Economic news: February 2010

Sunday, February 28, 2010

Retail Sales

The year-to-year increase was more impressive. January retail sales jumped 4.7%, compared to the same month in 2009.

Consumer spending accounts for two-thirds of U.S. economic activity, and related reports such as retail sales are used to gauge whether a recovery is underway.

Sales excluding autos and auto parts rose 0.6% last month. A consensus of economists had projected ex-auto sales to rise 0.5% in January.

"This is decent news considering just how bad the labor market is," said Adam York, an economist at Wells Fargo. "We had gains in most of the categories and the real strength was in general merchandise sales, so it looks like the consumers are just out there shopping again."

General merchandise store sales rose 1.5% in January, rebounding from a 1.1% drop in the prior month, and department store sales were up 0.2% after a 0.4% decline in December.

Non-store sales, which include online retailers, jumped 1.6% last month, following a 2.2% increase in December.

"We saw a good game in online sales, but it's in line with what's been going on," said York. "February online retail sales will be interesting, because we'll see if people were shopping from home while they were snowed in."

While retail sales in February may be weak given the recent snowstorms in the Northeast, he said he expects sales to improve further into the year.

"We're looking for fairly modest gains in personal consumption and sales, but consumers are not going to come roaring back," he said. "With the weakness in the labor market, it's going to be difficult to see a sustained growth path in consumption."

In a separate report earlier this month, sales tracker Thomson Reuters, which looks at monthly same-store sales for 30 chains including Costco (COST, Fortune 500) and Target (TGT, Fortune 500), said January sales rose 3.3%, beating analyst expectations.

Retail Sales Foreclosures can put dream homes in reach

Doctors threaten Medicare backlash

Some 43 million Americans receive Medicare coverage. For doctors who accept Medicare, federal law requires that reimbursement rates be adjusted annually based on formula tied to the health of the economy.

That law says rates should be cut every year to keep Medicare financially sound. But Congress has blocked those cuts from happening in seven of the last eight years and could still do so this year.

Those temporary fixes aren't good enough anymore, warned Rohack.

He said the AMA wants the current law to be repealed and a new formula used "that more accurately reflects the cost of providing care" in determining Medicare reimbursement rates.

In the meantime, physicians are asking the AMA to prepare handouts they can give patients to prepare them for the worst-case scenario: getting dropped completely. And a new report on the AMA's Web site tellsdoctors how they can help their patients find other doctors if they decide to no longer accept Medicare.

"All this is a result of physicians becoming very frustrated with the situation," said Rohack. "It's regrettable, but it reflects the current political environment. Congress need a crisis before it acts."

Dropping patients

Dr. Edward Kornel, a neurosurgeon based in White Plains, N.Y., stopped seeing Medicare patients two years ago. Two colleagues in his group practice have joined him in dropping Medicare patients over the past six months.

Kornel, who's been in practice for 27 years, said he had always accepted Medicare patients in the past.

"But when I looked at my income from reimbursements, I was losing money every time I took care of a Medicare patient," said Kornel. "It wasn't covering my costs."

While Medicare patients accounted for about 20% of his total patient load, they were generating less than 5% of his income.

"I would have had to do 300 operations in one year just to break even," he said.

Still, he said he doesn't want to turn away anyone who wants him as their doctor. "If they really can't pay the fees then I will do it pro bono," said Kornel.

The American Association of Neurological Surgeons, to which Kornel belongs, has warned that Medicare patients would likely get less access to doctors if Medicare payment cuts continue.

In a survey, the association found that 65% of its 3,400 members said they are referring their Medicare patients to other doctors. About 60% said they were reducing the number of Medicare patients in their practice.

"These results paint a bleak path we are going down," said Dr. Troy Tippett, president of the association.

However, the federal government's Center for Medicare and Medicaid Services said that its own data, and other industry reports, show that only a small percentage of beneficiaries unable to get physician access.

The agency maintains that 96.5% of all practicing physicians, nearly 600,000 doctors, currently participate in Medicare.

Dr. Priscilla Arnold, an ophthalmologist based in Bettendorf, Iowa, and past president of the American Society of Cataract and Refractive Surgery, isn't buying those numbers.

"You have to assume that CMS' data reflects physicians that are accepting Medicare patients but [do]not account separately for those who are reducing the number of Medicare patients," said Arnold, who added that a majority of her patients are on Medicare.

She said she has to "realistically evaluate" every year if she can continue to see all her patients.

If this latest cut goes into effect, Arnold said many doctors in her specialty won't be able to sustain their practices. "This year, the situation is more crucial than ever," she said.

Kornel said consumers should prepare for some difficult days ahead.

"If doctors drop Medicare patients, these people will be forced to go to clinics where it's hard to get appointments, the waits are long and you get far less attention than you would otherwise get," said Kornel. "I think this situation is headed for disaster."

How Obama will pay for health reform Tax Help: Turn assistance into gift for best tax outcome

Regulators ease up on small business loans

The move aims to reassure bankers who say they face blowback from government overseers when their loans go bad. Stiffer regulation has caused about half of community banks to pull back on their small business lending, according to a recent poll conducted in January by the Independent Community Bankers of America (ICBA).

"As the regulators tighten up their standards, the bankers tighten up their standards," said Mark Schroeder, president of community lender German American Bancorp in Jasper, Ind.

