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The United States economy has slowed considerably this year from a year ago, according to a report from the Commerce Department released on Friday.

The country’s gross domestic product, a broad measure of the goods and services produced across the economy, grew at an annual rate of 1.3 percent in the second quarter, after having grown at an annual rate of 0.4 percent in the first quarter — a number that itself was revised sharply down from earlier estimates of 1.9 percent . Both figures were well below economists’ expectations.

Data revisions going back to 2003 also showed that the 2007-2009 recession was deeper, and the recovery to date weaker, than originally estimated. Indeed, the latest figures show that the nation’s economy is still smaller than it was in 2007, when the Great Recession officially began.

“The word for this report is ‘shocking,’ ” said John Ryding, chief economist at RDQ Economics. “With slow growth, higher inflation and almost no consumer spending growth, it is very tough to find good news.”

The latest figures come as Congress is debating how to put the nation on a more sustainable fiscal path, with measures that some economists worry could further slow the economy and even throw it back into recession. Even in the absence of further austerity measures, some of the government’s current stimulative policies, such as the payroll tax cut, are phasing out, and state and local governments are slashing spending dramatically.

Such fiscal retrenchment was already expected to be a drag on growth in the coming year; the Commerce Department’s report and the Washington debt talks only magnify those concerns.

“There’s nothing that you can look at here that is signaling some revival in growth in the second half of the year, and in fact we may see another catastrophically weak quarter next quarter if things go wrong next week,” said Nigel Gault, chief United States economist at IHS Global Insight. By “things going wrong,” he said he means “if Congress actually starts implementing a massive contraction by suddenly cutting government spending immediately,” as many Republican representatives hope to do.

Prolonging the continuing talks in Washington to raise the amount of money the United States can borrow could also damage prospects for growth in the third quarter, as businesses and families wait to make big purchases until the threat of federal default passes.

“Even if everything gets done, there is still a big hit coming from uncertainty,” said Paul Dales, a senior United States economist at Capital Economics. “Companies have probably put projects on hold and postponed hiring.”

Usually, a sharp recession is followed by a sharp recovery, meaning the recovery growth rate is far faster than the long-term average growth rate; last quarter, though, output grew at only about one-third of the average rate seen in the 60 years preceding the Great Recession. As a result, the country’s output is far below its potential.

Particularly distressing to economists is that consumer spending — which, alongside housing, usually leads the way in a recovery — has been extraordinarily weak in recent quarters. Inflation-adjusted consumer spending in the second quarter barely budged, increasing just 0.1 percent, the Commerce Department report showed.

“People are spending more, but that spending is being absorbed in higher prices, not in buying more stuff,” Mr. Ryding said.

Even the brightest parts of the report were seen as bittersweet. For example, motor vehicle output fell much less than was predicted after the natural disasters in Japan disrupted supply chains. But that means there will likely be a less dramatic bounce back in autos in the coming months, which economists were counting on to raise growth rates later this year.

The economy’s slow growth rate is largely responsible for stubbornly high joblessness across the country, economists say. As of June, 14 million Americans were actively looking for work, and the average duration of unemployment has been reaching record highs month after month. Businesses are sitting on a lot of cash, but are still reluctant to hire because there is so much uncertainty about the future of the economy and whether they will continue to have a steady flow of customers.

Slow economic growth takes not only a human toll, but a fiscal one as well. Tepid output increases mean slower growth in the tax revenue needed to pay down the nation’s debt.

Washington, therefore, has a delicate balancing act in its current debt ceiling debates. Given the unsustainable debt trajectory that the economy is on — primarily because of the country’s growing health care obligations — Congress needs to impose greater fiscal discipline. But imposing too much too soon, or being too focused on the wrong types of spending cuts, could be self-defeating by weakening growth so greatly that tax revenue falls and requires the country to borrow even more.  

Given inflation concerns, it also seemed unlikely that the Federal Reserve will swoop in with another round of monetary easing to goose growth.

“There’s not going to be additional monetary stimulus, and it’s hard to imagine any fiscal stimulus given the current discussion in Washington,” Mr. Ryding said. “So what’s going to get us out of this? The inevitable conclusion is time, and that’s not very satisfactory.”

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Source:  The New York Times

Michigan moved Thursday to significantly cut its unemployment program, becoming the first of what could be a flurry of debt-laden states to reduce aid even as high jobless rates persist.

The Michigan measure reduces the maximum period a person can receive state unemployment benefits from 26 to 20 weeks, the lowest in the nation, officials said. Gov. Rick Snyder (R) indicated Thursday that he would sign the bill.

