Government Bonds

More stories

  • 125 Shares199 Views

    in Economy

    U.S. Government Shutdown Is Unlikely to Cause an Immediate Recession

    by

    White House and Wall Street estimates suggested the economy could withstand a brief shutdown, with risks mounting the longer it lasts.Federal government shutdowns have become so common in recent years that forecasters have a good read on how another one would affect the American economy. The answer is fairly simple: The longer a shutdown lasts, the more damage it is likely to inflict.A brief shutdown would be unlikely to slow the economy significantly or push it into recession, economists on Wall Street and inside the Biden administration have concluded. That assessment is based in part on the evidence from prior episodes where Congress stopped funding many government operations.But a prolonged shutdown could hurt growth and potentially President Biden’s re-election prospects. It would join a series of other factors that are expected to weigh on the economy in the final months of this year, including high interest rates, the restart of federal student loan payments next month and a potentially lengthy United Automobile Workers strike.A halt to federal government business would not just dent growth. It would further dampen the mood of consumers, whose confidence slumped in September for the second straight month amid rising gas prices. In the month that previous shutdowns began, the Conference Board’s measure of consumer confidence slid by an average of seven points, Goldman Sachs economists noted recently, although much of that decline reversed in the month after a reopening.Gregory Daco, the chief economist at EY-Parthenon, said a government shutdown would not be a “game changer in terms of the trajectory of the economy.” But, he added, “the fear is that, if it combines with other headwinds, it could become a significant drag on economic activity.”Jared Bernstein, the chairman of the White House Council of Economic Advisers, said in a statement on Wednesday that the council’s internal estimates suggest potential losses of 0.1 to 0.2 percentage points of quarterly economic growth for every week a shutdown persists.“Programmatic impacts from a shutdown would also cause unnecessary economic stress and losses that don’t always show up in G.D.P. — from delaying Small Business Administration loans to eliminating Head Start slots for thousands of children with working parents to jeopardizing nutrition assistance for nearly 7 million mothers and children,” Mr. Bernstein added. “It is irresponsible and reckless for a group of House Republicans to threaten a shutdown.”Goldman Sachs economists have estimated that a shutdown would reduce growth by about 0.2 percentage points for each week it lasts. That’s largely because most federal workers go unpaid during shutdowns, immediately pulling spending power out of the economy. But the Goldman researchers expect growth to increase by the same amount in the quarter after the shutdown as federal work rebounded and furloughed employees received back pay.That estimate tracks with previous work from economists at the Fed, on Wall Street and prior presidential administrations. Trump administration economists calculated that a monthlong shutdown in 2019 reduced growth by 0.13 percentage points per week.After that shutdown ended, the Congressional Budget Office estimated that real gross domestic product was reduced by 0.1 percent in the fourth quarter of 2018 and 0.2 percent in the first quarter of 2019. Although the office said most of the lost growth would be recovered, it estimated that annual G.D.P. in 2019 would be 0.02 percent lower than it would have been otherwise, amounting to a loss of roughly $3 billion. Because growth and confidence tend to snap back, previous shutdowns have left few permanent scars on the economy. Some economists worry that might not be the case today.Mr. Daco said federal workers might not spend as much as they would have absent a shutdown, and government contractors might not recoup all of their lost business.A long shutdown would also delay the release of important government data on the economy, like monthly reports on jobs and inflation, by forcing the closure of federal statistical agencies. That could prove to be a bigger risk for growth than in the past, by effectively blinding policymakers at the Federal Reserve to information they need to determine whether to raise interest rates again in their fight against inflation.The economy appears healthy enough to absorb a modest temporary hit. The consensus forecast from top economists is for growth to approach 3 percent, on an annualized basis, this quarter. But economists expect growth to slow in the final months of the year, raising the risks of recession if a shutdown lasts several weeks.Diane Swonk, the chief economist at KPMG, said she expected G.D.P. to rise about 4 percent in the third quarter, and then slow to roughly 1 percent in the fourth quarter. She said a two-week shutdown would have a limited impact, but one that lasted for a full quarter would be more problematic, potentially resulting in G.D.P. entering negative territory.“When you start nicking away even a tenth here or there, that’s pretty weak,” Ms. Swonk said.A shutdown could also further convey political dysfunction in Washington, which could rattle investors and push up yields on Treasury bonds, leading to higher borrowing costs, Ms. Swonk said.Biden administration officials had hoped to avoid such dysfunction when they reached a deal with Republicans in June to raise the nation’s borrowing limit. That agreement included caps on federal spending that were meant to be a blueprint for congressional appropriations. A faction of Republicans in the House has pushed for even deeper cuts, driving Congress toward a shutdown.Michael Linden, a former economic aide to Mr. Biden who is now a senior policy fellow at a think tank, the Washington Center for Equitable Growth, said immediate economic effects from the shutdown could force Republican leaders in the House to quickly pass a funding bill to reopen the government.“There’s a reason shutdowns tend to be pretty short,” Mr. Linden said. “They end up causing disruptions that people don’t like.” More