There's clear signs that's happening. The percentage of banks that tightened their credit standards for commercial loans to small companies hit a 20-year high in 2009, according to data from the Federal Reserve's quarterly loan-officer survey. Total small business lending dropped 1.8% for the year, removing $14 billion from the market, industry reports show.

"Everybody is walking the line," said Arthur Washington, senior vice president and chief lending officer of Nor-Cal FDC, a California financial development corporation. On the one hand, Washington policymakers urge banks to lend more -- but if loans go bad, regulators blast banks for their underwriting.

Schroeder is happy with new regulatory line-in-the-sand. "The regulatory body at least has recognized that, from the banks' perspective, the regulatory environment is probably too restrictive at this point," he said.

But others say they're waiting to see if local regulators will follow the orders to loosen up.

"We certainly are hopeful that those statements will come to fruition with the examiners in the field," said Bob Epling, president of Community Bank of Florida in Holmstead, Fla. "As of right now, it is a statement, and we haven't seen the end result, which would be the action. ... It is difficult for someone who comes from the outside to truly understand. They don't know the borrower."

The ICBA is also waiting to see what plays out, and wishes the regulators had issued more specific guidance. "We will have to see how it gets applied in the field," said Karen Thomas, the organization's head of government relations and public policy. "There is a lot of room for examiner judgment."

Striking a balance

Lax lending standards helped create the economic meltdown that's still reverberating. In response, regulators have leaned hard on banks to boost their capital reserves and strengthen their loan underwriting.

But small business lending is inherently risky, especially when the economy sours. Even the Small Business Administration, which has strict standards for the loans it backs, had to write off 5% of its main loan portfolio last year -- three times the default rate it faced two years earlier.

At commercial banks, things are even grimmer: Bank of America (BAC, Fortune 500) charged off 16% of its small business loan balance in the first nine months of 2009.

0:00/2:45Small banks still not lending

When credit constricts too far, though, promising startups can't launch and successful companies can't get financing to expand.

"Many small businesses are still struggling to get loans," President Obama said in a speech earlier this month. "We need to make it easier for them to open their doors, to expand their operations, to hire more workers."

Some banks are starting to heed the call. Huntington Bank (HBAN), a major regional lender in the Midwest, recently announced plans to increase its small business lending by $4 billion over the next three years, reaching as many as 27,000 businesses.

"We want to approve more of the applications that we see. Of the demand that is there, we want to be able to say yes more often," said Mary Navarro, the Columbus, Ohio, bank's head of retail and business banking. "Our intent is to be in the forefront of the turnaround. We see things getting better, or at least not getting any worse."

In many areas of the country, reduced demand is the biggest obstacle to a lending rebound. Business owners won't make capital-intensive investments until they're more optimistic about the economy, bankers say.

"There seems to be a lack of confidence," Epling said of the business owners his Florida community bank serves. "Without confidence that their business will see revenue to pay back the loan, many small business owners are just holding tight."

Larry Bauer, president of Planters & Merchants bank in Gillett, Ark., sees similar patterns among his customers, who largely work in the Mississippi River delta agriculture industry. "There is not a lot of demand for new lending," he said.

But in some areas, especially urban ones, entrepreneurs are eager to borrow -- and bankers say they welcome any help the government can offer to ease credit conditions.

"I see demand every day," said Matthew Gambs, CEO of Diamond Bancorp in Schaumburg, Illinois. He's recently worked with firms developing alternative energy sources, building iPhone applications and launching a kids' cooking show. It's been so busy that Gambs committed banker sacrilege: "I worked on President's Day!"

"There are 8,000 community banks out there so you can imagine they are not all going to be in the same situation," said Thomas of the ICBA.

She sees just one solution that will universally help banks boost their small business lending: "We need to get the economy moving again."

List of problem banks grows The Fed’s great rate debate

Saturday, February 27, 2010

Administration proposes help for middle class

To address these issues, the task force has introduced new initiatives for fiscal year 2011, such as a plan to protect retirement savings, a way to lower student loan payments and a proposal to increase a tax credit that would help with rising child care expenses.

Retirement: The retirement savings initiative would introduce new regulations to "improve the transparency and adequacy" of 401(k) savings, and employers will be required to enroll employees in a payroll-deduction IRA if the company doesn't already offer a retirement plan.

Under the same plan, the saver's credit for working families will become fully refundable and will be expanded to match 50% of the first $1,000 of a person's retirement savings for families who make up to $65,000.

0:00/3:03What is America's middle class?

"After a lifetime of employment, American workers deserve a secure retirement," the report said. "Yet for middle-class workers today, especially in the wake of the historic losses to retirement savings and housing wealth in the financial crisis, retirement seems anything but secure."

Education: In order to make college more affordable, the administration plans to make efforts to reform student lending, cap student loans, and proposes to permanently extend the American Opportunity Tax Credit, which is worth up to $2,500 per year.

Caregiving: As a way to help middle-class families handle the high costs of caregiving, the administration said it is aiming to nearly double the Child and Dependent Care Tax Credit and boost funding for the Child Care and Development Fund by $1.6 billion.

Jobs: The administration's plan to protect employees and create more jobs includes passing the Employee Free Choice Act to help workers who want to form unions, and offering tax benefits to small businesses to encourage hiring.

In order to support the manufacturing sector and encourage the creation of green jobs, the administration also plans to improve the process of procuring government contracts, invest in clean energy manufacturing and infrastructure, and add $5 billion to the $2.3 billion Advanced Energy Manufacturing Tax Credit.

