Evelyn Reynolds

More stories

  • 125 Shares169 Views

    in Economy

    Fed Officials Fretted Bank Turmoil Could Have Serious Economic Consequences

    Minutes from the Federal Reserve’s March 21-22 meeting showed that officials were grappling with how much more to lift borrowing costs.WASHINGTON — Federal Reserve officials wanted to remain flexible about the path ahead for interest rates, minutes from their March meeting showed, as they weighed a strong labor market and stubbornly high inflation against the risks that recent bank turmoil posed to the economy.Central bankers have spent more than a year waging a battle against the most painful burst of price increases in decades, raising interest rates to slow the economy and to wrestle price increases under control. After lifting their main rate to nearly 5 percent over the past 12 months, policymakers are contemplating when to stop those moves. But that choice has been complicated by recent high-profile bank blowups.Before Silicon Valley Bank failed on March 10 and Signature Bank failed on March 12, sending jitters across the global banking system, Fed officials had been contemplating making several more rate moves in 2023 to bring stubbornly inflation back under control. “Some” had even thought a large half-point rate move might be appropriate at the March 21-22 gathering, the minutes from the meeting showed.But officials adjusted their views after the shock to the banking system, the minutes released on Wednesday made clear. The Fed lifted rates at the March meeting, but only by a quarter point, and officials forecast just one more rate increase this year. Jerome H. Powell, the Fed chair, made it clear during his news conference after the meeting that whether and how much officials adjusted policy going forward would hinge on what happened both to credit conditions and to incoming economic data.At the meeting, “several participants emphasized the need to retain flexibility and optionality in determining the appropriate stance of monetary policy given the highly uncertain economic outlook,” the minutes showed.Officials on the policy-setting Federal Open Market Committee thought that “inflation remained much too high and that the labor market remained tight,” on one hand, but that they would also need to watch for signs that the bank issues had curbed bank lending and business and consumer confidence enough to meaningfully slow the economy.They said it would be “particularly important” to watch data on credit and financial conditions, which signal how difficult and expensive it is to borrow or raise money, the minutes showed.In the weeks since the meeting, early signs that lenders are becoming more cautious have begun to surface, but it is still too soon to tell exactly how much credit rates and availability will adjust in response to the turmoil.Fed staff projected that the bank tumult would even spur a “mild” recession later this year. “Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year with a recovery over the subsequent two years,” the minutes showed.At the same time, the latest data have suggested that inflation is slowing — though it remains abnormally rapid. A closely watched measure of consumer prices climbed 5 percent in March, down from 6 percent the previous month, as cheaper gas and flat food prices brought relief to consumers. But after stripping out food and fuel costs to get a sense of underlying trends, the “core” inflation index ticked up slightly on an annual basis to 5.6 percent.The current inflation rate is slower than the roughly 9 percent peak reached last summer, but it remains far faster than the rate that was normal before the pandemic and is still notably too quick for comfort. The Fed aims for 2 percent inflation on average over time, defining that goal using a separate inflation measure that is released at more of a delay.Financial markets barely budged in the immediate aftermath of the minutes’ release. From stocks to bonds to the U.S. dollar, the earlier inflation data had proved more consequential, suggesting that the minutes presented few surprises that notably moved the needle for investors.Fed officials — including Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, and Thomas Barkin, president of the Federal Reserve Bank of Richmond — suggested on Wednesday that the latest consumer price figures were encouraging but not decisive.“It was pretty much as expected,” Mr. Barkin said on CNBC. Ms. Daly said during an event in Salt Lake City that the report was “good news,” but noted that inflation was still elevated.The Fed’s next rate decision is set for release on May 3.Joe Rennison More

  • 225 Shares169 Views

    in Economy

    Inflation rises just 0.1% in March and 5% from a year ago as Fed rate hikes take hold

    The consumer price index rose 0.1% in March and 5% from a year ago, below estimates.
    Excluding food and energy, core CPI accelerated 0.4% and 5.6%, both as expected.
    Energy costs fell and food prices were flat. Used vehicle prices also declined.
    A 0.6% increase in shelter costs was the smallest gain since November, but still resulted in prices rising 8.2% on an annual basis.

    Inflation cooled in March as the Federal Reserve’s interest rate increases showed more impact, the Labor Department reported Wednesday.
    The consumer price index, a widely followed measure of the costs for goods and services in the U.S. economy, rose 0.1% for the month against a Dow Jones estimate for 0.2%, and 5% from a year ago versus the estimate of 5.1%.

    Excluding food and energy, core CPI increased 0.4% and 5.6% on an annual basis, both as expected.

