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Category: Don Lee

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Fed, more upbeat about economy, leaves monetary policy unchanged

The Federal Reserve, providing a somewhat more upbeat assessment of the economy, on Tuesday kept the benchmark short-term interest rate near zero but did not take any new steps to boost financial markets or the economy.

Top Fed policymakers, at the conclusion of their final scheduled meeting of the year, said the latest data indicate the economy "has been expanding moderately" and "point to some improvement in overall labor market conditions."

However, the Fed again warned that "strains in global financial markets," namely the threat from the European debt crisis, "continue to pose significant downside risks to the economic outlook."

Additionally, policymakers said that although consumer spending was growing, increases in business investments, one of the bright spots of the recovery, appear to be moderating and the housing market remains depressed.  

As expected, the Fed reaffirmed its pledge, first made in August, to maintain the federal funds rate near zero until at least mid-2013. This benchmark rate, which influences many types of loans, has been held at rock-bottom levels since the depths of the recession in December 2008.

Some people on Wall Street were hoping that the central bank would signal its intentions to make additional moves to stimulate the economy in light of the high unemployment rate, 8.6% in November.

As in the last meeting in early November, one Fed official, Charles Evans of the Federal Reserve Bank of Chicago, dissented from Tuesday's decision to stand pat on policy, saying that he thought the central bank should be doing more.

Many analysts believe that Fed Chairman Ben S. Bernanke and his colleagues will soon announce a new communications strategy that would include a forecast for the federal funds rate, possibly along with targets for inflation and unemployment, the Fed's chief economic concerns. By giving more information about its goals and where short-term rates are likely to be further out, the Fed's new communications plan could influence investors' actions and the broader economy.

The Fed’s next policy meeting is scheduled for Jan. 24-25.

-- Don Lee

Economy boosted by narrowing trade deficit

The U.S. economy, which has been picking up steam recently, got another boost from the latest trade numbers.

The Commerce Department said Friday that the nation’s trade deficit in October narrowed to $43.5 billion, the lowest level since December 2010.

The improvement, from an upwardly revised deficit of $44.2 billion in September, was due almost entirely to higher exports and lower imports of petroleum, a volatile category.   

Still, the smaller trade shortfall prompted analysts to mark up their projections for gross domestic product, the broadest measure of economic activity.

Macroeconomic Advisers raised its GDP growth forecast for the quarter by two-tenths of a percent, to an annual rate of 3.7%. That’s a significant pickup from 2% most recently estimated for the third quarter. If such an acceleration could be sustained, it would give a big boost to job creation.

But that’s a very big if.

Some analysts expect the U.S. trade deficit to widen again as oil prices have ticked back up. What’s more, there are hints that American exporters are starting to feel the pinch from Europe’s debt troubles and weakening economy.  While shipments of capital goods continued to grow, the rate of increase has slowed. Europe accounts for about one-fifth of all U.S. exports.

Meanwhile, the recent uptick in American consumer spending could lead to gains of imports in the near future.

Despite worries about the Eurozone debt crisis and the slow growth of jobs in the U.S., consumers are clearly feeling better about the  economy. In the latest sign of that, the early December reading of the University of Michigan consumer sentiment index increased to 67.7, from 64.1 in November, according to a report Friday. It marked the fourth straight month of improvement and was slightly better than what many analysts were expecting.

-- Don Lee

Fed action won't stave off threats to euro or global economy

GetprevThe coordinated action by the Federal Reserve and five other major central banks will help dollar-strapped European banks, but analysts said it doesn’t address the fundamental problems threatening the breakup of the euro and the global economy.

The Fed, with the European Central Bank, the Bank of Japan and three others, jointly announced Wednesday that they would offer cheaper access to dollars in an attempt to quell growing fears of a global funding crunch.

The Fed said the move, which expands on a joint effort by the central banks first announced in September, was intended to "ease strains in financial markets" and mitigate the resulting effects of a credit squeeze for businesses and households.

The announcement gave an immediate huge lift to European markets, and U.S. stocks surged. The euro rose against the dollar.

The markets also got a boost by a separate announcement by the People’s Bank of China, which announced a plan to inject more cash into its economy by lowering bank reserve requirements by half a percentage point. It was Beijing’s first monetary easing in three years and comes amid signs of economic slowing in the world's second-largest economy.

The Fed and other central banks’ action lowers the cost of so-called dollar swap lines by a half-percentage point, a move that would likely increase the flow of cash to European lenders. The new pricing would take effect next Monday.

As the debt crisis has intensified, European banks have seen a dwindling of dollar funding as vital sources such as U.S. money market funds have been reducing their exposure to the continent’s lenders.

“The open market used to be a cheap source of obtaining dollar funding by European banks, but this is becoming more economically unviable,” said Enam Ahmed, senior economist at Moody’s Analytics in London. “Banks are responding by reducing their dollar assets in a bid to raise dollar funds,” which has resulted in increasing evidence that European banks are pulling back from dollar-funded projects around the globe and raising the risk of a credit crunch.