How Obama will pay for health reform More people say no to credit

Home Prices

The loss was unexpectedly large. Experts had forecast that prices would be off by only 5% compared with last November, according to Briefing.com. The lone good news is that the rate of year-over-year declines have continued to shrink.

"While we continue to see broad improvement in home prices as measured by the annual rate, the latest data show a far more mixed picture when you look at other details." said David M. Blitzer, spokesman for Standard & Poor's. "Only five of the markets saw price increases in November versus Ocotber."

Four markets covered by the index -- Charlotte, Las Vegas, Seattle and Tampa -- hit their lowest index levels in four years, according to Blitzer. Any gains they recorded in recent months have been erased.

The five markets that showed month-over-month gains were led by Phoenix, where prices rose 1.1%. Thirteen markets had declines, with Chicago being the biggest loser at 1.1% down. Miami and Dallas showed no change.

Blitzer cautioned, however, that November is a weak time of year for home sales so this might not be a harbinger. In fact, when the data are adjusted for seasonal variations, 14 of the markets recorded gains.

Several markets have been on a strong positive run. Prices have risen in Los Angeles, Phoenix, San Diego and San Francisco for at least six consecutive months. Year over year, Dallas, Denver, San Diego and San Francisco have all entered positive territory, something not seen in at least two years in most markets.

The report failed to stir much passion on the part of industry observers, one way or another. Stuart Hoffman, chief economist with PNC Financial Services called it "not disappointing, considering the big run-up in prices for months before."

He expects continued weakness in home prices through the slow winter months followed by some gains in the spring when the current homebuyer tax credit is scheduled to expire. That should bring out a rush of house hunters looking to beat the deadline. Overall, Hoffman forecasts a flat 2010 -- not a bad thing after the steep drops of the past three years.

"The furious ride down on home sales and prices is pretty much behind us," he said. "I don't think we're going up anytime soon. We've hit the flat part of the roller-coaster ride."

Pat Newport, a real estate analyst for IHS Global Insight pointed out the fall had very favorable buying conditions. Not only was the first-time homebuyer tax credit boosting demand for homes, but mortgage rates were at extreme lows with 30-year, fixed-rate loans available for under 5%.

"It was a good time to buy, and we saw that in the sales numbers," he said.

He doesn't believe we have hit the price bottom, yet. "Most experts think prices are going to drop more, 5% or so, by the end of 2010," he said.

Price drop means low interest rates Home Prices

Jobless benefits start ending on Sunday

Starting Monday, the jobless will no longer be able to apply for federal unemployment benefits or the COBRA health insurance subsidy.

Federal unemployment benefits kick in after the basic state-funded 26 weeks of coverage expire. During the downturn, Congress has approved up to an additional 73 weeks, which it funds.

These federal benefit weeks are divided into tiers, and the jobless must apply each time they move into a new tier.

Because the Senate did not act, the jobless will now stop getting checks once they run out of their state benefits or current tier of federal benefits.

That could be devastating to the unemployed who were counting on that income. In total, more than one million people could stop getting checks next month, with nearly 5 million running out of benefits by June, according to the National Unemployment Law Project.

Lawmakers repeatedly tried to approve a 30-day extension this week, but each time, Sen. Jim Bunning, R-Ky., prevented the $10 billion measure from passing, saying it needs to be paid for first.

"Right now, the 1.2 million workers who will lose benefits in March are being held hostage by partisan attempts to delay and block this critical legislation," said Christine Owens, executive director of the National Employment Law Project.

0:00/3:58The challenges facing job growth

Senate Democrats plan to introduce legislation next week that pushes back the deadline as much as a year, an aide said. The House approved a bill in December that extended the deadline to the end of June.

Of course, once the measure is approved, the jobless would be able to reapply for federal benefits, though they would not receive missed payments.

Critical checks

About 11.5 million people currently depend on jobless benefits. Nearly one in 10 Americans are out of work and a record 41.2% have been unemployed for at least six months. The average unemployment period lasts a record 30.2 weeks.

The unemployment rate, which now stand at 9.7%, is expected to rise in February as snowstorms in many states disrupted the economy and stalled hiring.

While unemployment benefits now run as long as 99 weeks, depending on the state, not everyone will receive checks for that long a stretch if the deadline to apply is not extended.

Those extended benefits are vital, experts said. While the economy is slowly recovering, hiring is expected to remain slow in coming years. The unemployment rate is expected to remain at about 10% this year, according to the White House Council of Economic Advisers, and won't fall back to its 2008 level of 5.8% for another seven years.

"Those benefits will expire, but the need to heat their homes and put gas in their cars doesn't expire," said Senate Majority Leader Harry Reid, D-Nev., on Friday. "Those benefits will expire, but the need to take their medicine, or support an aging parent, or take care of their children doesn't expire.

Congressional gridlock

The jobless have anxiously watched from the sidelines as efforts to push back the deadlines took many twists and turns in recent weeks.

The extensions were included in an $85 billion bipartisan job creation draft bill that was unveiled in the Senate earlier this month. But then Reid decided to introduce a slimmed-down version that stripped them out, forcing lawmakers to vote on them as a stand-alone measure this week.

In order to speed the process along, the House on Thursday passed a bill extending the deadline to apply for unemployment insurance to April 5 and for COBRA benefits to March 28. That way, the Senate could have just approved the legislation and sent it directly to the president's desk.

However, Bunning's continued objection blocked Senate approval of the bill Friday.