    The data showed that while inflation is still well above where the Fed feels comfortable, it is at least showing continuing signs of decelerating. Policymakers target inflation around 2% as a healthy and sustainable growth level. The headline increase for CPI was the smallest since June 2021.
    A 3.5% drop in energy costs and an unchanged food index helped keep headline inflation in check. Food at home fell 0.3%, the first drop since September 2020, though it is still up 8.4% from a year ago. Egg prices, which had been soaring, tumbled 10.9% for the month, putting the 12-month increase at 36%.
    A 0.6% increase in shelter costs was the smallest gain since November, but still resulted in prices rising 8.2% on an annual basis. Shelter makes up about one-third of the weighting in the CPI and is being watched closely by Fed officials.
    Stock market futures rose sharply while Treasury yields fell following the report. Markets were still pricing in a 65% chance of a final 0.25 percentage point interest rate increase at the Fed’s May meeting, though that was slightly lower than Tuesday, according to the CME Group.

    Excluding shelter, CPI rose 3.4% from a year ago, according to Jeffrey Roach, chief U.S. economist at LPL Financial.
    “As the economy slows, consumer prices will decelerate further and should bring inflation closer to the Fed’s long-run target of 2%,” Roach said. “Markets will likely react favorably to this report as investors gain more confidence that the next Fed meeting may be the last meeting when the Committee raises the fed funds target rate.”
    Used vehicle prices, a major contributor to the initial inflation surge in 2021, declined another 0.9% in March and are now down 11.2% year over year. Medical care services costs also fell 0.5% for the month.
    Over the past year or so, the Fed has raised its benchmark interest rate nine times for a total of 4.75 percentage points, the fastest pace of tightening since the early 1980s. Officials initially dismissed inflation as transitory, expecting it to fall as pandemic-related factors dissipated, but were forced to play catch-up as price increases proved more durable.
    One key area the central bank has targeted is the labor market. A shortage of workers had helped push up wages and prices, a situation that has eased somewhat in recent months.
    In March, nonfarm payrolls increased by 236,000, the smallest gain since December 2020, and average hourly earnings rose at a 4.2% annual pace, the lowest level since June 2021.
    The Fed is hoping it can calibrate policy so that the slowdown it is trying to engineer in the labor market doesn’t tip the economy into recession. Gross domestic product growth is tracking at a 2.2% annualized pace in the first quarter, according to Atlanta Fed data, though many economists expect a contraction to come later in the year. More