The state’s economic troubles, aggravated by the recession and its shrinking manufacturing base, have turned Michigan into a bellwether of bust. Its unemployment rate stands at 10.7 percent — one of the worst in the country.

The move comes as other Republican-dominated legislatures, including Florida’s, are weighing similar efforts to restrict payments to the jobless, and states such as Wisconsin, Ohio and Indiana are implementing far-reaching, controversial plans to close budget gaps.

Although critics have decried the benefit reductions during a time of high joblessness as part of a political “war on the unemployed,” advocates of the cutbacks say they are necessary to ease the burden on employers, who pay for the programs through a payroll tax.

The cost of providing unemployment payments rose rapidly as the jobless ranks grew with the recession. Some states, including Michigan and Florida, face multi-billion dollar debts as a result, according to Labor Department estimates.

When state unemployment funds are depleted, they borrow from the federal government. Michigan owes the federal government $3.9 billion for the program. By comparison, the state’s proposed budget for next year is $45.9 billion.

“If we don’t solve the deficit problem, there won’t be any benefits for anyone,” said Wendy Block of the Michigan Chamber of Commerce, which lobbied for the bill. “This insures that employers won’t be taxed through the roof for unemployment benefits.”

Opponents, however, argue that it makes little sense to reduce benefits now when many Americans are finding it difficult to get work. The nation’s jobless rate stood at 8.9 percent in February, and nearly 44 percent of the country’s jobless have been out of work for more than six months, according to the Labor Department.

Moreover, opponents fear that Michigan’s approach on unemployment benefits could be copied by other states with energized Republican majorities, just as the collective-bargaining restrictions approved in Wisconsin have been entertained by other states.

“This is frightfully shortsighted for the individual families,” said U.S. Rep. Sander M. Levin (D-Mich.). “It turns back the clock on 50 years of these benefits. What concerns me is that it could go viral.”

Since the 1950s, nearly every state has offered at least 26 weeks of unemployment insurance.

Federal measures enacted in response to the recent economic downturn extend those benefits to as long as 99 weeks in states with the highest jobless rates – the longest period since the program’s inception. The extended federal benefits expire in January.

Most state unemployment funds have been depleted, and they are now borrowing from the federal government to make their portion of the payments.

The shortfalls can be traced to a failure during the economic boom to properly prepare for a downturn, experts said.

Unemployment benefits are funded by a payroll tax on employers, collected at a rate that is supposed to keep the funds solvent. Firms that fire lots of people are supposed to pay higher rates. Over the boom years, the drive to minimize state taxes on employers reduced revenues, and when the ranks of the unemployed grew during the crisis, the funds could not meet the need.

Collectively, the states owe the federal government $46 billion for the shortfalls in their unemployment funds. Those deficits put pressure on the states to reduce benefits or raise the payroll taxes.

This month, the Florida House approved a measure reducing the maximum benefit period from 26 to as little as 12 weeks while curbing increases in unemployment taxes paid by employers. The jobless rate in Florida is 11.9 percent.

“We are sending a message to the business community that Florida is quickly becoming the most business-friendly state in the country,” said state Rep. Doug Holder (R-Sarasota), the sponsor of the Florida bill.

It would go into effect Aug. 1.

In Arkansas, lawmakers are moving toward freezing unemployment benefits levels while trimming the maximum benefit period for state benefits from 26 to 25 weeks.

“The more that states look at the severity of the solvency problems, the more measures like this will be seriously considered,” said Douglas Holmes, president of UWC, an organization that provides advice on unemployment policy to businesses and some states.

The federal extensions — the latest one pushed forward by President Obama in December — have led to criticism that the unemployment program has morphed from a temporary bridge for laid-off workers into an expensive entitlement, a critique that angers advocates for the unemployed.

“We have had such high unemployment for so long, people maybe don’t have as much sympathy for the jobless as they did in 2008 or 2009,” said Rick McHugh, a staff attorney with the National Employment Law Project.

Pointing out that the maximum unemployment benefit in Michigan is $362 a week and $275 a week in Florida, McHugh added that it is unlikely that many people are financially comfortable just collecting unemployment benefits.

The Michigan measure was part of a bill that was necessary to ensure jobless people could receive a 20-week federal extension of unemployment benefits, the governor’s office said. Without it, about 35,000 people would have lost their benefits as of April 1.

A spokesman for Snyder said that he will sign the bill because it ensures that presently unemployed workers will continue to get benefits but that he would have preferred not to reduce the maximum benefit period.

“This makes sure we have that lifeline still in place,” Snyder spokeswoman Sara Wurfel said. “It was a necessary compromise. The votes to do anything else weren’t there otherwise.”
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Source: The Washington Post

Fewer people applied for unemployment benefits last week, providing support for the view that there will be stronger job growth this year.