This is not the first time unemployment insurance benefits -- which enjoy wide bipartisan support -- have fallen prey to politics. Last fall, the House approved adding up to 20 weeks to the federal benefits period. But it took seven weeks for the Senate to send it to the president's desk, during which time more than 200,000 people stopped receiving checks.

When lawmakers finally took up the measure, it passed by a 98-0 vote.

Senate eyes 15-day jobless benefit extension Bill would allow guns on bow-hunting trips

Friday, February 26, 2010

Come visit the U.S. - and create jobs!

America is one of the few developed countries that doesn't market itself abroad, according to industry experts, though states, resorts, hotel chains and attractions certainly promote themselves.

Marketing campaignsfunded by the act could attract an additional 1.6 million international visitors a year, generating $4 billion in spending and creating 40,000 jobs, according to consulting firm Oxford Economics, which has conducted research on behalf of the U.S. Travel Association, a trade group.

"We're the only modern nation that doesn't advertise ourselves," Senate Majority Leader Harry Reid, D-Nev., said Monday as he laid out his plan to spur employment. "Every state in the union, their No. 1 or No. 2 ... economic driver is tourism."

The act would create a public-private venture, similar to a state or city visitors' bureau, that would be run by an 11-member board of industry representatives appointed by the Commerce Secretary.

The $10 fee would be charged only to those visiting from the 35 countries that don't need visas to enter the United States. These include most European countries, as well as Japan, Australia and South Korea.

The fee, which would be charged only once every two years, would be collected when these travelers apply for pre-authorization to come to the United States.

In addition to marketing America as a destination, the venture would provide information on entry requirements and counter misperceptions of the nation's travel policies, according to the legislation. Its operations would be reviewed by the Commerce Secretary, the U.S. Comptroller General and Congress.

Bipartisan support

Co-sponsored by Sens. John Ensign, R-Nev., and Byron Dorgan, D-N.D., the bill previously passed the House of Representatives and enjoyed bipartisan support in the Senate, where it is also expected to be approved. President Obama touted it in a visit to tourism-dependent Nevada earlier this month.

Eager to give their tourism industries a boost, state and local officials have praised the effort. It has 53 co-sponsors in the Senate.

But not everyone has gotten on board. Sen. Jim DeMint, R-S.C., said creating what he called a "government tourism advertising agency" is unnecessary.

"The American travel industry already spends billions every year on advertising with tens of millions focused on international marketing," he wrote in an op-ed piece. "The purpose of the Travel Promotion Act is to subsidize that advertising."

The U.S. Travel Association said that foreign visitors view America's visa and entry process as difficult and unwelcoming. In its view, an advertising campaign to counter that perception will only succeed if it comes with government backing.

Though surveys show that many foreigners view the United States as a desirable place to vacation, fewer are coming here, said Adam Sacks, managing director of Tourism Economics, a subsidiary of Oxford Economics.

"When it comes down to decisions, there are a lot of other destinations that are top of mind," Sacks said.

Overseas travel to the U.S. is down 9% since 2000, said Roger Dow, the travel association's chief executive.

That has hurt the labor-intensive tourism sector, which has lost 441,000 jobs in the last decade, he said. One in eight Americans benefits from the travel industry, the association estimates, either by working directly for a hotel, rental car agency or the like or by being on the payroll of a supplier, such as a taxi service.

"If more people come to the U.S., more Americans work," Dow said.

The bill comes on the heels of a $15 billion jobs measure passed Wednesday by the Senate. Reid said he plans to introduce a string of employment initiatives in coming days.

Senate eyes 15-day jobless benefit extension Senate passes jobs bill

Hired! Aggressive networking gets the job done

"I found in that whole marketing, advertising space, people just weren't hiring."

Winfield both broadened his search to other agencies in New York, San Francisco and Boston and refined it within his own community. "In addition to making phone calls and sending out résumés, I got involved in the Social Media Club of Seattle," he said. "I found like-minded interested people who were looking at using social media to make connections."

Increasing his involvement in the social media space also gave Winfield an idea. "There were so many other résumés that looked so similar to mine. I started thinking about how I could stand out from the crowd," he explained. "I thought social media would be a great way of going about that."

Aside from posting his résumé on LinkedIn, creating a blog and fan page on Facebook and uploading a video manifesto to YouTube, Winfield decided to take out custom, targeted Facebook ads to reach companies directly.

Through targeted ads, Facebook advertisers can reach a specific audience based on keywords or location or even target specific businesses.

"I created specific small ads for individual companies that appeared within the news streams and on the walls of people on Facebook," Winfield explained. "They would see an ad from me that said 'You need Doug Winfield' followed by a description of who I am." Viewers could then leave a message for Winfield or become a fan of his page.

Winfield targeted 20 to 30 companies that way, each with a dedicated ad. Over the period of his two-month campaign, he received 477,000 views within Facebook. Of those, 1,382 people clicked on the ad to see more information. The total cost for Winfield's campaign was $170.

"Some people thought it was brilliant, some people thought it was creepy," he admitted. But several employers called Winfield in for interviews. "It did generate some interest and some meetings."

In January, Winfield was offered a position as the vice president of digital corporate practice for MS&L in New York and is responsible for coming up with new ways to communicate their clients' message using social media. Winfield says that one of things that helped him get hired was his own social media campaign. "That helped me stand out from the pack."