  • 125 Shares149 Views

    in Economy

    Why Ron DeSantis Is Taking Aim at the Federal Reserve

    Florida’s governor has been blasting Jerome H. Powell, the Fed chair, while spreading misinformation about central bank digital currency.WASHINGTON — Gov. Ron DeSantis of Florida, who is preparing to take a widely anticipated leap into a 2024 presidential campaign, appears to have discovered something that populists throughout history have found to be true: Bashing the Federal Reserve is good politics.Mr. DeSantis has begun to criticize Jerome H. Powell, the Fed chair, in speeches and news conferences. He has alleged without evidence that the Biden administration is about to introduce a central bank digital currency — which neither the White House nor the politically independent Fed has decided to do — in a bid to surveil Americans and control their spending on gas. He has quoted the Fed’s Twitter posts disparagingly.His critiques echo a familiar playbook from the Trump administration. Former President Donald J. Trump often blasted the central bank during the 2016 campaign and while he was in office, as policymakers lifted interest rates and slowed economic growth. Mr. Trump at one point called Mr. Powell — his own pick for Fed chair — an “enemy,” comparing him to President Xi Jinping of China.Because the central bank is responsible for controlling inflation, it is often blamed both for periods of rapid price increases and for the economic damage it inflicts when it raises rates to bring that inflation under control. That can make it an easy political target.And populist skepticism of government control of money dates back centuries in America. The nation’s first and second attempts at creating a central bank failed partly because of such concerns. The Fed, set up in 1913, was designed as a decentralized institution with quasi-private branches dotted around the country in part to avoid concentrating too much power in one place. It has been the subject of conspiracy theories and political attacks ever since.“In many ways, it is not surprising at all,” said Sarah Binder, a political scientist at George Washington University who has studied politics and the Fed. Mr. DeSantis is placing himself to Mr. Trump’s right, she said, “and it sounds like many populist right-side critiques of the Fed, of monetary control, that we’ve heard throughout history.”Mr. Powell has stated that the Fed “would not proceed” on a digital currency “without support from Congress.”T.J. Kirkpatrick for The New York TimesWhile Mr. DeSantis’s Fed-bashing is not new, some of his remarks have strayed into misinformation, said Peter Conti-Brown, a lawyer and Fed historian at the University of Pennsylvania.“The Fed can and should take this seriously,” Mr. Conti-Brown said.While the Fed is independent of and largely insulated from the White House, it does ultimately answer to Congress. And a lack of popular support could curb the Fed’s room to maneuver: If the government decided that pursuing a digital currency was a good idea, for instance, the backlash could make it more difficult to do so.Mr. DeSantis’s tone could also offer hints about the future. Starting from the early 1990s, presidential administrations have largely respected the Fed’s independence, avoiding commenting on monetary policy. Mr. Trump upended that tradition. President Biden has returned to a hands-off approach, but the recent criticism offers an early hint that the détente may not last if a Republican wins in 2024.Mr. DeSantis has faulted Mr. Powell’s policies for failing to control inflation, recently calling the Fed chair a “complete disaster.”In Mr. Powell, the potential presidential candidate has a rare opportunity to criticize Mr. Trump and Mr. Biden simultaneously: The Fed leader was first nominated to the central bank by President Barack Obama, then made chair by Mr. Trump and renominated as chair by Mr. Biden.Mr. DeSantis has focused much of his attention on a central bank digital currency, or C.B.D.C., which would operate like electronic cash but with backing from the federal government. The Fed has been researching both the potential uses and technical feasibility of a digital currency, but has not yet decided to issue one. Mr. Powell has made clear that the Fed “would not proceed with this without support from Congress.”The digital money that Americans use today — whether they are swiping a credit card or completing a Venmo transaction — is issued by banks. Physical cash, by contrast, comes directly from the Fed. A central bank digital currency would effectively be the digital version of a dollar bill.Many people who think the Fed should seriously consider issuing a central bank digital currency suggest that it could help improve