  • 125 Shares189 Views

    in Economy

    Can Ghana’s Debt Trap of Crisis and Bailouts Be Stopped?

    by

    Emmanuel Cherry, the chief executive of an association of Ghanaian construction companies, sat in a cafe at the edge of Accra Children’s Park, near the derelict Ferris wheel and kiddie train, as he tallied up how much money government entities owe thousands of contractors.Before interest, he said, the back payments add up to 15 billion cedis, roughly $1.3 billion. “Most of the contractors are home,” Mr. Cherry said. Their workers have been laid off.Like many others in this West African country, the contractors have to wait in line for their money. Teacher trainees complain they are owed two months of back pay. Independent power producers that have warned of major blackouts are owed $1.58 billion.The government is essentially bankrupt. After defaulting on billions of dollars owed to foreign lenders in December, the administration of President Nana Akufo-Addo had no choice but to agree to a $3 billion loan from the lender of last resort, the International Monetary Fund.It was the 17th time Ghana has been compelled to turn to the fund since it gained independence in 1957.This latest crisis was partly prompted by the havoc of the coronavirus pandemic, Russia’s invasion of Ukraine, and higher food and fuel prices. But the tortuous cycle of crisis and bailout has plagued dozens of poor and middle-income countries throughout Africa, Latin America and Asia for decades.Joshua Teye, a teacher in Suhum, Ghana. The government’s fiscal crisis has cut investment in schools dangerously short.Francis Kokoroko for The New York TimesThese pitiless loops will be discussed at the latest United Nations General Assembly, which begins on Tuesday. The debt load for developing countries — now estimated to top $200 billion — threatens to upend economies and unravel painstaking gains in education, health care and incomes. But poor and low-income countries have struggled to gain sustained international attention.In Ghana, the I.M.F. laid out a detailed rescue plan to get the country back on its feet — reining in debt and spending, raising revenue and protecting the poorest — as Accra negotiates with foreign creditors.Still, a nagging question for Ghana and other emerging nations in debt persists: Why will this time be any different?The latest rescue plan outlined for Ghana addresses key problems, said Tsidi M. Tsikata, a senior fellow at the African Center for Economic Transformation in Accra. But so did many of the previous ones, he said, and still crises recurred.The last time Ghana turned to the fund was in 2015. Within three years, the country was on its way to paying back the loan, and was among the world’s fastest-growing economies. Ghana was held up as a model for the rest of Africa.Agricultural production was up, and major exports — cocoa, oil and gold — were rising. The country had invested in infrastructure and education, and had begun a cleanup of the banking industry, which was riddled with distressed lenders.Yet Accra is again desperately in need. The I.M.F. loan agreement, and the delivery of a $600,000 installment in May, have helped stabilize the economy, settle wild fluctuations in currency levels and restore a modicum of confidence. Inflation is still running above 40 percent but is down from its peak of 54 percent in January.Cocoa pods at a cocoa farm. Ghana’s economy is dependent on exports of raw materials like cocoa, oil and gold, which rise and fall wildly in price.Francis Kokoroko for The New York TimesDespite the I.M.F.’s blueprint, though, Mr. Tsikata, previously a division chief at the fund for three decades, said the chance that Ghana wouldn’t be in a similar position a few years down the road “rests on a wing and a prayer.”The effects of devastating climate change loom over the problem. Within the next decade, a United Nations analysis estimates, trillions of dollars in new financing will be needed to mitigate the impact on developing countries.In Ghana, the government owed $63.3 billion at the end of 2022 not just to foreign creditors but also to homegrown lenders — pension funds, insurance companies and local banks that believed the government was a safe investment. The situation was so unusual that the I.M.F. for the first time made settling this domestic debt a prerequisite for a bailout. A partial restructuring, which cut returns and extended the due dates, was completed in February. While the haircut may have been necessary, it undermined confidence in the banks.As for foreign lenders, there are thousands of private, semipublic and governmental creditors, including China, which have different objectives, loan arrangements and regulatory controls.The magnitude and type of debt means “this crisis is much deeper than the type of economic difficulties Ghana has faced in the past,” said Stéphane Roudet, the I.M.F.’s mission chief to Ghana.The dizzying proliferation of lenders now characterizes much of the debt burdening distressed countries around the globe — making it also more complex and difficult to resolve.“You don’t have six people in a room,” said Joseph E. Stiglitz, a Nobel Prize winner and a former chief economist at the World Bank. “You have a thousand people in a room.”Victoria Chrappah, a trader, recounts the unfavorable business climate, as fluctuating exchange rates affect prices of imported goods from China.Francis Kokoroko for The New York Times‘Last Year Was the Worst of All.’Outside Victoria Chrappah’s narrow stall in Makola Market, snaking lines of sellers hawked live chickens, toilet paper packs and electronic chargers from giant baskets balanced on their heads. As restructuring negotiations with foreign lenders continue, households and businesses are doing their best to cope. Ms. Chrappah has been selling imported bathmats, shower curtains and housewares for more than 20 years.