Although the campaign didn't directly lead to an interview at his new employer, Winfield was able to successfully demonstrate his innovative approach to social media by showing them what he had done online, and his new bosses responded well. "I could show what's possible and present myself in a positive way. That went a long way to showing them I could do the same for clients."

The new, new networking

Social media expert Sandra Fathi calls Winfield's creative approach to the job hunt a very smart move, but cautions that it's not for everybody.

"Given his practice area it was a way to showcase his knowledge and intelligence and get the attention of the right folks," she said. "That level of enthusiasm definitely wins brownie points," Fathi added.

In today's job market, job seekers must both stand out from the masses and demonstrate their interest in each specific company, she said, but they should also be sensitive to the type of organization they are targeting.

"The social media skills are exactly what his employers are looking for, so it's a perfect match in his case," said Ford Myers, president of Career Potential, LLC, and author of the book, "Get the Job You Want, Even When No One's Hiring." "For other people it could border on being inappropriate."

"You have to ask yourself, is this appropriate to my own market?" he added. "It would not be the right approach for a nurse or accountant."

Read updates on the people previously profiled in Hired! Join the Hired! group on Facebook .

Have you found a job recently? We want to hear from you. Send us an email and attach a photo. Tell us where you got hired and how you landed the job and you could be profiled in an upcoming story on CNNMoney.com. For the CNNMoney.com Comment Policy, click here .

Don’t ‘discount’ Fed’s rate hike Senate passes jobs bill

Airlines ripe for another merger, experts say

"We've got too many airlines and too many seats and too many hubs," said Ray Neidl, an industry consultant. "In the next two to five years, we're going to have less airlines, and it's either going to be through mergers or bankruptcies."

But don't expect it to happen anytime too soon, he added -- the ongoing recession is dampening the corporate appetite for risk.

"Nobody wants to spend the money to merge two carriers with the economy falling apart," Neidl said. "With an economic recovery, if the airlines have a chance to build up some cash, then they would be able to plan for a merger the way Delta-Northwest did."

If the recession deepens, the industry will probably lose a carrier the hard way, he said: through bankruptcy.

0:00/3:09Airlines hit turbulence with alliances

The International Air Transport Association forecast an industry-wide global loss of $5.6 billion in 2010, following an $11 billion loss in 2009.

Timing is everything

There are a couple of factors that would prevent a merger from occurring soon, analysts say.

For one, the industry is still getting used to the Delta-Northwest consolidation. That merger was financially finalized last year, but it was only on Jan. 31 that Northwest renamed all its flights under Delta Air Lines (DAL, Fortune 500).

Robert Mann, owner of airline industry analysis and consulting company R.W. Mann & Co., said that other carriers are watching the recent merger to see if it proves beneficial.

"[Delta-Northwest] have not demonstrated -- and I think this is to Continental's satisfaction -- that the cost synergies or revenue synergies that were advanced as the reason to do a merger have been realized," he said. "It's probably too early to judge. In fairness, I think the clock is still running on that."

Mann described 2010 as a "show year" during which Delta will demonstrate to its competitors whether it's reaped benefits from the merger.

Daniel McKenzie, airline analyst with Hudson Securities, said that if consolidation doesn't happen within a year or so, then it isn't likely to happen for several more, due to the timing of labor contracts with various airlines.

"If we don't see a merger by late 2010 or 2011, my view is that we don't see a merger for another three years," he said.

When consolidation occurs, merging airlines typically give their workers a raise along with a new contract. Continental Airlines (CAL, Fortune 500) is due for a new contract this year and will be under pressure to provide a raise, McKenzie said. The airline could use that opportunity to pursue a merger at the same time, allowing it to offer just one raise, not two, he said.

"In the terms of the economics and the labor, the wrinkle in all this is quite simply that it doesn't make sense for management to give labor two bites at the apple," he said.

Who's next?

Mann, of R.W. Mann, said that a Continental-United Airlines merger makes much more sense than a United-U.S. Airways merger, because Continental and United already have a codeshare partnership and are "co-located" in Chicago, a major hub for both carriers.

Executives at United Airlines (UAL) and US Airways (LCC, Fortune 500) have both indicated that their companies are open to partaking in a merger, according to statements made at a recent Reuters conference.

But Continental spokeswoman Mary Clark said, in a subsequent e-mail: "Continental's preference has always been to remain independent as long as we can stay competitive."

Home Prices Nashville gas prices drop, but decline is not expected to last long

Fed probing Goldman trades with Greece

Bernanke's response was to a question posed by Senate Banking chief Christopher Dodd, D-Conn., who asked about U.S. financial banks and hedge funds that are making financial bets that the Greek government will default on its loans.

Goldman Sachs (GS, Fortune 500) and other banks have been in the news over reports they secretly helped raise $1 billion in credit for Greece, in a way that was off the balance sheet and helped hide Greece's big debt woes from European Union regulators.

The New York Times reported recently that some of these same banks were also now making side bets that Greece defaults on loans it owes U.S. banks and hedge funds. By betting in favor of default, the U.S. banks and hedge funds win whether Greece pays off its loans or not.

Dodd asked whether Bernanke thought there should be limits on the use of these types of bets to prevent firms from creating intentional runs against government.

"The rising price of these contracts contribute to an atmosphere of crisis, making it even more difficult for the Greek government, in my opinion, to borrow," Dodd said.

Bernanke said that while such bets are an important financial tool to help mitigate risk, the Fed planned to look into reports that the financial bets were made.