access to banking services. Some have argued that it is important to develop the technology: America’s global competitors, including China, are researching and issuing digital money, so there is a risk of falling behind.Yet critics have worried about the privacy concerns of a centralized digital dollar. And the dollar is the most important reserve currency in the world, so any technological issues with a digital offering could be catastrophic. That is why the Fed has pledged to proceed carefully — and why the idea of issuing a digital currency in America is only in its formative research stages.Though there is no plan to issue a digital currency, Mr. DeSantis on March 20 proposed state legislation to “protect Floridians from the Biden administration’s weaponization of the financial sector through a central bank digital currency.”He then warned during an April 1 speech, with no factual basis, that Democrats wanted to use a digital currency to “impose an E.S.G. agenda,” referring to environmental and social goals like curbing consumption of fossil fuels or tightening gun control.Mr. DeSantis “is heading off any attempt to control people’s behavior through centralized digital currency,” his press secretary, Bryan Griffin, said in response to a request for comment.Mr. DeSantis’s claims echo those on right-wing social media, and they are in line with the interests of important Republican donors: Many banks and cryptocurrency firms are adamantly opposed to the idea of a central bank digital currency, worried that it would take away business.Florida, in particular, has been friendly to the digital currency industry, with lawmakers passing favorable legislation.And people with stakes in cryptocurrency are among Mr. DeSantis’s top political donors. Kenneth Griffin, the billionaire hedge fund executive and crypto skeptic turned advocate, gave $5 million to a political action committee that supported Mr. DeSantis’s 2022 re-election. Paul Tudor Jones, a billionaire investor who had significant shares in the now-bankrupt crypto trading platform FTX, contributed $850,000 to the group, according to campaign finance filings.Nor is it just Mr. DeSantis who is expressing opposition to the idea of a central bank digital currency: Prominent Republicans like Senator Ted Cruz of Texas and Representative Marjorie Taylor Greene of Georgia have joined in.Mr. Cruz and Representative Tom Emmer of Minnesota, the Republican whip, have introduced legislation to block the Fed from creating such a currency. Gov. Kristi Noem of South Dakota, another potential Republican presidential contender in 2024, recently vetoed a state bill that she claimed would have opened the door for a C.B.D.C.Some political figures are also incorrectly conflating a possible central bank digital currency with the central bank’s FedNow initiative, a separate effort to modernize America’s payment system to make transactions quicker and more efficient. A Fed spokesperson underlined that FedNow and the research into a possible digital currency were entirely different.Robert F. Kennedy Jr., a prominent figure in the anti-vaccine movement who recently announced his intention to run for president as a Democrat in 2024, wrongly conflated FedNow and the digital currency, claiming that it would “grease the slippery slope to financial slavery and political tyranny.”Tulsi Gabbard, a former Democratic presidential candidate and representative from Hawaii who is now independent, echoed warnings that a digital currency would undermine freedom, incorrectly stating that the government “has just begun implementing” such a currency.Incorrect statements about FedNow and digital currency have proliferated on social media, spread by influential political figures as well as conspiracy theorists.The Fed has tried to push back on the swirling misinformation.“The FedNow Service is neither a form of currency nor a step toward eliminating any form of payment, including cash,” the central bank posted on Twitter on Friday. Its six-tweet F.A.Q. made no mention of politics, but nevertheless read like a rare public rebuke from an institution that diligently avoids wading into political commentary.“The Federal Reserve has made no decision on issuing a central bank digital currency (CBDC) & would not do so without clear support from Congress and executive branch, ideally in the form of a specific authorizing law,” the Fed said — in a tweet that Mr. DeSantis quoted.“It is not merely ‘ideal’ that major changes in policy receive specific authorization from Congress,” Mr. DeSantis said in a reply.By Tuesday afternoon, the Fed had updated its F.A.Q. online to be even more explicit: The central bank “would only proceed with the issuance of a CBDC with an authorizing law.” More