Applications fell to a seasonally adjusted 385,000 last week, marking the third decline in the past four weeks, the Labor Department reported Thursday.

The four-week average for claims dropped to 386,250. That was the lowest level since July 2008, providing evidence that the job market is on a more solid footing.

Benefit applications below 425,000 signal modest job growth. But the level of applications needs to fall below 375,000 to be seen as a sign of sustained declines in the unemployment rate. Benefit applications peaked at 651,000 during the recession.

Analysts were encouraged by last week’s decline in benefit applications which came after applications had risen to 401,000 in the previous week.

“The downward trend in initial jobless claims is undeniable,” said Joshua Shapiro, chief U.S. economist at MFR Inc. Shapiro said it provided “strong evidence that the labor market recovery is for real” and he predicted it would continue in coming months.

Companies are finally hiring more after months of sluggish job creation. Employers added 192,000 jobs in February, the biggest gain in nearly a year. The unemployment rate dropped to 8.9 percent, the lowest point since April 2009.

Stronger job growth was a major reason the Federal Reserve this week offerred its most optimistic assessment of the economy since the recession ended. Fed policymakers said the recovery was on “firmer footing” and the jobs market was improving gradually.

At their previous meeting on Jan. 26, the Fed had said that the progress in lowering the unemployment rate had been “disappointingly slow,” a phrase it dropped in the statement summing up Tuesday’s meeting.

While private economists also believe the economy is gaining momentum, they worry about a number of downside risks. Those range from a surge in oil prices caused by political turmoil in oil exporting countries to a devastating earthquake and ongoing nuclear crisis in Japan, the world’s third larest economy.

The benefits report showed that the number of people receiving regular unemployment benefits fell by 80,000 to 3.71 million. That was the lowest level since the week of Sept. 27, 2008.

An additional 4.36 million unemployed workers received benefits under the extended programs during the week of Feb. 26, an increase of 53,000 from the previous week. In total, 8.95 million people were on the benefit rolls during the last week in February.
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Source: The Washington Post

President Obama went to a busy window-manufacturing plant near here on Friday to promote his economic policies and his new team of advisers as the monthly jobs report reflected only modest employment growth.

“We will not rest until we have fully recovered from this recession,” the president told workers.

Only hours earlier, the chairman of the Federal Reserve told Congress that while he expected the economy to be “moderately stronger” this year, it would be several years before the jobless rate fell to more normal levels.

That suggests that Mr. Obama is likely to face relatively high unemployment rates for the rest of his term. In responding, the president and his economic advisers will focus on getting the most bang for the buck from existing stimulus measures. New initiatives will tend not to carry a big price tag that adds to the growing national debt, officials say.

For example, aides say, Mr. Obama is exploring whether to seek an overhaul of the corporate tax system by closing myriad tax breaks and using the savings to cut business taxes. That could spur investment and jobs.

After two years of responding to the economic crisis he inherited, Mr. Obama starts the second half of his term managing the slow recovery and building on what he calls a “foundation” for growth. In his view, this includes the two-year stimulus package with its increases for education, research and work-training programs; stronger financial industry regulations; the overhaul of the health care system; and, most recently, the tax cuts that Mr. Obama and Republican leaders agreed to last month.

Yet Mr. Obama will have to defend his foundation even as he seeks to solidify it: Newly empowered Republican lawmakers have taken office this week with an economic agenda that calls for tearing down the stimulus spending initiatives, the health care law and the financial regulations, as well as any new administration regulations.

Last month’s enactment of the bipartisan package of business and individual tax cuts, which few had expected before the lame-duck Congress met, helps explain the relative scarcity of new administration ideas, officials say.

“We accomplished what were our main ideas for bipartisan agreement going forward,” said one official, who spoke on the condition of anonymity.

Chief among those ideas was a cut of two percentage points in workers’ payroll taxes for Social Security, a reduction that has begun showing up in paychecks this week. Mr. Obama alluded to that fact in his remarks to employees at the Thompson Creek Window Company in Landover, Md.

Another was a proposal to allow businesses to write off the full cost of some equipment and other capital investments in 2011, as Thompson Creek’s owners plan to do in expanding its factory and work force this year.

Mr. Obama, in his appearance alongside four of his newly named economic advisers, made clear that his emphasis would be on promoting the measures already on the books. “Part of this team’s mission in the months ahead will be to maximize the steps we’ve taken to spur the economy,” he said.

He also spoke as if to a national audience, salesman-style, through the nearby television cameras.