0:00/00:58Goldman Sachs under global scrutiny

"Obviously, using these instruments in a way that intentionally destabilizes a company or a country is -- is counterproductive, and I'm sure the SEC will be looking into that," Bernanke said. "We'll certainly be evaluating what we can learn from the activities of the holding companies that we supervise here in the U.S."

The kinds of financial bets that regulators are concerned about are credit default swaps, which are insurance contracts -- the same kind of contracts that pushed the insurance giant American International Group (AIG, Fortune 500) to the brink of collapse.

During the real estate boom, investment firms were buying and selling securities backed by pieces of mortgages. The firms also paid AIG to back up the investments if they turned sour.

When all the real estate investments went bad at the same time, AIG didn't have enough money to pay back all the promises it had made.

Later in the hearing, Bernanke noted the similarity of the situation of banks making bets to hedge against Greek debt to banks that made bets to hedge against real estate debt, which imploded AIG.

"The poster child for that would be the capital arrangements that banks took out for AIG," Bernanke said. "Derivatives have a legitimate purpose, but if they're used to distort accounting results or regulatory ratios, that needs to be addressed."

Congress is considering legislation to make such financial bets more transparent in its regulatory overhaul package. The Senate has yet to pass a bill on that subject.

Bernanke’s audit olive branch List of problem banks grows

Financial reform: Do-or-die time

While there has been bipartisan agreement on such issues as forcing banks to meet stronger capital requirements and unwinding giant financial firms, lawmakers can't agree on a way to protect consumers.

Last December, the House passed a sweeping financial overhaul package. The measure would create a stand-alone consumer agency, impose tougher capital cushions for the largest banks and Wall Street firms, and force them to pay billions into an emergency fund that could be tapped when a troubled company needs to be broken up.

Getting a Senate version has been more problematic.

Early this month, the ranking member of the Senate Banking Committee, Sen. Richard Shelby, R-Ala., officially pulled out of negotiations with the committee chairman, Sen. Christopher Dodd, D-Conn., over an impasse on the consumer agency, although both left the door open for more talks which have since taken place.

Then, a freshman Republican, Sen. Bob Corker of Tennessee, said he'd work with Dodd in crafting a compromise consumer agency.

Key Democrats in Congress and the Obama administration say financial overhaul legislation can't move forward without a strong regulator who's looking to protect consumers.

Crunch time

"The status quo is not acceptable," Assistant Treasury Secretary Michael Barr told the Credit Union National Association in a Tuesday speech. Barr continues to push for a consumer agency, saying it would protect "consumers from sharp practices of the type that pervaded segments of the mortgage market before the crisis."

The clock is ticking -- veteran Congressional watchers say political will to tackle such a complex initiative could crumble as the campaign season picks up this summer.

The White House, the House and Dodd want an independent consumer protection regulator with strong powers to regulate credit cards and mortgages, saying existing regulators fell down on the job of protecting consumers during the financial crisis.

But Republicans -- including Shelby and Corker -- are steadfastly opposed to the independent stand-alone agency, saying a consumer regulator would be at cross-hairs with regulators watching for safety and soundness at banks.

"I believe a stand-alone agency for consumer protection or separating those protections from safety and soundness are nonstarters," Corker said when he started working with Dodd.

To win bipartisan support, Dodd has signaled that he could give up on a stand-alone consumer agency, and instead base the regulator in the Treasury Department or other existing government entity.

As a result, the debate has shifted to how much power and independence a consumer regulator should have and how it should be funded. There's also disagreement about which industries and financial products should be subject to the new regulator, with groups as diverse as credit unions, small banks, auto and payday lenders seeking to avoid a new regulator or new rules.

0:00/5:49Frank: Reform is coming

"Bad actors should be brought into some form of regulatory rubric," said Dan Berger, chief lobbyist for the National Association of Federal Credit Unions."But since credit unions didn't cause the economic crisis we are all clawing out of, we oppose a CFPA (consumer agency) for credit unions."

Other concerns

The banking panel also lacks consensus in a couple of other areas, including what --if anything -- should be done to crack down on executive compensation.

And while senators generally agree that complex financial trades called derivatives should be more transparent and better watched, they disagree about which kinds of derivatives (like trades on currency or trades made by companies to mitigate risk) should get special treatment and continue unregulated.

Lawmakers are also still working out how to strengthen bank supervision and regulator's ability to watch for systemic risk, while reining in Federal Reserve powers.

But insiders say those issues aren't dealbreakers and expect they can be worked out.

"In general, I'm still pretty optimistic we'll get a regulatory reform bill this year," said Brookings Institution analyst Doug Elliott. "This isn't like health care, there are a lot of reasons for some Republicans to join with Democrats."

Under 21? Getting a credit card just got tougher Price drop means low interest rates

Bernanke's audit olive branch

This represents a softening of Bernanke's opposition to an audit of some Fed operations by the GAO, the investigative arm of Congress.

In November, a congressional subcommittee approved an amendment calling for a full-fledged audit, prompting Bernanke to warn that a "takeover" of monetary policy by Congress could undermine market stability.

But Bernanke hasn't forgotten about the Fed's cherished independence. His pledge Wednesday to cooperate with an expanded GAO audit stops well short of giving Congress any oversight of monetary policy -- the decisions the Fed makes regarding interest rates and banking reserves that affect the amount of money sloshing around in the economy.

"Clearly he's trying to offer Congress something of a compromise, so he can keep monetary policy out of the discussion," said Mark Calabria, a former Senate Banking Committee staffer who is now director of financial regulation studies at the libertarian Cato Institute in Washington.