  • 100 Shares109 Views

    in Economy

    IMF Lowers Growth Outlook Amid Financial System Tremors

    The International Monetary Fund says a painful slowdown, which could include a recession, has become a bigger risk for the global economy.WASHINGTON — The world economy faces the increasing risk of a painful slowdown amid worries about the global banking system and concerns that rising interest rates could force banks to curtail lending, the International Monetary Fund said on Tuesday.The warning follows weeks of turmoil in the global banking sector, which included two bank failures in the United States and UBS’s takeover of Credit Suisse, brokered by the Swiss government. Fears that bank runs would ripple through the financial system have abated in recent weeks, but concerns that additional bank failures and tightening lending standards could slow economic output around the world remain.In its latest World Economic Outlook report, the I.M.F. made a slight reduction to its growth forecast for 2023, lowering it to 2.8 percent, from 2.9 percent in January. Growth for the year is expected to be much slower than the I.M.F. predicted a year ago, when it projected output of 3.4 percent.Growth projections for Japan, Germany and India were all lowered since the start of the year, when the I.M.F. said a global recession would most likely be avoided.The I.M.F. and the World Bank have both raised alarms in recent weeks that the global economy is facing a period of extended stagnation. The I.M.F. expects growth to hover around 3 percent for the next five years, which is its weakest medium-term growth forecast since 1990.On Tuesday, the I.M.F. expressed optimism that a financial crisis could be averted, but it lamented that inflation was still elevated and that the global economy remained fragile, facing a “rocky” road ahead. It suggested that a so-called hard landing, which could entail economies around the world tipping into recession, was increasingly plausible.“A hard landing — particularly for advanced economies — has become a much larger risk,” the I.M.F. report said, adding, “The fog around the world economic outlook has thickened.”Pierre-Olivier Gourinchas, the I.M.F.’s chief economist, said hopes for stronger growth hinged partly on China’s reopening after strict Covid-19 regulations.How Hwee Young/EPA, via ShutterstockThe dimmer forecast comes as top economic officials from around the world are convening in Washington this week for the spring meetings of the I.M.F. and World Bank. The gathering is taking place at a moment of high uncertainty, with Russia’s war in Ukraine grinding on, prices around the world remaining stubbornly high and debt burdens in developing countries raising unease about the possibility of defaults.Treasury Secretary Janet L. Yellen is expected to meet with other international regulators this week to assess the state of the global financial system. On Tuesday, she expressed confidence in the U.S. banking system and the health of the economy, explaining that she continues to believe that the outlook is brighter than what many economists predicted last fall.“Here at home, the U.S. banking system remains sound, with strong capital and liquidity positions,” Ms. Yellen said during a news conference. “The global financial system also remains resilient due to the significant reforms that nations took after the financial crisis.”Ms. Yellen said she remained “vigilant” to the risks facing the economy, pointing to recent pressures on banking systems in the United States and Europe and the potential for more fallout from Russia’s war in Ukraine. She is not currently seeing evidence that credit is contracting, she added, but acknowledged that it was a possibility.“I’m not anticipating a downturn in the economy, although, of course, that remains a risk,” Ms. Yellen said.Treasury Secretary Janet Yellen expressed confidence on Tuesday in the strength of the U.S. economy but acknowledged that a downturn remained possible.Yuri Gripas for The New York TimesThe I.M.F. made a small upgrade to its projection for U.S. output, which is now expected to be 1.6 percent for 2023.Economists are still working to assess what effects the bank failures might have on the broader U.S. economy. Analysts at Goldman Sachs wrote in a research note this week that bank stress could reduce lending by as much as six percentage points and that small businesses, which rely heavily on small and midsize banks, could bear the brunt of tighter lending.The I.M.F. attributed the strain on the financial sector to banks with business models that relied heavily on a continuation of low interest rates and failed to adjust to the rapid pace of increases in the last year. Although it appears that the turbulence in the banking sector might be contained, the I.M.F. noted that investors and depositors remained highly sensitive to developments in the banking sector.Unrealized losses at banks could lead to a “plausible scenario” of additional shocks that could have a “potentially significant impact on the global economy” if credit conditions tighten further and businesses and households have an even harder time borrowing.“The risks are again heavily weighted to the downside and in large part because of the financial turmoil of the last month and a half,” Pierre-Olivier Gourinchas, the I.M.F.’s chief economist, said at a briefing ahead of the report’s release.In the most severe scenario, in which global credit conditions tighten sharply, the I.M.F. projected that global growth could slow to 1 percent this year.Mr. Gourinchas noted that the financial system was not the only cloud hanging over the global economy. Hopes for stronger growth have been hinging on China’s reopening after strict pandemic regulations, and changes to that policy could slow output and disrupt international commerce, he said. At the same time, Russia’s war in Ukraine continues to threaten the reliability of food and energy supply chains.Last month, the I.M.F. approved a $15.6 billion loan package for Ukraine, the first such financing program for a country involved in a major war.Emile Ducke for The New York TimesThe I.M.F. has been playing a leading role in trying to stabilize the Ukrainian economy, and last month it approved a $15.6 billion loan package for Ukraine, the first such financing program for a country involved in a major war. But despite the efforts by Western nations to buttress Ukraine and weaken Russia, the I.M.F. raised its outlook for the Russian economy, projecting it will grow 0.7 percent this year and 1.3 percent in 2024.The I.M.F. noted that Russia’s energy exports continued to be robust, allowing it to support its economy through government spending. The impact of efforts by the United States and Europe to cap the price of Russian oil at $60 a barrel remains unclear because global oil prices have been falling amid recession fears. I.M.F. officials said that because of lower oil prices, Russian oil was no longer trading at as much of a discount and that Russia had been successful at finding ways to circumvent the price cap.Even as it underscored the risks facing the global economy, the I.M.F. urged central banks to maintain their efforts to contain prices while standing ready to stabilize the financial system, noting that inflation is still too elevated relative to their targets.Despite the I.M.F.’s warnings about a hard landing, Ms. Yellen sought to open this week’s meetings with a note of optimism. She pointed to signs that inflation is diminishing and the resilience of the financial system as reasons for hope.“I wouldn’t overdo the negativism about the global economy,” Ms. Yellen said. “I think we should be more positive.”She added: “I think the outlook is reasonably bright.” More