“Companies who are listening out there: If you are planning or thinking about making investments sometime in the future, make those investments now and you’re going to save money,” he said. “And that will help us grow the economy ”

Mr. Obama introduced Gene B. Sperling as his new director of the National Economic Council, charged with coordinating policies and brokering differences within the administration. Mr. Sperling held the same job under President Bill Clinton; he replaces Lawrence H. Summers, who returned to Harvard University.

“One of the reasons I’ve selected Gene is he’s done this before,” Mr. Obama said. During the Clinton administration, Mr. Obama added, “He helped formulate the policies that contributed to turning deficits to surpluses and a time of prosperity and progress for American families.”

With the elevation of Mr. Sperling, who has been a counselor to the Treasury secretary, Timothy F. Geithner, Mr. Obama has replaced three of the four principals of his original team. When he took office he chose people with experience in global economics and financial crises, including Mr. Summers and Mr. Geithner, the only remaining member of the original group.

Now Mr. Obama has turned to pragmatic liberals with experience in the policy-making bureaucracy — and negotiating with Republicans in Congress.

He previously chose Jacob J. Lew as budget director — the same job Mr. Lew had under Mr. Clinton — to succeed Peter R. Orszag, who has taken a job with Citigroup. And last summer Mr. Obama promoted Austan Goolsbee, a former campaign adviser, as chairman of his Council of Economic Advisers after Christina D. Romer returned to the University of California, Berkeley.

Also on Friday, Mr. Obama promoted Jason Furman, who remains as deputy director of the National Economic Council but with a higher rank. He nominated Katharine G. Abraham to take the third seat on the Council of Economic Advisers, which opened when Mr. Goolsbee became chairman, and Heather Higginbottom, a White House domestic policy adviser, to be Mr. Lew’s deputy budget director.

Source:  The New York Times

Housing starts in the United States increased more than expected in August to their highest level in four months and permits for residential construction also rose, government data showed on Tuesday, suggesting that the embattled market was starting to stabilize following the end of a tax credit.

The Commerce Department said housing starts rose 10.5 percent, the largest increase since November, to a seasonally adjusted annual rate of 598,000 units. July’s residential construction was revised down to show a 0.4 percent gain, which was previously reported as a 1.7 percent increase.

Analysts polled by Reuters had expected housing starts to rise to a 550,000-unit rate. Compared with August a year ago, housing starts were up 2.2 percent.

New building permits rebounded 1.8 percent to a 569,000-unit pace last month after a 4.1 percent drop in July, lifted by a 9.8 percent rise in permits for multifamily units. Analysts had expected a 560,000-unit pace in August.

The housing market has hit a soft patch after the end of a homebuyer tax credit in April. A combination of high unemployment and an oversupply of homes is also weighing on the sector, which was the main catalyst of the worst recession since the Great Depression.

The downturn ended in June last year, but the economic recovery has since lost momentum, sparking fears in financial markets of a renewed recession.

Residential construction in August was lifted by a 32.2 percent jump in groundbreaking activity in the volatile multifamily segment to an annual rate of 160,000 units.

Single-family starts increased 4.3 percent to a 438,000-unit pace, the highest since June.

Home completions increased 5.6 percent to a 603,000-unit pace, also the highest since June. The inventory of total houses under construction was unchanged at 444,000 units last month, while the total number of units authorized but not yet started fell 3.1 percent to a record low 87,000 units
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Source: The New York Times

The percentage of Americans struggling below the poverty line in 2009 was the highest it has been in 15 years, the Census Bureau reported Thursday, and interviews with poverty experts and aid groups said the increase appeared to be continuing this year.

With the country in its worst economic crisis since the Great Depression, four million additional Americans found themselves in poverty in 2009, with the total reaching 44 million, or one in seven residents. Millions more were surviving only because of expanded unemployment insurance and other assistance.

And the numbers could have climbed higher: One way embattled Americans have gotten by is sharing homes with siblings, parents or even nonrelatives, sometimes resulting in overused couches and frayed nerves but holding down the rise in the national poverty rate, according to the report.

The share of residents in poverty climbed to 14.3 percent in 2009, the highest level recorded since 1994. The rise was steepest for children, with one in five affected, the bureau said.

The report provides the most detailed picture yet of the impact of the recession and unemployment on incomes, especially at the bottom of the scale. It also indicated that the temporary increases in aid provided in last year’s stimulus bill eased the burdens on millions of families.

For a single adult in 2009, the poverty line was $10,830 in pretax cash income; for a family of four, $22,050.

Given the depth of the recession, some economists had expected an even larger jump in the poor.

“A lot of people would have been worse off if they didn’t have someone to move in with,” said Timothy M. Smeeding, director of the Institute for Research on Poverty at the University of Wisconsin.