Bernanke's proposal comes as anger over the financial bailouts of 2008 and 2009 has continued to build. Critics say the Fed has failed to fully explain how it arrived at bailout decisions that cost taxpayers billions of dollars.

Bernanke was expected to win reconfirmation to his four-year post as Fed chief in routine fashion. But the outcome appeared in doubt for much of last month before lobbying by the White House in Congress finally pushed the Senate to a 70-30 vote to reconfirm him.

With the economy struggling through the early stages of a jobless recovery and the government widely perceived to be in the pocket of Wall Street, it behooves Bernanke to meet his less vocal critics in Congress halfway, in hopes of forging a deal to preserve the Fed's independence to set monetary policy.

"My sense is that he has seen the writing on the wall and realized that they cannot hide behind a veil of secrecy given the public outrage," said University of Oregon economics professor Tim Duy, who follows monetary policy at his Fed Watch blog.

Yet it would be a mistake to make too much of this latest shift, given all the loopholes in the sort of audit Bernanke evidently envisions.

For instance, much of the anger over the bailouts has focused on the Federal Reserve Bank of New York's handling of its multistage, multibillion-dollar rescue of AIG (AIG, Fortune 500). Documents subpoenaed by Congress this year show the New York Fed pressured the insurer not to disclose the terms of the bailout in securities filings even when the company wanted to.

The key issue there was a list of the securities that had been insured by AIG and the banks that had purchased the derivatives conferring insurance. The New York Fed repeatedly opposed the release of this list, which shows that big banks including Goldman Sachs (GS, Fortune 500) and Deutsche Bank (DB) of Germany received full compensation for securities worth much less in the market.

Duy said Bernanke's proposal wouldn't make such a list of securities accepted as collateral or purchased by the Fed available to the public, though "this is what I think most critics really want."

That said, it wasn't clear what one of the loudest and most persistent foes of the Fed, Rep. Ron Paul, R-Texas, was after Wednesday in his questioning of Bernanke.

Apparently making a case for an audit, Paul rambled on about the Fed's alleged loans to Saddam Hussein in the 1980s and its purported plans to fund a bailout of Greece.

0:00/1:59Politics cloud Bernanke decision

Bernanke responded that the allegations were "absolutely bizarre" before adding that the Fed has no plans to participate in a bailout of any foreign country.

As wacky as the exchange was, it could actually strengthen the case for a full audit. Regular reports from the GAO can only boost the pitifully low level of economic understanding in Congress, Calabria said.

And with rates already near zero and the Fed having spent more than $1 trillion supporting housing, the Fed may already appear to be bowing to political pressure to make sure the economy doesn't deteriorate further in a key election year.

"I'm open to the case that we need Fed monetary independence, but I just don't know that the Fed has made it persuasively," Calabria said. "It's hard to believe Congress could make policy any looser than it is."

Senate passes jobs bill How Obama will pay for health reform

Wednesday, February 24, 2010

Public college tuitions spike 15%, even 30%

Next year's tuition numbers aren't final, since many states are still hashing out their budgets. But one thing is certain: Rates are going up, and the schools that will be hit the hardest are in the states that have seen the worst of the economic downturn.

For example, the Universities of Nevada, Florida, and Washington, each estimate that their tuitions will jump 10% to 15% next year.

University of Washington's Associate Vice Provost, Gary Quarfoth said the school expects to raise rates by 14% to help make up for a $21 million cut in funding from Washington state.

The UC system has endured massive cuts in recent years. The state of California slashed $637 million from the UC school system in 2009-2010, and another $814 million in the 2008-2009 school year.

The school doesn't yet know how much funding it will receive for next year, but it estimates that even with the 30% tuition hike it will still be in the red by $237 million, according to UC spokesman Steve Montiel.

0:00/2:22Cards cut on campus

But the good news for public college and university students is that this is an election year, notes Pat Callan, president of the National Center for Public Policy and Higher Education, which may make legislators reluctant to vote for more budget cuts.

And regardless of any rate hikes, public schools are still a steal compared to private schools. The average sticker price for four-year public colleges and universities this year was relatively low, at $7,020. The average annual cost of attendance at a four-year private college is $26,273; some schools cost as much as $50,000 a year.

Of course, most students don't pay a public or private school's list price; after financial aid is factored in, the actual cost of college is often much lower. The College Board estimates that aid in the form of grants and tax benefits averaged about $5,400 at public four-year colleges in 2009-2010, putting the net cost at about $1,620.

The bad news is that there is no end in sight to year after year tuition hikes, for the simple reason that the cost of college hasn't hurt school enrollment levels. Demand continues to outstrip supply.

"Even universities charging $50,000 a year will be able to fill their seats because there are enough wealthy people out there willing to pay this price," said Chris Miller, executive director at The Education Advisory Board, a higher education consultancy.

"Price sensitivity hasn't manifested itself yet in empty seats."

Search narrows for land for new Franklin school Ohio State is No. 1 - in president’s pay

GDP

Economists surveyed by Briefing.com had forecast growth of 4.7%.

Good end to a terrible year. The growth in the fourth quarter was the highest since the third quarter of 2003. The economy rose at a 2.2% annual pace in the third quarter of last year.

But even with the strong growth in the second half of 2009, the economy shrunk by 2.4% last year. That was the biggest drop in 63 years and first annual decline for the economy since 1991.