  • 138 Shares199 Views

    in Economy

    California Economy Is on Edge After Tech Layoffs and Studio Cutbacks

    As recession fears persist, the troubles in major industries have hurt tax revenues, turning the state’s $100 billion surplus into a deficit.California has often been at the country’s economic forefront. Now, as fears of a national recession continue to nag, the state is hoping not to lead the way there.While the California economy maintains its powerhouse status, outranking even those of most countries, the state’s most-powerful sectors — including tech companies and supply chain logistics — have struggled to keep their footing, pummeled by high interest rates, investor skittishness, labor strife and other turmoil.Even the weather hasn’t cooperated. Severe flooding throughout much of the winter, caused by atmospheric rivers, has left farming communities in the Central Valley devastated, causing hundreds of millions of dollars in crop losses.Thousands of Californians have been laid off in the last few months, the cost of living is increasingly astronomical, and Gov. Gavin Newsom revealed in January that the state faced a $22.5 billion deficit in the 2023-24 fiscal year — a plummet from the $100 billion surplus a year ago.“It’s an EKG,” Mr. Newsom said at the time, comparing a graph of the state’s revenue to the sharp spikes and drops of the heart’s electrical activity. “That sums up California’s tax structure. It sums up the boom-bust.”The structure, which relies in large part on taxing the incomes of the wealthiest Californians, often translates into dips when Silicon Valley and Wall Street are uneasy, as they are now. Alphabet, the parent company of Google, one of the state’s most prominent corporations, said in January that it was cutting 12,000 workers worldwide, and Silicon Valley Bank, a key lender to tech start-ups, collapsed last month, sending the federal government scrambling to limit the fallout.This has coincided with a drop in venture capital funding as rising interest rates and recession fears have led investors to become more risk-averse. That money, which declined 36 percent globally from 2021 to 2022, according to the management consulting firm Bain & Company, is critical to Silicon Valley’s ability to create jobs.“The tech sector is the workhorse of the state’s economy, it’s the backbone,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University. “These are high earners who might not be able to carry the state as much as they did in the past.”Gov. Gavin Newsom, center, said in January that the state faced a $22.5 billion deficit in the 2023-24 fiscal year, after a $100 billion surplus a year ago.Lipo Ching/EPA, via ShutterstockEntertainment, another pillar of California’s economy, has also been in retreat as studios adjust to new viewing habits. Disney, based in Burbank, announced in February that it would eliminate 7,000 jobs worldwide.In California alone, employment in the information sector, a category that includes technology and entertainment workers, declined by more than 16,000 from November to February, according to the latest Bureau of Labor Statistics data, which predates a recent wave of job cuts in March.A recent survey from the nonpartisan Public Policy Institute of California found widespread pessimism about the economy. Two-thirds of respondents said they expected bad economic times for the state in the next year, and a solid majority — 62 percent — said they felt the state was already in a recession.When Mr. Newsom announced the deficit earlier in the year, he vowed not to dip into the state’s $37 billion in reserves, and instead called for pauses in funding for child care and reduced funding for climate change initiatives. Joe Stephenshaw, director of the California Department of Finance, said in an interview that he and top economists had begun to spot points of concern — persistent inflation, higher interest rates and a turbulent stock market — on the state’s horizon during the second half of last year.“Those risks became realities,” said Mr. Stephenshaw, an appointee of the governor.He acknowledged that the problem was driven largely by declines in high earners’ incomes, including from market-based compensation, such as stock options and bonus payments. As activity slowed, he said, interest rates rose and stock prices fell.But the state’s problems aren’t limited to the tech industry.Cargo processing at the Port of Los Angeles in February was down 43 percent from the year before.Alex Welsh for The New York TimesCalifornia’s robust supply chain, which drives nearly a third of the state’s economy, has continued to buckle under stresses from the pandemic and an ongoing labor fight between longshoremen and port operators up and down the West Coast, which has prompted many shipping companies to rely instead on ports along the Gulf and East Coasts. Cargo processing at the Port of Los Angeles, a key entry point for shipments from Asia, was down 43 percent in February, compared with the year before.“The longer it drags on, the more cargo will be diverted,” said Geraldine Knatz, a professor of the practice of policy and engineering at the University of Southern California, who was executive director of the Port of Los Angeles from 2006 to 2014. Still, wherever the economic cycle is leading, California heads into it with some strengths. Although unemployment in February, at 4.3 percent, was higher than in most states, it was lower than the rate a year earlier. In the San Francisco and San Jose metropolitan areas, unemployment was below 3.5 percent, better than the national average.Over decades, California’s economy has historically seen the highest of highs and the lowest of lows, part of the state’s boom-bust history. During the recession of the early 1990s, largely driven by cuts to aerospace after the end of the Cold War, California was hit much harder than other parts of the country.Zeeshan Haque is looking for a job after losing his position as a software engineer at Google. “It’s just very competitive at this time because of so many layoffs,” he said.Mark Abramson for The New York TimesIn March, the U.C.L.A. Anderson Forecast, which provides economic analysis, released projections for both the nation and California, pointing to two possible scenarios — one in which a recession is avoided and another in which it occurs toward the end of this year.“Even in our recession scenario we have a mild recession,” said Jerry Nickelsburg, director of the Anderson Forecast.Regardless of which scenario pans out, California’s economy is likely to be better off than the national one, according to the report, which cited increased demand for software and defense goods, areas in which California is a leader. Mr. Nickelsburg also said the state’s rainy-day fund was healthy enough to withstand the decline in tax revenues. But that shortfall could complicate the speed at which Mr. Newsom can carry out some of his ambitious, progressive policies. In announcing the deficit, Mr. Newsom scaled back funding for climate proposals to $48 billion, from $54 billion.The fiscal outlook also casts a cloud over progressive proposals, widely supported by Democrats, who have a supermajority in the Legislature.A state panel that has been debating reparations for Black Californians is set to release its final report by midyear. Economists have projected that reparations could cost $800 billion to compensate for overpolicing, housing discrimination and disproportionate incarceration rates. Once the panel releases its report, it will be up to lawmakers in Sacramento to decide how much state revenue would support reparations — a concept that Mr. Newsom has endorsed.Through all this, one thing has remained constant: Many Californians say their biggest economic concern is housing costs.The median value for a single-family home in California is about $719,000 — up nearly 1 percent from last year, according to Zillow — and recent census data shows that some of the state’s biggest metro areas, including Los Angeles and San Francisco Counties, have continued to shrink. (In Texas, where many Californians have relocated, the median home value is about $289,000.)Still, some Californians remain optimistic.Zeeshan Haque, a former software engineer at Google, learned in January that he was being laid off. His last day was March 31.“It was out of nowhere and very abrupt,” said Mr. Haque, 32, who recently moved from the Bay Area to Los Angeles.He bought a $740,000 house in the city’s Chatsworth neighborhood in February and spent time focusing on renovations. But in recent weeks, he has begun to look for a new job. He recently updated his LinkedIn avatar to show the hashtag #opentowork and said he hoped to land a new job soon.“It’s just very competitive at this time because of so many layoffs,” he said.Ben Casselman More