“Last year was the worst of all,” she said.Inflation surged, and the cedi lost more than half its value compared with the U.S. dollar — a blow to consumers and businesses when a country imports everything from medicine to cars. The Bank of Ghana jacked up interest rates to cope with inflation, hurting businesses and households that rely on short-term borrowing or want to invest. The benchmark rate is now 30 percent.Because of the rapidly depreciating currency, Ms. Chrappah explained, “you can sell in the morning at one price, and then you have to think of changing the price the following day.”Purchasing power as well as the value of savings has been halved. Doreen Adjetey, product manager for Dalex Swift, a finance company based in Accra, said a bottle of Tylenol to soothe her 19-month-old baby’s teething pain cost 50 cedis last year. Now it’s 110.A month’s worth of groceries cost more than 3,000 cedis compared with 1,000. Before, she and her husband had a comfortable monthly income of 10,000 cedis, worth about $2,000 when the exchange rate was 5 cedis to the dollar. At today’s rate, it’s worth $889.Joe Jackson, the director of business operations at Dalex, said default rates for small and medium-size enterprises “are through the roof,” jumping to 70 percent from 30 percent.The real estate and construction market has also tanked. “There’s been a drastic drop in the number of homes in the first-buyer segment of the market,” said Joseph Aidoo Jr., executive director of Devtraco Limited, a large real estate developer.Construction of an apartment complex in Accra. The real estate and construction market has suffered along with the rise in the cost of borrowing. Francis Kokoroko for The New York TimesWhen the pandemic struck in 2020, paralyzing economies, shrinking revenues and raising health care costs, fear of a global debt crisis mounted. Ghana, like many developing countries, had borrowed heavily, encouraged by years of low commercial rates.As the Federal Reserve and other central banks raised interest rates to combat inflation, developing countries’ external debt payments — priced in dollars or euros — unexpectedly ballooned at the same time that prices of imported food, fuel and fertilizer shot up.As Ghana’s foreign reserves skidded toward zero, the government began paying for refined oil imports directly with gold bought by the central bank.Even so, while the series of unfortunate global events may have supercharged Ghana’s debt crisis, they didn’t create it.The current government, like previous ones, spent much more than it collected in revenues. Taxes as a share of total output are also lower than the average across the rest of Africa.To make up the shortfall, the government kept borrowing, offering higher and higher interest rates to attract foreign lenders. And then it borrowed more to pay back the interest on previous loans. By the end of last year, interest payments on debt were gobbling up more than 70 percent of government revenues.“The government is bloated and inefficient,” said E. Gyimah-Boadi, the board chair of Afrobarometer, a research network. Half-completed schools, hospitals and other projects are abandoned when a new administration comes in. Corruption and mismanagement are also problems, several economists and business leaders in Ghana said.More fundamentally, Ghana’s economy is not set up to generate the kind of jobs and incomes needed for broad development and sustainable growth.“Ghana’s success story is real,” said Aurelien Kruse, the lead country economist in the Accra office of the World Bank. “Where it may have been a bit oversold,” though, is that “the fast growth has not been diversified.” The economy is primarily dependent on exports of raw materials like cocoa, oil and gold, which peak and swoop in price.Manufacturing accounts for a mere 10 percent of the country’s output — a decline from 2013. Without a thriving industrial sector to provide steady employment and produce exportable goods, Ghana has no other streams of revenue from abroad, which can build wealth and pay for needed imports.This model — the import of expensive goods and the export of cheap resources — characterized the colonial system.Senyo Hosi, executive chairman of Kleeve & Tove, an investment company based in Accra, said he had an agribusiness that produced rice in the Volta region and worked with more than 1,000 growers. He can’t do required upgrades to equipment, though, because 30 percent interest rates make borrowing impossible. “I stopped production,” he said.Delivery riders for an online food delivery app. Francis Kokoroko for The New York Times‘For Us It Means Shutdown.’As the global financial system struggles to restructure hundreds of billions of dollars in existing debt, the question of how to avoid the debt trap in the first place remains more urgent than ever. Large chunks of money are required to invest in desperately needed roads, technology, schools, clean energy and more. But dozens of countries lack the domestic savings needed to pay for them, and grants and low-cost loans from international institutions are scarce.Road works continue on sections of the National Route Six, a carriageway connecting Ghana’s capital to its second largest city, Kumasi.Francis Kokoroko for The New York Times“The fundamental issue is the need for financing,” said Brahima S. Coulibaly, a senior fellow at the Brookings Institution.So governments turn to international capital markets, where investors are foraging the world for high returns. Both political leaders and investors often look for short-term wins, whether in the next election or earnings call, said Martin Guzman, a former finance minister of Argentina who handled his country’s debt restructuring in 2020.This free flow of capital around the globe has resulted in a flood of financial crises. “Inequality is embedded in the international financial architecture,” a United Nations Global Crisis Response Group concluded in an analysis.Even worthy investments — and not all of them are — don’t always generate enough revenue to repay the loans. When bad times hit or foreign lenders get spooked, governments are left in the lurch. This process can be accelerated in Africa, where research has found there is an exaggerated perception of risk, which lowers credit ratings and raises financing costs.Without a safety cushion to fall back on, a small government cash crunch can turn into a disaster. Think of a household in a tough stretch that can’t cover next month’s rent and is evicted. Now instead of being a few hundred dollars in debt, the members of the household are homeless.“For us,” said Ken Ofori-Atta, Ghana’s finance minister, a credit downgrade “means shutdown.”Ghana’s finance minister, Ken Ofori-Atta, at his home in Accra: “For us, a credit downgrade means shutdown.”Francis Kokoroko for The New York TimesSeveral organizations have sketched out escape routes from the debt trap, including more low-cost lending from multilateral banks like the World Bank.Debt Justice, which advocates for debt forgiveness, along with many economists, argues that some of the $200 billion in debt must be erased. It has also called for governments and lenders to publicly reveal the amount and terms of loans, and what the money was used for so it can be better tracked and audited.Other research groups have looked at ways to stabilize the evolving African bond market and help governments survive short-term shortfalls as well as boom-and-bust swings in commodity prices.Mr. Ofori-Atta said he had “extreme confidence” that Ghana would have strong growth after it emerged from this debt tunnel.But the problem of finding manageable amounts of low-cost investment capital remains.Where does an African country — or any developing country — get the type of financing it needs to grow? Mr. Ofori-Atta asked.Before the cycle of debt crises is broken, that question will have to be answered. More

