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Bernanke ‘Green Shoots’ May Signal False Spring Amid Job Losses


SnyderShrugged

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April 6 (Bloomberg) -- It will be months before it’s clear whether what Federal Reserve Chairman Ben S. Bernanke calls the U.S. economy’s “green shoots” represent the early onset of recovery, or a false spring.

The Labor Department’s April 3 report that the economy shed an additional 663,000 jobs last month, while the unemployment rate rose to 8.5 percent, will be followed by months more of bad-news headlines, economists say. The recession, now in its 17th month, has already cost 5.1 million Americans their jobs, the worst drop in the postwar era; unemployment may hit 9.4 percent this year, according to the median estimate in a Bloomberg News survey, and may top out above 10 percent in 2010.

The risk is that the jobs picture turns even more bleak than forecast or the drumbeat of bad news still to come causes consumers, whose spending has firmed up in recent months, to hunker down again.

“If something happens to spook consumers and they crawl back into their tortoise shells, that would be terrible news,” says Alan Blinder, former Fed vice chairman and now an economics professor at Princeton University.

Consumer spending, which accounts for more than 70 percent of the economy, rose 0.2 percent in February after climbing 1 percent in January, breaking a six-month string of declines.

“Whether the little wisps of improvement in spending are sustained needs watching,” says Stephen Stanley, chief economist at RBS Securities Inc. in Greenwich, Connecticut.

Interest Rates

Declining interest rates on mortgages and business loans led Bernanke, 55, to tell CBS Corp.’s “60 Minutes” on March 15 that he sees “green shoots” in some financial markets, and that the pace of economic decline “will begin to moderate.”

Fueled by optimism that the economy may finally be stabilizing, the Standard & Poor’s 500 Index last month gained 8.5 percent, the most in seven years. Still, “I would be careful about chasing this rally,” Jason Trennert, chief investment strategist at Strategas Research Partners in New York, said in a March 27 interview.

With the Obama administration borrowing to finance record budget deficits, U.S. debt sales will almost triple this year to a record $2.5 trillion, according to estimates from Goldman Sachs Group Inc.

The borrowings may send 10-year yields as high as 6 percent by the end of 2010 from 2.9 percent on April 4, Trennert says, adding that it’s “hard to get optimistic” about stock prices “if you’re in a situation where it’s reasonable to expect long- term interest rates to be higher.”

Stock-Price Plunge

Another plunge in stock prices is just one of the things economists say might derail any recovery. Others include the disorderly collapse of General Motors Corp., Chrysler LLC or a major financial firm; or the failure of the Obama administration’s bank-rescue plan.

A one-month jump in the jobless rate of more than 0.6 percentage point would be a severe blow to confidence, says Alan Blinder, former Fed vice chairman and now an economics professor at Princeton University. So would monthly job losses that continue to top 600,000 into the second half of the year, says Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania.

Payrolls have been shrinking by more than that every month since December. Losses need to come down below 500,000 in the next few months and drop close to 100,000 by year-end to confirm that the worst of the recession is over, Zandi says.

“If we continue to lose 600,000-plus jobs a month, that will burn out those green shoots pretty quickly,” he says. “If you lose jobs like that, it continues to undermine consumer spending and confidence.”

‘Head Fake’

Joseph LaVorgna, chief U.S. economist at Deutsche Bank AG in New York, says he wouldn’t be surprised to see a first- quarter gain in consumer spending that “may turn out to be a head fake, which isn’t uncommon in a recession.” Spending might turn lower in the current quarter before stabilizing in the second half, he says.

If consumers retrench, “you’d be looking at a very negative scenario again,” says David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York.

Hensley is watching the savings rate, which reached 4.4 percent of disposable income in January after hovering below 1 percent for most of the past four years. Any further surge in savings would indicate that Americans are still avoiding big purchases.

‘Not Enough Income’

“There’s just not enough income in the system to support both an increase in the savings rate and stable consumer spending,” Hensley says.

First-quarter earnings reports from Citigroup Inc. on April 17 and Bank of America Corp. on April 20 will be among early signposts. Those will be followed at the end of the month by the Treasury Department’s “stress tests” of the two firms and other major banks to identify which ones need additional capital.

Citigroup and Bank of America both reported a strong start to the year, and a rally in their shares last week helped send stock indexes to their highest levels since early February. Disappointing quarterly results might quickly reverse those gains.

What’s more, Stanley says, stress tests showing more than a few banks are too frail to continue would trigger wider credit spreads and tighter lending conditions. The so-called TED spread, the gap between what banks and the Treasury pay to borrow for three months, ended last week at 95.5 basis points, close to the low for 2009 of 90 basis points, reached Feb. 10.

Triple the Level

While that’s down from the peak of 463 basis points on Oct. 10, 2008, it’s still triple the level of two years ago, before the recession began.

The Obama administration is also looking for a solution in the next two months to the auto industry’s woes, perhaps through a merger for Chrysler and a quick and orderly bankruptcy filing for General Motors.