“This action would reduce some of the strains in the global financial system,” he said.

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Central banks join forces to ease debt crisis

The Federal Reserve and five other major central banks joined forces Wednesday to offer European lenders easier access to dollars in an attempt to quell growing fears of a global funding crunch
Reacting to the deepening Eurozone debt crisis, the Federal Reserve and five other major central banks joined forces Wednesday to offer European lenders easier access to dollars in an attempt to quell growing fears of a global funding crunch.

The Fed said its coordinated action with the European Central Bank, the Bank of Japan and three others was intended to "ease strains in financial markets" and mitigate the resulting effects of a credit squeeze for businesses and households.

The announcement gave an immediate lift to European markets, and U.S. stock futures surged.

The action, which follows a similar coordinated move in September, lowers the cost of so-called dollar swap lines to increase the flow of cash to European lenders. The new pricing would take effect next Monday.

Separately, the People's Bank of China announced a plan to inject more cash into its economy by lowering bank reserve requirements by a half a percentage point. It was Beijing’s first monetary easing in three years, and comes amid signs of economic slowing in the world's second-largest economy.

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Americans feel more confident, but should they?

China's central bank cuts reserve ratios to boost sagging economy

--  Don Lee in Washington

Photo: The U.S. Federal Reserve building in Washington. Credit: Bloomberg News

Parent of American Airlines files for bankruptcy

 

The parent company of American Airlines, facing its fourth straight year of operating at a loss, filed for Chapter 11 bankruptcy protection on Tuesday, a move designed to reduce debts and cut labor and other costs.

AMR Corp., which also announced a new chief executive, said it was running normal flight schedules and that reservations, frequent-flier programs and all other operations were conducting business as usual.

AMR said in a release that all of its major rival airlines had restructured their costs and debts through bankruptcy reorganization, giving the company a "very substantial cost disadvantage compared to our larger competitors."

AMR also cited global economic uncertainty, rising fuel costs and increasing competition as factors compounding its troubles. “Our board decided that it was necessary to take this step now to restore the company's profitability, operating flexibility and financial strength," said Thomas W. Horton, AMR's newly appointed chairman and chief executive.

The company said Tuesday that Horton was named chairman and chief executive of both AMR and American Airlines. He replaces AMR Chief Executive Gerard Arpey, who has decided to retire.

In its filing with the U.S. Bankruptcy Court in New York, AMR said it had $24.7 billion in assets and $29.6 billion in debt as of Sept. 30. The company said it has about $4.1 billion in cash and short-term investments to pay its vendors and suppliers.

For the nine months ended Sept. 30, AMR posted a net loss of $884 million, more than double the loss of the prior year's nine-month period.

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 -- Don Lee


New jobless claims continue modest decline

Jobless-blog

The number of workers filing for new unemployment benefits dipped slightly last week, a sign the job market is improving, albeit very slowly.

The Labor Department said Thursday initial jobless claims filed in the week ending Oct. 15 dropped to 403,000 from an upwardly revised 409,000 in the prior week. That’s down from the summer high of more than 430,000, but still far from comforting given that employers haven’t stepped up their hiring much.

Based partly on this latest count of new-jobless claims, Barclays Capital Research said it was now looking for 100,000 net new jobs to be added this month, or about the same as in September. That’s a little less than what’s needed to keep pace with the growth of the working-age population. And that means the unemployment rate will most likely remain stuck at 9.1%.

Diane Swonk, chief economist at Mesirow Financial, observed another trouble spot in the latest labor market indicator: rising ranks of unemployed civilian and military federal workers.

“Those who want smaller government are getting it in droves,” she said in a note to clients. “The problem, especially for returning veterans, is that we don’t seem to have jobs for them when they return home.”

From week to week, the initial jobless claims data can be quite volatile. But averaging the last four weeks and comparing that with prior four-week periods also shows a steadily improving trend since summer. In the latest week, Wisconsin led the states reporting decreasing new-unemployment claims. California, New York and Texas showed the biggest increases in filings.

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Wages of top 1% rise much faster than bottom 90%

Average 30-year mortgage rate remains above 4%, Freddie Mac says

-- Don Lee

Photo: Job seekers line up at the Congressional Black Caucus For the People jobs fair in Los Angeles. Credit: Reuters 

Nobel economics prize won by two American academics

NOBEL
Two American scholars Monday won the Nobel Memorial Prize in Economic Sciences for their separate research examining the cause-and-effect relationships between economic policies, such as tax cuts and interest rate hikes, and the broader economy.

Thomas J. Sargent of New York University and Christopher A. Sims of Princeton University, both 68 years old, will share the $1.5 million award.

In announcing the prize, the last of the Nobel awards announced this year, the Royal Swedish Academy of Sciences said Sims and Sargent's pioneering work in the 1970s and '80s had been adopted by researchers and policymakers throughout the world and helped in understanding how economic shocks and systematic policy shifts affect the economy in the short run and long run.