  • 125 Shares149 Views

    in Economy

    Inflation Rose to 3.2%, but Overall Price Trends Are Encouraging

    by

    Economists looked past the first acceleration in overall inflation in more than a year and saw signs that price pressures continued to moderate in July.Fresh inflation data offered the latest evidence that price increases were meaningfully cooling, good news for consumers and policymakers alike more than a year into the Federal Reserve’s campaign to slow the economy and wrestle cost increases back under control.The Consumer Price Index climbed 3.2 percent in July from a year earlier, according to a report released on Thursday. That was the first acceleration in 13 months, and followed a 3 percent reading in June.But that tick up requires context. Inflation was rapid in June last year and slightly slower the next month. That means that when this year’s numbers were measured against 2022 readings, June looked lower and July appeared higher than if the year-earlier figures had been more stable.Economists were more keenly focused on another figure: the “core” inflation index, which strips out volatile food and fuel prices. That picked up by 4.7 percent from last July, down from 4.8 percent in June. And on a monthly basis, core inflation roughly matched an encouragingly low pace from the previous month.The upshot was that inflation continued to show signs of seriously receding after two years of rapid price increases that have bedeviled policymakers and burdened shoppers — and the details of the July report offered positive hints for the future. Rent prices have been moderating, a trend that is expected to persist in coming months and that should help to weigh down inflation overall. An index that tracks services prices outside of housing is picking up only slowly.“This is continuing the kind of progress I think that you want to see,” said Omair Sharif, the founder of Inflation Insights, a research firm. Airfares fell sharply, and hotel costs eased last month. Big drops in those categories may be difficult to sustain but are helping to limit price increases for now.Used cars were also cheaper last month, a trend that some economists expect to intensify in the months ahead, based on declines that have already materialized in the wholesale market where dealers purchase cars. More