  • 113 Shares179 Views

    in Economy

    Bank Turmoil Squeezes Borrowers, Raising Fears of a Slowdown

    Economists are watching for the aftereffects of recent bank collapses across many industries. How bad could it get?Sarah Puil needs to buy $500,000 to $1 million of premium wine and other inventory by the end of the year to make into the specialty blends that her company sells and ships to customers around the country. But after the collapse of Silicon Valley Bank started a chain reaction that is causing many types of funding to dry up, she is not sure where she is going to get the cash.Boxt, her three-year-old purveyor of upscale boxed wine, is at a vulnerable stage in which access to credit is crucial to its growth and ability to keep producing its red, white and rosé offerings.As banks and other investors retrench because of the turmoil, Ms. Puil and fellow entrepreneurs are finding that borrowing and raising money are more difficult and expensive.“It’s all we’re talking about,” she said. The demise of the bank, a major lender to the tech and wine industries, “accelerated the tightening of venture capital — that’s the big thing,” she said.Boxt’s worries offer a hint of the economic fallout facing borrowers across the country as credit becomes harder to get. It is too soon to say how much the banking tumult could slow the economy, but early evidence points to increased caution among banks and investors.Taking out big mortgages is getting harder, industry experts report. The commercial real estate industry is bracing for trouble as the midsize banks that service it become more cautious and less willing to lend. Used car loans are more expensive. And a recent survey by the Federal Reserve Bank of Dallas showed a sizable share of banks in the region reporting stricter credit standards.The question now is whether banks and other lenders will pull back so much that the U.S. economy crashes into a severe recession. Until comprehensive data is released — a Federal Reserve survey of loan officers nationwide is due in early May — economists are parsing stories from small businesses, mortgage originators and construction firms to get a sense of the scale of the disruption. Interviews with more than a dozen experts across a variety of industries suggested that the effects are beginning to take hold and could intensify.“People are for the first time in some time using the ‘c’ words: credit crunch,” said Anirban Basu, chief economist at Associated Builders and Contractors, a trade association. “What I’m hearing — and what I’m beginning to hear from contractors — is that credit is beginning to tighten.”Silicon Valley Bank’s collapse on March 10 sent shock waves across the banking world: Signature Bank failed on March 12, First Republic required a $30 billion cash injection from other banks on March 16 and, in Europe, Credit Suisse was sold to its biggest rival in a hastily brokered deal on March 19.The situation seems to have stabilized, but depositors have continued to drain cash from bank accounts and put it into money market funds and other investments. Early Fed data on the banking system, released each Friday, has suggested that commercial and industrial lending and real estate lending both declined meaningfully through late March.When banks lose deposits, they lose a source of cheap funding. That can make them less willing and able to extend loans. The threat of future turmoil can also make banks more cautious.When lending becomes more difficult and expensive, fewer businesses expand, more projects fail and hiring slows — laying the groundwork for a broader economic slowdown.Bags of a rosé wine blend. Boxt’s worries about its access to credit offer a hint of the economic fallout facing borrowers.Tamir Kalifa for The New York TimesThat sequence is why officials at the Fed believe the recent upheaval will cause at least some damage to the economy, though nobody is sure how much.Any slowdown will intensify conditions that were already getting tougher for borrowers. The Fed has been raising interest rates for the past year, making money more expensive to borrow, and labor market data released on Friday offered the latest evidence that demand is beginning to slow enough to cool the economy, weighing on hiring and wage gains.Still, many Fed officials had come into March anticipating that they might lift rates a few more times in 2023 until inflation comes under control. Now, the banking fallout may restrain the economy enough to make further moves less urgent, or even unnecessary.“It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond,” Jerome H. Powell, the Fed chair, said at a news conference last month.Aftershocks are already surfacing. Commercial real estate borrowers rely heavily on midsize regional banks, which have been particularly hard-hit by the turbulence. Those banks were already become pickier as interest rate increases bit, said Stephen Buschbom, research director at Trepp, a commercial real estate research firm. Anecdotally, Silicon Valley Bank’s blowup is making it worse.“It’s not easy to get a loan commitment is the bottom line,” Mr. Buschbom said.Tougher credit could bedevil a sector that was already suffering: Office real estate has struggled in the pandemic as many city workers have eschewed their desks. Mr. Buschbom says he thinks many borrowers will struggle to renew their loans, forcing some into what’s known as special servicing, where they pay interest but not principal. And as distress trickles through the industry, it could worsen the pain for midsize banks.The problems could mean less business for contractors like Brett McMahon, chief executive of the concrete construction firm Miller & Long in Bethesda, Md.“I don’t think it’s 2008, 2009 — that was such an extraordinarily severe event,” Mr. McMahon said. But he thinks the bank blowups are going to intensify the tightening of credit. He’s being cautious, trying to eke more time out of aging machines. He expects to pause hiring by the end of the year.“Most contractors will tell you that 2023 looks decent,” he said. “But 2024: Who the hell knows?”When it comes to the residential real estate market, jumbo loans — those above about $700,000 or $1 million, depending on the market — were already becoming more expensive. Now, Michael Fratantoni, the chief economist at the Mortgage Bankers Association, has been hearing from bankers that deposit outflows in the wake of Silicon Valley Bank’s demise mean banks have less room to create and hold such loans.Ali Mafi, a Redfin real estate agent, has noticed big banks tightening their standards a bit for borrowers in San Francisco. It’s nothing like the 2008 financial crisis, but over the past few weeks, they have begun asking that would-be borrowers keep a couple of more months of mortgage payments in their bank accounts.Still, he hopes the fallout will not be extreme: Some mortgage rates have eased as investors anticipate fewer Fed rate moves, which is combining with higher stock prices and a drop in local house prices to counteract some of the banking issues.Auto loan interest rates have risen sharply, based on credit application data from March analyzed by Cox Automotive. Borrowing costs for used cars rose more than three-quarters of a percentage point in a month, said Jonathan Smoke, Cox’s chief economist. New car loans also became more expensive, though not as significantly.“The auto market is going to have some challenges,” Mr. Smoke said. But there’s a silver lining: “We haven’t seen appreciable declines in approval rates.”Ms. Puil, right, joined other senior company executives in preparing the packaging for wine shipments at Boxt’s fulfillment center in Austin, Texas.Tamir Kalifa for The New York TimesThere are also reasons for hope in the wine industry. Winemakers have been on “tenterhooks” since Silicon Valley Bank’s collapse, said Douglas MacKenzie, a partner at the consulting firm Kearney, partly because many big banks “don’t know the difference between a $100 case of sauvignon and a $2,000 case” when it comes to valuing collateral that can be “quite liquid, no pun intended.”But he noted that the Bank of Marin, a regional lender, had been running ads in trade magazines saying it was open to new customers. There is also interest in the private equity industry, with which he works.And Ms. Puil at Boxt is determined to get through the crunch.“I’m going to find that money,” she said. Failing because of a lack of credit “can’t be how this story ends.” More