Sargent and Sims conducted their research independently, and one of the big challenges they faced was the-chicken-or-the-egg problem in economics, that is, whether policy affects the economy or the other way around. Because economics experiments are difficult to perform in the real world, the Nobel committee said "the laureates' foremost contribution has been to show that causal macroeconomic relationships can indeed be analyzed using historical data, even in cases with two-way relationships."

Their work is relevant today as the United States and Europe grapple with anemic growth, high unemployment and budgetary woes in the wake of the recent global financial crisis and recession.

The Nobel committee said analytical methods developed by Sargent and Sims could help answer such questions as: How are gross domestic product and inflation affected by a temporary interest-rate hike or a tax cut? And what happens if a central bank makes a permanent change in its inflation target or a government changes its goals in budget balancing?

Sargent, a native of Pasadena, and Sims, who was born in Washington, D.C., both received their PhD degrees from Harvard University in 1968.

Sims said he was sleeping when he got the call from the Nobel committee early Monday informing him of the award.

"Actually, at first we were called twice and my wife couldn't find the talk button on the phone so we went back to sleep," he said, speaking by phone to a news conference in Stockholm, where the prize was announced.

Last year’s Nobel economics prize went to three researchers, including two Americans, for helping to explain such phenomena as high unemployment.  

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-- Don Lee in Washington

Photo: Christopher Sims, left, and Thomas Sargent are sharing the 2011 Nobel economics prize. Credit: AFP / Getty Images

Economy adds 103,000 jobs but jobless rate remains at 9.1%

Unemployment-blog-sept

Hiring picked up a bit in September as employers added 103,000 jobs over the month, the government said Friday in a report that’s likely to ease fears that the economy is hurtling toward another recession.

But the job growth wasn’t strong enough to lower the unemployment rate, which remained stuck at 9.1% for the third straight month. What’s more, manufacturing payrolls shrank, and government continued its sharp cutbacks.

Still, the latest statistics provided some encouraging signs. The Labor Department said the average workweek for all private-sector workers edged up in September. And statisticians said employers in August added 57,000 jobs, not zero as previously reported, and July’s job count was also revised up to 127,000 from 85,000 initially reported.

Share your story: How has the downturn affected you?

In all, that puts the third quarter’s average monthly job growth at 96,000 jobs -– still not enough to keep up with the population growth and bring down the unemployment rate. Job growth averaged 166,000 a month in the first quarter of this year.

The September jobs were partially inflated by the return to work of striking Verizon workers, just as their temporary absence from their jobs lowered the August job numbers. Apart from that, professional and business services led the industries in job growth by adding 48,000 to their payrolls last month. Healthcare employment rose by 44,000, and the long-declining construction sector added an unexpectedly large 26,000 jobs over the month.

The ranks of the unemployed, however, remained at about 14 million. And about 45% of these workers last month said they had been without jobs for six months or more.

Also, the number of part-time workers who want full-time hours rose sharply over the month, to 9.3 million, from 8.8 million in August. Including these workers and those who have quit looking because they don’t see hope of getting hired, the percent of unemployed and underemployed in the U.S. rose to 16.5% in September, up from 16.2% in the prior month.

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-- Don Lee

Photo: A sign greets job seekers during a job fair at a Goodwiill store in Atlanta. Credit: Associated Press

Fed will revive Operation Twist in hope of stimulating recovery

Fed-blog 

A divided Federal Reserve, trying to do what it can to perk up the dreary economy, announced Wednesday that it would revive a half-century-old scheme intended to make borrowing even cheaper for consumers, businesses and municipalities.

Under the plan, known as Operation Twist, the Fed would sell $400 billion in shorter-term Treasury debt in its portfolio and use the proceeds to buy an equal amount of longer-term bonds by the end of June 2012 –- a shift aimed at pulling down mortgage and other long-term rates to stimulate borrowing and spending.

"This program should put downward pressure on long-term interest rates and help make broader financial conditions more accommodative," the Fed said in a statement issued after an extended two-day meeting in Washington.

The new initiative, announced with a sobering assessment of the economy, was widely expected by investors and analysts, but few think it will do much to speed up job growth or the stalling recovery. And it flies in the face of calls by congressional Republican leaders who took the unusual step of sending a letter Monday to the Fed chairman, Ben S. Bernanke, urging him to avoid further stimulus action.

As many economists see it, the economy’s underlying problem is weak demand. Mortgage rates already are at record lows, and other borrowing costs are relatively cheap. But many corporations remain reluctant to make big investments, concerned about weakening sales and a climate of uncertainty in the global economy and fractious domestic politics. Many smaller businesses are finding it tough to get credit from wary lenders. And with home prices depressed and job growth and incomes stagnant, worried consumers are putting off major buying decisions.

"Really, it’s not a problem interest rates are too high,” said Dean Croushore, an economics professor at the University of Richmond whose own preference was that the Fed stand pat. He noted that research from Bernanke and others showed the original Operation Twist produced very modest results in the early 1960s.

Still, it’s understandable why the central bank would act, Croushore said. “They want to appear to be doing something. They don’t think it’s going to hurt; it could help a little bit, so why not?”

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