  • 125 Shares99 Views

    in Economy

    Fitch’s Debt Downgrade Is Unlikely to Deter Borrowing, Investors Say

    by

    Fitch’s credit-rating decision stemmed from concerns about America’s ability to govern itself, along with the nation’s growing debt load.The downgrade of the United States’ debt by a major ratings firm is a damning indictment of the country’s fractious politics and a blot on its financial record that is unlikely to be quickly erased. But many investors and analysts say it won’t affect the government’s ability to keep borrowing money.On Tuesday, Fitch Ratings lowered the credit rating of the United States one notch to AA+ from a pristine AAA. The firm, citing a “deterioration in governance” along with America’s mounting debt load, suggested that it could be a long time before that decision was reversed.“Our base case is that deficits will remain high and the debt burden will continue to rise,” said Richard Francis, co-head of the Americas sovereign group at Fitch and its primary analyst for the United States, in an interview on Wednesday. “I think it is unlikely that there will be any meaningful changes.”The move — like the drop to AA+ in 2011 by S&P Global, which has kept its U.S. rating there — followed partisan brinkmanship over America’s debt ceiling, which caps how much money the government can borrow. The United States came within days of defaulting on its debt this spring as Republican lawmakers refused to lift the cap unless President Biden made concessions on spending. The two sides ultimately reached an agreement on May 27, just days before the Treasury Department projected that the government could run out of cash.With both Fitch and S&P now carrying a lower assessment, the United States’ credit rating, at least for most investors, will no longer be considered among the top tier, which includes Germany, Australia and Singapore.While the move is something of a black eye, market watchers expect the practical impact to be small. Analysts at Wells Fargo noted that the early feedback from their clients was that their appetite to keep lending to the government wasn’t likely to change much.That’s because the U.S. Treasury market is the largest sovereign debt market in the world, underpinning borrowing costs across the globe, with Treasuries owned by investors of all stripes. The U.S. rating remains among the highest in the world, backed by a strong and diverse economy and aided by the central global role of the country’s currency.“This is largely a symbolic move,” said Peter Tchir, head of macro strategy at Academy Securities.Stock markets slumped on Wednesday, and the yield on Treasuries — which indicates how much investors are demanding to be paid in exchange for lending to the government — rose. But analysts suggested that had more to do with rising government borrowing forecasts, resulting in higher interest rates and pointing to increased costs for companies, too.Fitch downgraded America’s debt on the day that former President Donald J. Trump was indicted on charges related to his efforts to overturn the 2020 election, which culminated in an attack on the Capitol on Jan. 6, 2021. The attack showcased deep distrust in the government and the rule of law.Despite the suspension of the debt limit in June, future fiscal fights — including a possible government shutdown this fall — are looming. The lack of comity between the political parties means the cap is likely to remain a political tool, with no guarantee that a compromise will always be reached.That increased polarization was central to Fitch’s decision. Mr. Francis said intense partisanship had inhibited decisions on better budgeting and the debt ceiling, with both Democrats and Republicans unmovable on policies that could improve the country’s fiscal position. These include, he added, changes to taxes, military spending, and Social Security and Medicare, which are expected to face ballooning costs as more baby boomers retire.“There is no willingness on any side to really tackle the underlying challenges,” Mr. Francis said.The ratings agency also cited the Jan. 6 attack as a concern that fed into the downgrade.“There’s the debt ceiling standoff, there is this painful budgeting process, there is political polarization that is ongoing and probably deteriorating — and then there is the Jan. 6 insurrection, but that is one factor among many,” Mr. Francis said.The Federal Reserve’s rapid interest rate increases have compounded some of those factors by raising borrowing costs, forcing the government to borrow even more money to account for higher interest and other payments to bondholders.On Wednesday, the Treasury Department detailed its plans to borrow over $1 trillion for the third quarter, which runs from July through September. The estimate, announced on Monday, is $274 billion more than the Treasury had forecast in May. The United States current debt is $32.5 trillion.More borrowing means more debt for investors to digest. A larger supply of Treasuries while investor demand stays the same, or even shrinks, means higher borrowing costs for the government. The 10-year Treasury yield rose 0.07 percentage points on Wednesday to 4.09 percent, its highest level since November.Treasury Secretary Janet L. Yellen continued to criticize the Fitch decision on Wednesday, describing it as “puzzling” and “entirely unwarranted.”“Its flawed assessment is based on outdated data and fails to reflect improvements across a range of indicators, including those related to governance, that we’ve seen over the past two and a half years,” Ms. Yellen said during an event in Virginia.Still, there does not seem to be any movement toward one solution that Fitch and many analysts have said would help the United States return to its higher rating: getting rid of the debt ceiling.Mr. Francis said it would “probably be helpful” to get rid of the debt limit if the United States ever wanted to regain a higher rating. Despite Mr. Biden’s desire to alter the process, there has been no indication that any changes are coming soon.Instead, Republicans and Democrats returned to the kind of partisan bickering that helped fuel the downgrade, with each side blaming the other for it.“The downgrade comes just months after Biden and congressional Democrats took the country to the brink of default and amid an increasingly unsteady economic path,” said Jake Schneider, director of rapid response for the Republican National Committee.The Democratic National Committee blamed the tax cuts and spending policies that were initiated by Republicans and Mr. Trump when he was president, saying the downgrade was “a direct result of Donald Trump and MAGA Republicans’ extreme and reckless agenda.” More