Dr. Smeeding said that in a typical case, a struggling family, like a mother and children who would be in poverty on their own, stays with more prosperous parents or other relatives.

The Census study found an 11.6 percent increase in the number of such multifamily households over the last two years. Included in that number was James Davis, 22, of Chicago, who lost his job as a package handler for Fed Ex in February 2009. As he ran out of money, he and his 2-year-old daughter moved in with his mother about a year ago, avoiding destitution while he searched for work.

“I couldn’t afford rent,” he said.

Danise Sanders, 31, and her three children have been sleeping in the living room of her mother and sister’s one-bedroom apartment in San Pablo, Calif., for the last month, with no end in sight. They doubled up after the bank foreclosed on her landlord, forcing her to move.

“It’s getting harder,” said Ms. Sanders, who makes a low income as a mail clerk. “We’re all pitching in for rent and bills.”

There are strong signs that the high poverty numbers have continued into 2010 and are probably still rising, some experts said, as the recovery sputters and unemployment remains near 10 percent.

“Historically, it takes time for poverty to recover after unemployment starts to go down,” said LaDonna Pavetti, a welfare expert at the Center on Budget and Policy Priorities, a liberal-leaning research group in Washington.

Dr. Smeeding said it seemed almost certain that poverty would further rise this year. He noted that the increase in unemployment and poverty had been concentrated among young adults without college educations and their children, and that these people remained at the end of the line in their search for work.

One indirect sign of continuing hardship is the rise in food stamp recipients, who now include nearly one in seven adults and an even greater share of the nation’s children. While other factors as well as declining incomes have driven the rise, by mid-2010 the number of recipients had reached 41.3 million, compared with 39 million at the beginning of the year.

Food banks, too, report swelling demand.

“We’re seeing more younger people coming in that not only don’t have any food, but nowhere to stay,” said Marla Goodwin, director of Jeremiah’s Food Pantry in East St. Louis, Ill. The pantry was open one day a month when it opened in 2008 but expanded this year to five days a month.

And Texas food banks said they distributed 14 percent more food in the second quarter of 2010 than in the same period last year.

The Census report showed increases in poverty for whites, blacks and Hispanic Americans, with historic disparities continuing. The poverty rate for non-Hispanic whites was 9.4 percent, for blacks 25.8 percent and for Hispanics 25.3 percent. The rate for Asians was unchanged at 12.5 percent.

The median income of all households stayed roughly the same from 2008 to 2009. It had fallen sharply the year before, as the recession gained steam and remains well below the levels of the late 1990s — a sign of the stagnating prospects for the middle class.

The decline in incomes in 2008 had been greater than expected, and when the two recession years are considered together, the decline since 2007 was 4.2 percent, said Lawrence Katz, an economist at Harvard. Gains achieved earlier in the decade were wiped out, and median family incomes in 2009 were 5 percent lower than in 1999.

“This is the first time in memory that an entire decade has produced essentially no economic growth for the typical American household,” Mr. Katz said.

The number of United States residents without health insurance climbed to 51 million in 2009, from 46 million in 2008, the Census said. Their ranks are expected to shrink in coming years as the health care overhaul adopted by Congress in March begins to take effect.

Government benefits like food stamps and tax credits, which can provide hundreds or even thousands of dollars in extra income, are not included in calculating whether a family’s income falls above or below the poverty line.

But rises in the cost of housing, medical care or energy and the large regional differences in the cost of living are not taken into account either.

If food-stamp benefits and low-income tax credits were included as income, close to 8 million of those labeled as poor in the report would instead be just above the poverty line, the Census report estimated. At the same time, a person who starts a job and receives the earned income tax credit could have new work-related expenses like transportation and child care. Unemployment benefits, which are considered cash income and included in the calculations, helped keep 3 million families above the line last year, the report said, with temporary extensions and higher payments helping all the more.

The poverty line is a flawed measure, experts agree, but it remains the best consistent long-term gauge of need available, and its ups and downs reflect genuine trends.

The federal government will issue an alternate calculation next year that will include important noncash and after-tax income and also account for regional differences in the cost of living.

But it will continue to calculate the rate in the old way as well, in part because eligibility for many programs, from Medicaid to free school lunches, is linked to the longstanding poverty line.
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Source: The New York Times

Illinois has borrowed more than $2.2 billion from the federal government since July 2009 to pay unemployment benefits.

The good news is the state has not had to borrow since April, and the loan is interest-free for now.

“We really do access it as needed. It’s a day-to-day decision, five days a week,” Illinois Department of Employment Security spokesman Greg Rivara said Thursday.

