Talk Back

These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

Incoming economic data recently suggest that U.S. real GDP growth for the third quarter, while still positive, remains in a soft patch.

As best we can judge, the high-frequency jobless claims data through August might be consistent with real GDP growth in the vicinity of 1% to 2%. Also, an early read from monthly indicators, mostly July data, suggests that consumer spending is tracking roughly 2%, growth in capital expenditures probably moderated to around 7% to 9%, and residential investment seems poised to contract at around 10%, all measured on an annual-rate basis.

In addition, the guidance from forward-looking indicators implies that inventory change is likely to detract slightly from overall GDP growth, but net exports should reverse some hefty subtraction in the prior quarter and add modestly to third-quarter growth. As a group, inventory change, net exports and government spending could generate a net contribution of less than half a percentage point to overall growth.

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These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Americans may be dissatisfied with the economy but don’t look for Republicans to sweep control of the House and Senate.

Voters have good reason to be disenamored of both parties.

Democrats have pushed through President Barack Obama’s agenda. With more than $800 billion in stimulus spending, health care reform, and new financial regulations, the economy remains sluggish and Treasury Secretary Timothy Geithner tells us unemployment will linger near 10% for many months.

The Republican chant of less regulation and lower taxes is just not credible after the Wall Street meltdown of 2008 and with a $1.5 trillion budget deficit.

Voters want a clear plan to balance the budget and create decent jobs, and to win their confidence, one or the other party must come clean about what that takes.

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These are the personal views of Lena Komileva, group chief economist overseeing market economic research at Tullett Prebon:

In the end it was the disappointing Federal Reserve Bank of Philadelphia survey and U.S. Dept. of Labor’s jobless claims figures that provided the trigger for a fresh downgrade in investor risk sentiment and appetite for yield in an otherwise peaceful holiday week.

The Philadelphia Fed survey is the most volatile of regional surveys and carries the weakest correlation with the nationwide trend, so the fundamental implications should not be overstated.

Still, the July decline sends an important signal for the health of the economy as it reflects a universal picture of deteriorating corporate sentiment that is driven not by ultra-low Fed funds rates and the strong earnings-driven liquidity reserve accumulated through the past two years’ deleveraging, but by companies’ desire to protect capital and cash-flows in an environment of restrictive credit, local government austerity and future economic uncertainty.

In the survey detail, the Philadelphia Fed purchasing managers’ index manufacturing fell into contraction territory, at -7.7 in August, down from +5.1 in July, for the first time since July 2009 (-8.9). Core growth components sent out universally bearish signals as new business flows, shipments and backlogs all fell and firms slashed inventories and employment.

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These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Sometimes religious leaders and presidents act on good principle but exercise poor judgment. The New York mosque controversy may provide a textbook example.

Plans to construct a mosque and community center in close proximity to Ground Zero may be well intended by Islamic leaders to educate Americans and other visitors about the positive role Muslim Americans play in U.S. life.

Well before the international conflicts of late 20th century, Muslims were a small but productive community in the U.S. Many worked in the auto industry in Michigan, where significant numbers settled, and our finest universities boast Muslims among their faculty.

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These are the personal views of Thomas Lam Tai Loong, group chief economist at OSK Group/DMG & Partners:

The August 10 post-meeting Federal Open Market Committee (FOMC) statement has instigated debates and speculations on the need for additional policy actions and the efficacy of these actions. The Committee’s decision to change the reinvestment policy on agency securities, which more-or-less maintains the size of the Fed’s overall holdings of securities by purchasing Treasuries while allowing agency debt and MBS to run-off, did lower longer-term Treasury yields, however.

The 10-year Treasury yield fell by around 15bps over two sessions in total on August 10 (post-meeting FOMC statement) and August 11 (released a tentative schedule of Treasury purchases). Our estimation suggests that the foregoing result was primarily due to a lower term premium, which probably declined by roughly 10bps or more in aggregate during those two days. Indeed, the term premium response was in-line with current research. (Theoretically, longer-term interest rates can be decomposed into an average of current and expected future short-term rates plus a term premium. The term premium is simply additional compensation required for the risk of holding onto longer-term assets.)

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By Min Zeng

    A DOW JONES NEWSWIRES COLUMN

NEW YORK (Dow Jones)–Thursday’s sale of $16 billion in 30-year Treasury bonds faces a challenge after the Federal Reserve signaled that the longest maturity in the bond market isn’t on its priority list of purchases.