  • 125 Shares119 Views

    in Economy

    Fed Rate Increases Hinge on Strength of Jobs and Economy

    by

    Federal Reserve policymakers are debating how much further they need to raise interest rates to ensure that inflation speedily returns to a normal pace, and that calculus is likely to depend heavily on the job market’s strength.Officials will closely watch the employment report on Friday, the last reading on job growth that they will receive before their July 25-26 meeting, for a hint at how much momentum remains in the American economy.Fed officials have been surprised by the economy’s staying power 16 months into their push to slow it down by raising interest rates, which makes borrowing money more expensive. While growth is slower, the housing market has begun to stabilize and the job market has remained abnormally strong with plentiful opportunities and solid pay growth. Fed officials worry that if wage growth remains unusually rapid, it could make it difficult to bring elevated inflation fully back to their 2 percent goal.That resilience — and the stubbornness of quick inflation, particularly for services — is why policymakers expect to continue raising interest rates, which they have already lifted above 5 percent for the first time in about 15 years. Officials have ratcheted up rates in smaller increments this year than last year, and they skipped a rate move at their June meeting for the first time in 11 gatherings. But several policymakers have been clear that even as the pace moderates, they still expect to raise interest rates further.“It can make sense to skip a meeting and move more gradually,” Lorie K. Logan, the president of the Federal Reserve Bank of Dallas, said during a speech this week, while noting that it is important for officials to now follow up by continuing to lift rates.She added that “inflation and the labor market evolving more or less as expected wouldn’t really change the outlook.”Fed officials predicted in June that they would raise interest rates twice more this year — assuming they move in quarter-point increments — and that the labor market would soften, but only slightly. They saw the unemployment rate rising to 4.1 percent from 3.7 percent currently.Investors widely expect Fed officials to raise interest rates at their July meeting, and the strength of the labor market could help to shape the outlook after that. While policymakers will not release new economic projections until September, Wall Street will monitor how policymakers are reacting to economic developments to gauge whether another move this year is likely. More

  • 138 Shares129 Views

    in Economy

    GDP Data Shows US Economic Growth Rate of 2% in Q1

    by

    The NewsThe United States economy grew faster early this year than previously believed.Gross domestic product, adjusted for inflation, expanded at an annual rate of 2 percent in the first three months of the year, the Commerce Department said Thursday. That was a significant upward revision from the 1.1 percent growth rate in preliminary data released in April. (An earlier revision, released last month, showed a slightly stronger rate of 1.3 percent.)An alternative measure of growth, based on income rather than production, painted a different picture, showing that the economy contracted for the second quarter in a row. That measure was also revised upward from the prior estimate.The report underscored the surprising resilience of the country’s economic recovery, which has remained steady despite high inflation, rapidly rising interest rates and persistent predictions of a recession from many forecasters on Wall Street.The new data is cause for “genuine optimism,” wrote Gregory Daco, chief economist at EY, the consulting firm previously known as Ernst & Young, in a note to clients. “This is leading many to rightly question whether the long-forecast recession is truly inevitable.”Consumers are powering the recovery through their spending, which increased at a 4.2 percent rate in the first quarter, up from a 1 percent rate in late 2022 and faster than the 3.7 percent rate initially reported in April. That spending, fueled by a strong job market and rising wages, helped offset declines in other sectors of the economy like business investment and housing.Consumers are powering the recovery through their spending, which increased at 4.2 percent rate in the first quarter.Jim Wilson/The New York TimesWhat It Means: Complications for the Fed.The continued strength of the consumer economy poses a conundrum for policymakers at the Federal Reserve, who have been raising interest rates in an effort to curb inflation without causing a recession.On the one hand, data from the first quarter provides some signs of success: Economic growth has slowed but not stalled, even as inflation has cooled significantly since the middle of last year.But many forecasters, both inside and outside the central bank, are skeptical that inflation will continue to ease as long as consumers are willing to open their wallets — meaning policymakers are likely to take further steps to rein in growth. At their meeting this month, Fed officials left interest rates unchanged for the first time in more than a year, but they have signaled they are likely to resume rate increases in July.The Fed chair, Jerome H. Powell, at a conference in Madrid on Thursday, noted that inflation had repeatedly defied forecasts of a slowdown.“We’ve all seen inflation be — over and over again — shown to be more persistent and stronger than we expected,” he said.What’s Next: Data on income and spending.Mr. Powell and his colleagues will get more up-to-date evidence on their progress on Friday, when the Commerce Department releases data on personal income, spending and inflation from May.Jeanna Smialek More