Illinois has plenty of borrowing company. According to the National Conference of State Legislatures, 31 states and the Virgin Islands had borrowed $38.7 billion to pay jobless claims as of this week.

Several states exceeded Illinois borrowing, topped by California at nearly $7.5 billion.

Unemployment trust funds are paid for through withholding taxes on employers, but Rivara said there have been minimal rate changes up to now in Illinois because rates are based on a three-year payment history.

The system is designed to ease rates during a down economy, when claims are high, and for rates to rise in good times to rebuild the fund, he said. Rates for 2010 are lower than those in 2007, while the taxable wage-base is higher.

Interest free, for now

The federal government suspended interest on loans to states for jobless benefits as part of the national stimulus legislation, but that exemption is scheduled to expire in January barring a congressional extension.

Several states, including most recently Pennsylvania, already are struggling with ways to build unemployment trust funds. But the basic options — raise rates on employers or cut benefits in an already-struggling economy — are a tough political sell, said Marc Katz, congressional and public affairs director for the National Association of Workforce Agencies in Washington, D.C.

“In terms of escalating taxes, this is going to be an issue that’s getting a lot of attention. … It’s going to be a major issue with state legislatures,” said Katz.

Katz said a variety of proposals are pending in Congress, including simply forgiving the state debts because of the severity of the recession. But he said the federal government has its own financial issues.

“It’s unclear what will happen because there’s also intense focus on the (federal) deficit,” said Katz.

Not unprecedented

Illinois resorted to borrowing during a recession in the early 1980s, when at one point the unemployment trust fund was $2.3 billion in the red. The borrowing also resulted in a series of reforms in 2003 that set up the current system.

The same trend occurred in 2009, said Rivara.

“We were in positive territory when 2009 started, and we were in negative territory when 2009 ended,” he said.

The balance has since rebounded to about $481 million, though Rivara said that is primarily because employers pay the bulk of withholding taxes in spring and summer. The state could be forced to borrow again, he said.

Illinois has not yet begun to repay the federal loan, and Rivara said the state could pay as much as 4 percent interest on the balance if the interest exemption expires in January. He said states also could be penalized in other ways, including federal incentives for business, if the money is owed for more than two years.
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Source: The State Journal Register - The Oldest Newspaper in Illinois

Faster job growth is needed to accelerate the recovery, but economists worry the government’s July employment report won’t show strong gains.

Without more jobs, Americans are likely to remain cautious with their spending, restraining the economic rebound. But without more spending, companies will likely be slow to hire.

The report will be released Friday morning.

“To break out of this, we need both employment and consumption to come up together,” said Nigel Gault, an economist at IHS Global Insight.

While the economy has grown modestly in the past year, much of the rebound is due to temporary factors. They include government stimulus spending and companies’ restocking of warehouses depleted in the recession.

More hiring and rising incomes would put the recovery on a sustainable footing. But Friday’s jobs report may not show much of an increase.

Companies are forecast to have added a net total of 90,000 private-sector jobs in July, according to economists surveyed by Thomson Reuters. That’s not nearly enough to bring down the unemployment rate, which is expected to rise to 9.6 percent from 9.5 percent.

Overall, the economy is likely to lose a total of 65,000 jobs because of the end of temporary positions with the U.S. Census Bureau.

Friday’s report is being closely watched by the Federal Reserve as it considers ways to energize the recovery. A weak jobs report would put pressure on the Fed to take new steps to boost the economy and keep interest rates at record lows when it meets next week.

Economic reports Thursday showed that the economic recovery is still weak. Retailers around the country posted a sales increase of just 2.8 percent for July compared with a year earlier - when the economy looked much bleaker than it does today.

The July figure, released by the International Council of Shopping Centers based on results from 31 chains, was the fourth straight month of weak retail numbers. And in a reminder of how weak the job market is, the government said Thursday that first-time claims for unemployment benefits rose last week to their highest level in four months.

Corporate net income rose sharply in the second quarter, but businesses aren’t using the proceeds to ramp up hiring. Companies in the S&P 500 index reported a 46 percent increase in net earnings for the second quarter, compared to a year earlier.

But many employers are uncertain about the future course of the economy. Some are concerned sales will slow once government stimulus and other temporary factors fade. Others fear what will happen if federal income taxes are allowed to rise next year as tax cuts enacted by President George W. Bush expire.

“People have a long worry list they’re looking at,” said Ethan Harris, chief economist at Bank of America Merrill Lynch.

Showing caution, some companies have resorted to hiring mostly temporary workers. Temporary help services have added 192,300 jobs this year, nearly a third of the net gain of 593,000 private-sector jobs.

That increase shows “businesses are taking the least committed way” of increasing their work forces, Harris said.