The administration has given Chrysler until May 1 to complete a combination with Italy’s Fiat SpA, and GM has until the end of May to “fundamentally restructure.” If they fail to meet the deadlines and one or the other collapses in a disorderly heap, the ripple effects would be felt throughout U.S. manufacturing, causing the loss of another million jobs and pushing unemployment to 11 percent, LaVorgna says.

The outlook for a second-half pickup also depends on the Treasury successfully executing its plan to help banks remove as much as $1 trillion worth of devalued loans and securities from their books so they can start lending again and resuscitate the economy.

“Basically, it’s a confidence story,” says LaVorgna. “The risk is that banks could deteriorate further and prolong the pain.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJa8WNMvKaxg&refer=worldwide

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Everyone is afraid to call the bottom. This is nothing new.

I think there are quite a few signs of recovery out there. No doubt unemployment will probably rise a bit more, as it is a lagging indicator

I still do not believe we will get a long term sustainable recovery unless housing prices fall more, or incomes rise to meet current levels of housing

Or else we will still be on the borrow and consume economy. The ratios still aren't right in terms of being close to 3 to 1, house price to income

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I still do not believe we will get a long term sustainable recovery unless housing prices fall more, or incomes rise to meet current levels of housing

Or else we will still be on the borrow and consume economy. The ratios still aren't right in terms of being close to 3 to 1, house price to income

Housing is still a big concern, no doubt. At a minimum I think it will act as an ankle weight attached to the leg of any recovery.

My guess is from everything I've seen is that this recovery will be a slow one. Much like our plunge into recession was slow, if you look back on it.

...

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I still do not believe we will get a long term sustainable recovery unless housing prices fall more, or incomes rise to meet current levels of housing

Or else we will still be on the borrow and consume economy. The ratios still aren't right in terms of being close to 3 to 1, house price to income

Where are they?

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I don't think housing can fall much more without 60+% of the people being upside down by huge numbers if you bought after 1998.

You are correct. Which puts us in quite the bind here

Cheap credit has essentially been a substitute for higher income and wages

Can't afford the TV? Get the Best Buy credit card

Well of course you can't afford to pay that card off at once. Get another CC from Capital One to pay it off

Gotta pay off the Cap One card. Lets just re-fi the home, pull 30k in cash out, pay off the credit cards

Eventually gotta pay back that re-fi. But you can keep re-fi'ng as long as the housing market is trucking

Wait, housing stopped going up? Uh oh

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I keep asking this (and its highlighted here again), but what does the national debt and/or deficit have to do with economic recovery?

a) You gotta pay it back. Higher taxes :)

B) hyperinflation or worse, stagflation. If the economy is unable to rebound, yet we have all these dollars out there, we'll be suffering like we did in the late 1970s

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B) hyperinflation or worse, stagflation. If the economy is unable to rebound, yet we have all these dollars out there, we'll be suffering like we did in the late 1970s

Keep in mind the very large negative effect that our dried up credit markets have on inflation. Which is why we continue to see deflation even as the government prints money as fast as they can.

Bernanke has said that he (unlike Greenspan) will reel back in the money supply when he sees credit recovering.

*however- I'm not saying there are no risks to running huge debt. The hogging of all that capital by our gov't is definitely a bad thing

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a) You gotta pay it back. Higher taxes :)

B) hyperinflation or worse, stagflation. If the economy is unable to rebound, yet we have all these dollars out there, we'll be suffering like we did in the late 1970s

Can we all agree that government deficit spending had nothing to do with the economic crisis? There is this underlying argument that our government's spending is what led us into this problem. This argument makes it sound like we are at the precipe of how much debt the government can accumulate and Obama is taking us over that cliff. But there really is no evidence to support that we are at that cliff.

Government spending had nothing to do with this crisis. Government lack of regulations may have, but deficit spending had nothing to do with it. They are two totally separate things. If we balanced the budget today, we would not be doing anything to help the current problems we face, per se.

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I keep asking this (and its highlighted here again), but what does the national debt and/or deficit have to do with economic recovery?

1. The percentage of taxes to pay off the debt increases, taxes not used for programs they support.

2. More money is tied up in debt, making the government need to print or borrow more. If printed, can create hyperinflation. If borrowed, owe debt to foreign countries. And that's the potential devastating effect to our currency should they all decided to cash in their dollars creating a currency shock. Or they could simply move elsewhere to find investments devaluing our dollar catastrophically.

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Bernanke has said that he (unlike Greenspan) will reel back in the money supply when he sees credit recovering.

*however- I'm not saying there are no risks to running huge debt. The hogging of all that capital by our gov't is definitely a bad thing

We shall see if helicopter actually does that. If the economy booms at the start of the next decade with all these cheap dollars out there, I don't see him tightening up money

And people do forget Greenspan did tighten up credit in late 1999, early 2000. Remember the whole talk of a "soft landing?" at the end of the Clinton term?