  • 88 Shares129 Views

    in Economy

    U.K. Inflation Remains Stuck at 8.7 Percent

    by

    The rate, which had been expected to edge lower in May, shows that Britain’s cost-of-living crisis persists, and is likely to prompt the Bank of England to raise interest rates again.Britain’s inflation rate held steady in May, frustrating expectations that price increases would slow down, according to data released Wednesday, the day before the country’s central bank is widely expected to raise interest rates again.Consumer prices rose 8.7 percent from a year earlier, the same as in April, the Office for National Statistics said. Economists had forecast it would dip slightly. The data is likely to compound concerns that Britain’s cost-of-living crisis may intensify in the coming months as mortgage holders confront the burden of higher interest rates pushed through to tackle stubbornly strong inflation.The Bank of England on Thursday is expected to lift interest rates for a 13th consecutive time, by a quarter-point to 4.75 percent, the highest since early 2008.Last week, wage data showed pay growing faster than expected. On Wednesday, the statistics agency said core inflation, which excludes energy and food prices and is used to assess how deeply inflation is embedding in an economy, rose to 7.1 percent in the year through May, the fastest pace since 1992. Services inflation, an indicator that is closely watched by policymakers, climbed to 7.4 percent, from 6.9 percent in April.“The overwhelming impression is that this is a disappointing set of numbers that shows broad-based strength” in prices, Sandra Horsfield, an economist at Investec, wrote in an analyst note. “This is simply not good enough.”The rise in core inflation is “something that may cause some concern,” Grant Fitzner, the chief economist at the statistics agency, told the BBC.That’s because it has been pushed higher by price increases in services, such as at restaurants and hotels, much of it reflecting higher wage costs for companies, Mr. Fitzner said. “Services prices are quite sticky,” he said. “It can take longer for them to pick up but likewise longer for them to unwind as well.”This is leading to worries that overall inflation will be much slower to fall that it was to rise, he added.And that is what Britain is experiencing, as inflation data over the past few months has repeatedly defied expectations and stayed higher than predicted.Britain’s headline inflation rate has slowed from a peak of 11.1 percent in October, but it’s still uncomfortably high, especially compared with its international peers. In the United States, the Consumer Price Index rose 4 percent in May from the year before, and in the eurozone, inflation averaged 6.1 percent last month for the 20 countries that use the euro. The Federal Reserve has paused its interest rate increases, and traders are betting that the European Central Bank will raise rates just once or twice more; in Britain, though, investors are predicting the central bank will be forced to raise rates for longer to stamp out inflation.“We are in a situation now where markets are saying they’ve lost faith and that requires a big reaction from the bank,” said Andrew Goodwin, an economist at Oxford Economics. The central bank “needs to acknowledge that the game has changed,” he said, adding that he wouldn’t be surprised if the central bank raised rates by half a point on Thursday.Andrew Bailey, the governor of the Bank of England, said last week that policymakers still expected the inflation rate to come down, but “it’s taking a lot longer than expected.”Mr. Bailey’s predecessor, Mark Carney, said recently that Britain’s departure from the European Union was part of the reason Britain was suffering from stubbornly high inflation. There were other economic shocks at the same time, such as rising energy prices following Russia’s invasion of Ukraine, but Brexit is a “unique” part of the adjustment that will take years to resolve, he said.“We laid out in advance of Brexit that this will be a negative supply shock for a period of time and the consequence of that will be a weaker pound, higher inflation and weaker growth,” he told The Daily Telegraph last week.Traders are betting that the Bank of England’s interest rate could reach 6 percent by early next year. These expectations are shown through rising yields on government bonds, which now exceed the levels reached during Liz Truss’s brief but turbulent stint as prime minister last fall.In response, mortgage rates are rising too. Last weekend, the average rate for a two-year fixed-rate mortgage hit 6 percent for the first time this year.Last month, the central bank warned that many mortgage holders had not experienced the cost of higher interest rates yet. About 1.3 million households are expected to reach the end of their fixed-rate term by the end of the year, prompting a reset in the rate that applies to their loan. And the average mortgage holder in that group will see their monthly interest payments increase about 200 pounds ($255) a month, or £2,400 over the course of a year, if their mortgage rate rises 3 percentage points, which is what mortgage quotes suggested last month, the bank said.The additional financial strain follows months of higher prices, from energy bills to groceries. Food and nonalcoholic drink prices rose 18.3 percent in May from a year earlier, data showed on Wednesday, a slight slowdown from previous months when food inflation hit a 45-year high. The moderation in food and fuel prices was offset by rising prices at restaurants and hotels and for secondhand cars and live music events.“We know how much high inflation hurts families and businesses across the country,” Jeremy Hunt, the chancellor of the Exchequer, said in a statement on Wednesday, adding that the government’s plan to halve the rate of inflation would be the best way to keep costs and interest rates down.“We will not hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy,” he said.In January the government, led by Prime Minister Rishi Sunak, vowed to halve inflation by the end of the year, which would mean a rate of about 5 percent, amid waves of public and private sector strikes from workers frustrated by declining living standards.When that promise was made, it seemed almost guaranteed to succeed based on economic forecasts. But as the months have worn on, inflation has been harder to slow down than expected and that pledge is now at risk of being missed.Adding to the government’s challenges, separate data published on Wednesday estimated that Britain’s public sector debt exceeded 100 percent of gross domestic product for the first time since 1961, as the government paid out more money for energy support programs and social benefits to mitigate the cost-of-living crisis. More