Vehicle parts maker Federal-Mogul Corp., for example, has hired 1,400 workers in the United States in the past year, as car sales have grown. But many of those hires are temporary, CEO Jose Maria Alapont said. That allows the company to stay flexible and reduce its work force if the economy sours, he said.

“There is a very clear recovery during the first half of the year, but there are still questions whether that will continue in the second half,” he said in an interview last month.

The Southfield, Mich., company cut its global work force by 11,000 in 2008 and 2009 to about 39,000.

Some companies are adding permanent workers. The hospital chain HCA Inc. currently has 8,300 open positions, said company spokesman Ed Fishbough. That includes nurses, physicians and information technology professionals needed to build HCA’s ability to handle electronic medical records. HCA employs about 190,000 people in the U.S. and the U.K.

Many companies are still laying off employees. FBR Capital Markets, an investment bank based in Arlington, Va., cut its work force by about 15 percent in early July to about 500 employees, saying it needed to reduce costs. In the second quarter, its net loss deepened 18.5 percent to $25.8 million despite an increase in revenue.
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Source: The Washington Post

Senate Democrats are poised to break a partisan stalemate on Tuesday over extending unemployment benefits for millions of Americans who have been jobless for six months or more, but the fight seems certain to continue playing out as a defining issue in the midterm elections.

One day before a crucial procedural vote to provide added unemployment assistance through November, President Obama appeared in the Rose Garden on Monday with three out-of-work Americans to hammer Republicans for blocking the extension until now by insisting, over Democratic objections, that the $34 billion costs of the benefits not be added to the deficit.

“The same people who didn’t have any problem spending hundreds of billions of dollars on tax breaks for the wealthiest Americans are now saying we shouldn’t offer relief to middle-class Americans,” Mr. Obama said.

Democrats have been one vote short of pushing the measure through the Senate. But on Tuesday, a new Democratic senator from West Virginia will be sworn in to succeed Robert C. Byrd, who died last month, putting Democrats in position to overcome the Republican blocking tactic and bring the bill to a final vote.

As a political matter, the issue has appeal to both parties, especially in an election year in which each party needs first to motivate its own base.

For Republicans, it provides a concrete vehicle for pushing the argument that the government’s response to the recession has been wasteful and ineffective, that the growing national debt requires deep spending cuts and that Mr. Obama is guilty of ideological overreach.

For Democrats, it is an opportunity to accuse Republicans of being obstructionist and out of touch with the pain caused by an economic downturn that began on the Republicans’ watch.

Mr. Obama’s tough attack on Monday signaled the White House’s confidence that it has the upper hand, legislatively and politically. Recent public opinion polls show that a majority of Americans favor giving the long-term unemployed more financial help even if it adds to the deficit.

“To govern is to choose, and this is a clear choice: You either support extending benefits for people who are out of work or you don’t,” said Rahm Emanuel, the White House chief of staff. “There are obvious political ramifications to that difference.”

With many voters expressing growing alarm at the mounting national debt, Republicans say that standing against an unemployment extension that would add to the deficit could energize their voters and help them regain some of the reputation for fiscal responsibility they have lost in recent years. They also accused the White House of misleading the public about the Republican position on added jobless pay.

“The president knows that Republicans support extending unemployment insurance, and doing it in a fiscally responsible way by cutting spending elsewhere in the $3 trillion federal budget,” Representative John A. Boehner of Ohio, the House Republican leader, said in a statement Monday. “At a time of record debt and deficits made worse by Washington Democrats’ massive spending spree, that’s the right thing to do and the right way to do it.”

The additional money for those who have exhausted their standard 26 weeks of jobless pay has been tied up since the beginning of June but had become a growing point of contention since February when Senator Jim Bunning, Republican of Kentucky, initiated a one-man filibuster against a temporary extension of the safety-net spending.

While Republicans eventually relented and allowed an additional month of unemployment compensation, the party began to coalesce around the position that further extensions should be paid for with offsetting cuts in other spending, leading to the current stalemate.

Most Democrats contend that deficit spending is acceptable — even, in economic terms, necessary — to help not only the jobless but also the economy as a whole. Their argument is that unemployed workers will spend all or nearly all of their benefits on goods and services that help support other jobs.

“At what point do we pivot and start being concerned about our children and our grandchildren?” Senator Mitch McConnell of Kentucky, the Republican leader, said Sunday on CNN. “There is no way in the world on a trillion-dollar budget this year we can’t find the money to pay for an extension of unemployment insurance, something we’re in favor of.”

