government stops issuing new debt. For now, such “disruptions” are minor but noticeable, said Karen Shaw Petrou, managing partner of the research firm Federal Financial Analytics.

“It’s like before a thunderstorm,” she said. “The birds are quiet in the trees, and there’s a very weird mood in the market. But it hasn’t yet started to rain.”
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Source: The Washington Post