  • 188 Shares189 Views

    in Economy

    Outlook for credit access hits record low while inflation expectations jump, NY Fed survey shows

    Respondents to a New York Fed survey expect prices to rise by half a percentage point in the year ahead, equating to a 4.75% annual gain.
    Those reporting that credit is much or somewhat harder to get than a year ago rose to 58.2%, the highest ever in a data series that goes back to June 2013.
    Consumers expect gas prices to rise by 4.6% in the year ahead and see food prices up 5.9%.

    A customer shops for eggs at a H-E-B grocery store on February 08, 2023 in Austin, Texas. Wholesale egg prices have begun declining more than 50% since December record highs according to Urner Barry data.
    Brandon Bell | Getty Images News | Getty Images

    Consumers are getting more pessimistic about inflation and their access to credit, according to the results of a monthly survey the New York Federal Reserve released Monday.
    Respondents expect prices to rise by half a percentage point in the year ahead, equating to a 4.7% annual gain, the central bank branch’s Survey of Consumer Expectations for March showed.

    That’s the first time the near-term outlook increased since October and runs counter to the narrative from Fed officials that they expect inflation to subside as a series of interest rate increases take hold. In their most recent economic projections, policymakers said they anticipate inflation including food and energy prices to decline to 2.5% in 2024.
    The current one-year outlook is down from 6.6% from the same time in 2022, but is running well ahead of the Fed’s 2% inflation goal. Expectations on a three- and five-year horizon were little changed, at 2.8% and 2.5%, respectively.
    Consumers expect gas prices to rise by 4.6% in the year ahead, slightly less than the February outlook, and they see food prices up 5.9%, which was a decline of 1.4 percentage points from last month’s survey.
    At the same time, consumers see their access to credit diminishing.

    Those reporting that credit is much or somewhat harder to get than a year ago rose to 58.2%, the highest ever in a data series that goes back to June 2013. Likewise, the expectation that credit will be more difficult to get a year from now rose to nearly 53%, up from 48.8% in February.

    The outlook for missing a minimum debt payment in the next year rose by 0.3 percentage point to 10.9% of respondents.
    The survey also showed less optimism about stocks, with just 35% expecting higher prices a year from now, down 1.4 percentage points on a monthly basis.
    The results come as the Fed considers whether to continue raising interest rates or to go on hold when it meets again in May. Current market pricing sees a 69% probability of another quarter percentage point increase, according to the CME Group. More

  • 100 Shares169 Views

    in Economy

    U.S. Job Growth Eases, but Extends Its Streak

    Employers added 236,000 jobs as the Federal Reserve’s interest-rate increases appeared to take a toll. The unemployment rate fell to 3.5 percent.The U.S. economy generated hearty job growth in March, but at a slowing rate that appeared to reflect the toll of steadily rising interest rates.Employers added 236,000 jobs in the month on a seasonally adjusted basis, the Labor Department reported on Friday, down from an average of 334,000 jobs added over the prior six months. The unemployment rate fell to 3.5 percent, from 3.6 percent in February.The year-over-year growth in average hourly earnings also slowed, to 4.2 percent, the slowest pace since July 2021 — a sign the Federal Reserve has been looking for as it seeks to quell inflation. And the average workweek shortened with the easing of staffing shortages, which had required workers to cover extra hours.Preston Caldwell, chief U.S. economist at Morningstar Research, said the data offered fresh hope that the Fed could cool off the economy without causing a recession. “It does look like the range of options that are adjacent to what we might call a soft landing is expanding,” he said. “Wage growth has mostly normalized now without a massive uptick in unemployment. And a year ago, a lot of people were not predicting that.”Wage growth is slowing and is still behind inflationYear-over-year percentage change in earnings vs. inflation More