In the absence of Fed support, and given the very low yields on offer, market participants are concerned that demand at the 1 p.m. EDT sale could waver.

The so-called long bond has a much narrower investor base than other maturities: its buyers are mainly domestic, rather than foreign, and are typically pension funds, insurance companies and asset managers that need to match long-dated liabilities.

Soft demand would be bad news for the U.S. government as it would have to pay up to get the sale done. The higher costs would come just at a time when the government is looking to lengthen the maturity of its outstanding debt.

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These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

It is widely acknowledged that the Federal Reserve still has policy ammunition–such as reintroducing large-scale asset purchases, lowering the interest-on-excess-reserves rate, adjusting its reinvestment policy on agency securities and enhancing its communication strategy–to mitigate the downside risks to the outlook.

But the final decision on which tool(s) to employ remains highly challenging, partly because of the vague distribution of marginal costs and benefits associated with the available policy options.

Nonetheless, over the past week or so, there has been increasing chatter that the tone of Tuesday’s Fed meeting could potentially deviate from the seemingly unexciting postmeeting announcements lately. On balance, the soggier data releases recently weighed on Treasury yields and extended expectations on the timing of Fed policy normalization.

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A reader comments on the housing market and economy in the U.S.:

Our country is facing a wonderful opportunity to stabilize the housing market and to return the U.S. economy back onto a growth pattern.

In fall 2008, I sent a Talk Back comment on my solution to stabilizing the U.S. housing market’s precipitous decline, which Dow Jones Newswires graciously ran. Generally it suggested a simple but effective way to stabilize home prices and, in turn, the U.S. economy by converting most current outstanding primary-residence mortgages to a 15-, 23- or 30-year mortgage at a rate of 4 1/4%, 4 1/2% or 4 7/8%, respectively, at the mortgagor’s option.

Additionally all of these mortgages would have a covenant attached that would allow every one of them to be assumable once, meaning that the outstanding mortgage balance and its terms could be transferred from the current owner of a property to a new qualified buyer. The logic for attaching the assumption clause was that by making the mortgages assumable the home-finance system becomes impregnated with mortgage funding that for the next several years could significantly replace the collapsed private-issuance mortgage-backed securities market and could compensate for the unwillingness of banks to originate and retain loans for their own balance sheets.

It simply enables the already-provided and -lent funds to remain in the market independent of the MBS market and banks’ willingness to participate.

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These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Friday, forecasters expect the Labor Department to report the economy shed 70,000 jobs in July and that unemployment rose to 9.6%.

Economists expect the private sector created about 100,000 jobs but government employment fell 170,000, as more temporary census jobs disappeared.

Thirteen months into recovery from a deep recession, this is disappointing. The economy must add 13 million private sector jobs by the end of 2013 to bring unemployment down to 6%. President Barack Obama’s policies are not creating conditions for businesses to hire those 320,000 workers each month, net of layoffs.

Net of inventory adjustments, the economy’s demand for goods and services is growing at only 1.3% a year.

In the second quarter, consumer spending; investment in new structures, equipment and software; and government purchases added 4.1% to demand–but as imports grew much more rapidly than exports, the trade deficit tapped off 2.8%. The difference, 1.3%, is annual growth in demand for U.S.-made goods and services. That has been the pace since recovery began in July 2009.

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These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

The Bush tax cuts were a huge success, and failing to extend them for all Americans–not just families earning less than $250,000, as President Barack Obama proposes–would be a terrible mistake.

Contrary to current White House propaganda, President George W. Bush achieved a lot of growth prior to the financial crisis, and lower taxes for all helped. The Bush prosperity was the byproduct of several multidecade policy trends that freed markets and empowered individuals to innovate and create wealth.

Freer trade championed by presidents since John F. Kennedy, and deregulation (begun by Jimmy Carter with the airlines) were critical to this trend. Also key was reducing excessively high tax rates on upper-income Americans, initiated by Ronald Reagan, somewhat interrupted by Bill Clinton, and reinstated by Bush.

Economists recognize highly productive people, if taxed punitively, create less wealth in the U.S. through arcane tax planning or simply move investments offshore. Higher taxes for high-income families would raise rates on fully half of the income earned by proprietorships and leave those small and medium-sized business with less to invest in creating new jobs.

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