Besides the support of Carte Goodwin, the West Virginian to be sworn in Tuesday to succeed Mr. Byrd, Democrats are counting on the votes of Senators Susan Collins and Olympia J. Snowe, the two Maine Republicans, to reach the minimum 60 votes needed to overcome the threat of a Republican filibuster.

To ease objections, Democrats have scaled back the unemployment proposal, which originally was to extend through December and included billions of dollars in health insurance subsidies for the unemployed.

In a floor speech Monday, Senator Harry Reid, the Nevada Democrat and majority leader, chastised Republicans for blocking the added unemployment benefits, noting that Republicans had voted before to treat the assistance as emergency spending that could be added to the deficit.

He also accused Republicans of being callous to the unemployed, noting that some Senate Republicans — as well as Senate candidates — have suggested that the added unemployment pay amounts to welfare and is discouraging people from taking jobs when they can rely on the government.

“Many of my constituents take offense at these absurd allegations, and they’ve let me know about it,” Mr. Reid said. “They’ve written or called me or pulled me aside when I see them in Nevada.”

If the Senate is successful in approving the extension, the House will have to vote on the measure before it is sent to the president, but Democrats have sufficient votes there.

The potential impact on Congressional races was evident Monday.

In one case, the Democratic Senatorial Campaign Committee issued a statement noting that Dan Coats, the Republican Senate candidate in Indiana, had backed Republican efforts to block the jobless pay unless it was offset with cuts elsewhere.

“Due to Republican obstructionism, over 48,000 unemployed Hoosiers have already lost their unemployment benefits,” the Democratic statement said.

Republicans fired back, criticizing Representative Brad Ellsworth, the Democratic Senate candidate, for his support of deficit spending on unemployment pay.

“Instead of making the tough economic decisions that every Indiana family and small business face each day, Brad Ellsworth has been sitting in Washington maxing out the government credit card and doing nothing to get more Hoosiers back to work,” said Brian Walsh, a spokesman for the National Republican Senatorial Committee.
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Source: The New York Times

Edward Glaeser’s post from last week has been getting a fair amount of attention. But I think there is some potential for misunderstanding what Mr. Glaeser was actually saying about the stimulus program.

Mr. Glaeser wrote about his analysis of the effect of “per capita Federal Recovery Act funds received in each state.” Depending how one looks at these data, either they show that states receiving more stimulus money had larger increases in unemployment than states that received less money, or they show that there was no relationship. In both cases, the data give reason to wonder if the stimulus program helped the economy.

“I’m not suggesting that spending did or didn’t reduce unemployment,” Mr. Glaeser was careful to note. “I am asserting that we can’t tell anything with any degree of certainty.”

Here’s where the misunderstanding comes in: The term “per capita Federal Recovery Act funds” does not refer to the entire stimulus program. It refers to a relatively small portion of it — the money spent by the federal government on highway projects, other infrastructure programs and the like. As of early June, the government had spent about $61 billion of this money. Another $400 billion of other stimulus money — aid to states, jobless benefits, health-insurance subsidies, tax credits — has also been spent. Mr. Glaeser did not analyze this spending, for some good technical reasons; it would be harder to do so.

Given that, I don’t think his analysis does suggest that the stimulus program may not have worked. It suggests that one part of the stimulus program did not have a noticeable effect on the economy, given how slowly this money has been spent and given everything else going on — the financial crisis, the recession and the hundreds of billions of other stimulus.

When you look at the program as a whole, the picture is not nearly as uncertain. Home buying jumped during the very period when a tax credit for home buying was in effect. The same happened with corporate investment. State spending stabilized in the middle of last year — just as states were hearing about their stimulus awards — even though state revenues were continuing to fall at the time. Consumer spending has risen faster than income growth would suggest, but about as fast as you’d expect given the combination of income growth and stimulus tax cuts.

More broadly, job cuts began shrinking just as the stimulus was going into effect last year, and the stock market began rising shortly after it passed. The stimulus was by no means the only reason, but it appears to have been a significant one.

Based on its economic models, the Congressional Budget Office recently estimated that between 1.4 million and 3.4 million workers who have now jobs would be unemployed if the stimulus hadn’t been enacted. Three of the best-known private economic research firms — IHS Global Insight, Macroeconomic Advisers and Moody’s Economy.com — have come up with similar estimates. The average estimated effect on employment is about 2.5 million jobs.

Nariman Behravesh, IHS Global Insight’s chief economist, has a nice way of summarizing what the bill did (and, to some extent, didn’t) do: “It prevented things from getting much worse than they otherwise would have been. I think everyone would have to acknowledge that’s a good thing.”

Note: I’ve changed my description of Mr. Glaeser’s findings in this earlier post. Yes, I had oversimplified those findings.
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Source: The New York Times