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And people do forget Greenspan did tighten up credit in late 1999, early 2000. Remember the whole talk of a "soft landing?" at the end of the Clinton term?

Yah, Howard Stern took a few sensitivity training courses at one time too

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Can we all agree that government deficit spending had nothing to do with the economic crisis? There is this underlying argument that our government's spending is what led us into this problem. This argument makes it sound like we are at the precipe of how much debt the government can accumulate and Obama is taking us over that cliff. But there really is no evidence to support that we are at that cliff.

Revenue went to interest on debt rather then the program they were appropriated for. Money is then borrowed or printed to cover the appropriation. Sound familiar?

Government spending had nothing to do with this crisis. Government lack of regulations may have, but deficit spending had nothing to do with it. They are two totally separate things. If we balanced the budget today, we would not be doing anything to help the current problems we face, per se.

I disagree. It's all the same culture.

ETA: And to the money supply, we have stopped deflation. Prices aren't going to drop much more, temporarily, because we have now printed more then we've lost during this crisis.

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1. The percentage of taxes to pay off the debt increases, taxes not used for programs they support.

2. More money is tied up in debt, making the government need to print or borrow more. If printed, can create hyperinflation. If borrowed, owe debt to foreign countries. And that's the potential devastating effect to our currency should they all decided to cash in their dollars creating a currency shock. Or they could simply move elsewhere to find investments devaluing our dollar catastrophically.

How pays off the debt is totally up in the air right now... you are assuming that there is going to be an across the board increase in all taxes and its going to hit everyone and harm the economy. Higher taxes does not equal bad for economy, period.

In regards to point 2, as I said, where is the evidence that we are on this precipe of hell in running up government debt? There is none. Its not like if we go up to 10 trillion in debt we will fall apart, but 9 trillion we will be fine.

Ultimately, we can't run deficits every year, but there is this permeating argument that we are right at the point of no return on debt and to keep running deficits would crush us. There's no reason to think that running more debt now is bad for the economy, or vice versa that balancing the government budget now will solve any of our problems. :2cents:

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Revenue went to interest on debt rather then the program they were appropriated for. Money is then borrowed or printed to cover the appropriation. Sound familiar?

I disagree. It's all the same culture.

So, are you worried about higher taxes or about government causing hyper-inflation? You are saying both, that we are going to just print to cover it, and that we are going to have to raise taxes on everyone... which is it?

Its not the same culture either... I don't buy that the government's spending had anything to do with the wall street culture of the last 20 years.

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Ultimately, we can't run deficits every year, but there is this permeating argument that we are right at the point of no return on debt and to keep running deficits would crush us. There's no reason to think that running more debt now is bad for the economy, or vice versa that balancing the government budget now will solve any of our problems. :2cents:

Sure there is. Right now we are over 11 trillion in the hole. The more the national debt goes up, the more money that is needed to allocate for interest spending to finance that debt, which leaves less to spend on vital areas. You know like SSI, medicare and medicaid. And we are doing this, just as those programs are ready to EXPLODE

We still gotta pay for this

challenges31.png

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It makes sense to increase government spending during recessions. It is NOT sustainable I don't think anyone denies that. Government spending has to be cut and taxes have to be increased when the economy recovers. Something has to be done about medicare too...

it's not going to be easy

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It makes sense to increase government spending during recessions. It is NOT sustainable I don't think anyone denies that. Government spending has to be cut and taxes have to be increased when the economy recovers. Something has to be done about medicare too...

it's not going to be easy

Can you name a time, in say the past oh 60 years, that government spending has ever been cut from one year to the next?

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Can you name a time, in say the past oh 60 years, that government spending has ever been cut from one year to the next?

nope, I won't even try

but we have had surpluses which means there is reason to believe we can have more revenue than spending, which is promising

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It makes sense to increase government spending during recessions. It is NOT sustainable I don't think anyone denies that. Government spending has to be cut and taxes have to be increased when the economy recovers. Something has to be done about medicare too...

it's not going to be easy

I'm okay (tickled, even) for the government to leverage heavily during downturns.

What I'm not okay with is the government spiraling up debt during times of economic boom.

Which is why I throw up in my mouth a little bit every time we see a Republican whine about the current government's spending. I seriously want to slap them and tell them to STFU and sit down. They had their chance and failed.

The real story here will be how Obama's administration and this congress handle the debt when the economy starts to get turned around.

.......

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nope, I won't even try

but we have had surpluses which means there is reason to believe we can have more revenue than spending, which is promising

Which leads to another question

How many surpluses did we have that were not social security surpluses during the height of the internet feeding frenzy :)

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The real story here will be how Obama's administration and this congress handle the debt when the economy starts to get turned around.

.......

I think we have seen it. The President's optimistic projections are a 633 billion dollar debt in 4 years. With a recovering economy, and AMT games and cap and trade revenue.

That is higher then the highest Bush deficits until FY 2009

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