  • 88 Shares149 Views

    in Economy

    Federal Reserve’s June Meeting: What to Watch

    by

    Central bankers are expected to leave interest rates unchanged on Wednesday, but the decision is an unusual nail-biter. Also: Keep an eye on the economic forecasts.Federal Reserve officials will announce their June policy decision on Wednesday, and they are widely expected to hold steady after 10 straight interest rate increases — taking a breather to see how the economy is shaping up 15 months into their fight against rapid inflation.Prices have been increasing faster than the Fed would like for more than two years, but a report on Tuesday confirmed that the pace of overall inflation continues to cool. That doesn’t mean the Fed can declare victory: Once volatile food and fuel prices were stripped out, the data showed inflation remained stubbornly rapid.Investors are betting that Fed officials will respond to the mixed picture by skipping an increase this month, even as they signal that they might lift rates in July.Still, the outlook is very uncertain, and investors will be watching Wednesday’s Fed meeting closely for any hint at what could come next. Central bankers will release their rate decision and fresh economic forecasts at 2 p.m., followed by a news conference with Jerome H. Powell, the Fed chair, at 2:30 p.m. Here’s what to know about the decision.Interest rates are at their highest since 2007.Fed officials have raised interest rates sharply since March 2022, pushing them to just above 5 percent in the fastest series of rate increases since the 1980s.The speed of adjustment is relevant because it takes months or even years for the effects of interest rate changes to fully trickle through the economy.Given that, the economy is — most likely — feeling only part of the brunt of the Fed’s past moves. That increases the risk that the central bank could overdo it and slow growth by more than is strictly necessary to contain inflation if officials push forward without taking time to assess conditions.Overshooting would have serious ramifications: Restraining the economy too aggressively would very likely cost jobs, diminishing financial security for many Americans.But an incomplete policy response would also carry consequences. If rapid inflation drags on for years, consumers could come to see fast price increases as the norm, making them harder to stamp out without serious economic pain that causes higher unemployment down the road.Skipping does not mean stopping.If setting monetary policy is like a marathon, a pause now is like stopping for a water break — to stretch and take stock — rather than giving up on running altogether. Fed officials have been clear that while they may hit pause temporarily, they could lift rates again if needed.“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” Philip Jefferson, a Fed governor who is President Biden’s pick to be the central bank’s next vice chair, said in a speech last month. Instead, Mr. Jefferson said, skipping would “allow the committee to see more data.”Tuesday’s inflation data probably kept officials on track to hold policy steady in June while teeing up a July increase, said Sarah Watt House, senior economist at Wells Fargo.“They are going to have to walk a very fine line,” she said. “The U.S. economy continues to carry some pretty formidable momentum.”Investors are on dot watch.Every three months, the Fed releases a set of projections — the “dot plot” — that shows where each official expects interest rates to land by the end of the next few years. (The predictions are anonymous and are demarcated by little blue spots, hence the name.)The dots come out alongside a set of projections for unemployment, inflation and growth. They will be released on Wednesday for the first time since March.Some economists are expecting the Fed to pencil in slightly higher growth for the economy, slightly higher core inflation, and a slightly lower unemployment rate by the end of 2023. One complication is that officials will have had barely any time to update their projections in the wake of Tuesday’s Consumer Price Index report. Officials had until Tuesday evening to change their forecasts, but that meant they had just hours to factor in the new figures.Investors are probably going to be most focused on how much higher interest rates are expected to rise this year. Many expect Fed officials to pencil in one more rate move — lifting the anticipated policy rate to a range of 5.25 percent to 5.5 percent at the end of 2023. But given the varied opinions on the central bank’s policy-setting committee, the predictions might be for even higher rates.All eyes are on Jerome Powell.Jerome H. Powell, the Fed chair, will give a news conference after the meeting. He may explain how central bankers are thinking about their path ahead for interest rates — and how officials will judge whether they have done enough to feel confident that inflation, now running at 4.4 percent by their preferred measure, is back on a path toward their 2 percent goal.“The main message will be: A pause does not necessarily mean the end of the rate hiking cycle,” said Michael Feroli, chief U.S. economist at J.P. Morgan. More