The GDP report does not mark an official end of the recession. That determination will be made by the National Bureau of Economic Research, and that group typically waits months -- if not more than a year -- to declare when recessions ended and began.

0:00/3:26The end of the US-centric economy

But two straight quarters of economic growth is typically a sign of a recovery, and most economists agree that the recession ended at some point in the middle of 2009. The Federal Reserve even used the word "recovery" in the statement following its latest meeting earlier this week.

Inventories lead the way. Much of the improvement was driven by a turnaround in inventories, the supply of goods that businesses produce in anticipation of sales. Businesses slashed inventories in late 2008 and early 2009 due to concerns about worsening economic conditions.

According to Friday's report, 3.4 percentage points of growth in the fourth quarter came from the change in inventories. A pickup in auto production was a significant part of the inventory turnaround, even though auto sales themselves only rose modestly.

But the U.S. consumer was somewhat of a bystander in the fourth quarter, as personal consumption grew at only a 2% annual rate in the period. Spending by consumers accounts for more than two-thirds of economic activity.

Lakshman Achuthan, managing director of Economic Cycle Research Institute, said that growth from inventories shouldn't be dismissed since they are typically a driving force of strong recoveries.

"In late 2008 into 2009 everyone freaked out to prepare for Armageddon," he said. "They fired everybody and stopped buying inventories. That overreaction is what's being undone. Yes, you have to have jobs growth, but we'll get that next, probably in January or February."

Other economists say the turnaround in inventories isn't enough to lead to strong growth over a sustainable period. A better labor market that would give consumers the confidence and money they need to spend is also necessary.

"I'm not dismissing the inventory gain, but now that inventories are getting more into line with final sales, then the thrust of economic growth depends on final demand picking up," said John Silvia, chief economist with Wells Fargo Securities.

Stimulus, exports, also feed growth. Economic growth in the third quarter was greatly attributed to the federal stimulus bill passed at the beginning of 2009. But stimulus doesn't appear to have had as big of an impact in the fourth quarter.

Federal spending on stimulus does not show up on any one line of the GDP report. In fact, government spending contributed little to growth by itself, even as non-defense spending by the federal government rose at an annual 8% rate in the quarter.

But money pumped into the economy by tax cuts, such as the first-time home buyer tax credit, coupled with spending by businesses that received stimulus dollars, did have an impact in the quarter, even if it was harder to quantify.

An 18% jump in the value of exports also played a major role in the economy's rebound, contributing nearly 2 percentage points of growth. Silvia said exports have a chance to be a significant source of growth in the coming year, helped by the weaker dollar and stronger growth in developing economies, particularly in Asia.

Investment in business equipment and software jumped at a 13% annual rate, the biggest increase in nearly four years. That spending added almost a full point to GDP, and is often a precursor to employers starting to hire once again.

Slower growth ahead? Sung Won Sohn, economics professor at Cal State University Channel Islands, said there was good news in the report, but cautioned that the economy is unlikely to keep growing at such a strong pace.

"The not-so-good news is that most of the growth came from temporary factors such as inventories and government stimulus which can't be sustained," he said.

Sohn's forecast is for GDP growth of 2.6% in the first quarter, and only a bit higher than that for the full year. Silvia expects GDP growth of 2.3% in the first quarter of 2010, and 2.7% for the full year.

But Achuthan said growth doesn't have to stay above 4% or 5% for the economy to start making significant gains.

"It is normal to have a burst of acceleration coming out of a recession, particularly a sharp recession, and then have growth ease back," he said.

Fed chief vote fans economic fears GDP

Home Prices

"The furious ride down on home sales and prices is pretty much behind us," he said. "I don't think we're going up anytime soon. We've hit the flat part of the roller-coaster ride."

"It was a good time to buy, and we saw that in the sales numbers," he said.

He doesn't believe we have hit the price bottom, yet. "Most experts think prices are going to drop more, 5% or so, by the end of 2010," he said.

Home Prices Condos propel increase in Nashville-area home sales

Get ready for higher mortgage rates

That could be bad news. There is wide agreement that the removal of this support will mean higher mortgage rates, which could hit housing prices and sales hard. Some even worry that this could cause the broader economic recovery to stall.

The program was the largest single injection of cash into the economy by the Fed during the financial crisis, and it will be the longest-lasting source of funds as well. Even though the Fed intends to stop buying mortgages, few expect the central bank will start selling them to private investors any time in the next few years.

Higher rates on the way. But even if the Fed holds onto the mortgages it has already purchased, the act of no longer buying additional mortgages is likely to raise mortgage rates in the coming weeks. Experts say a jump of at least a quarter to a half percentage point is likely.

San Francisco Federal Reserve President Janet Yellen warned of higher rates in a speech Monday. Fed Chairman Ben Bernanke is likely to take questions about the Fed's mortgage program when he testifies about economic conditions on Capitol Hill Wednesday and Thursday.

The spread between the interest on 30-year fixed rate mortgages and the benchmark 10-year Treasury note now stands at about 1.2 percentage points. Before the financial crisis, this spread was typically closer to 1.5 percentage points.

0:00/4:36Why we missed the housing crisis

The worry is that high foreclosure rates and a still struggling economy will make investors demand a bigger spread than "normal", since mortgages carry far greater risk in the current market.

Before the Fed started buying mortgages, the spread had climbed to about 2.5 percentage points. A return to that spread is unlikely, but there is uncertainty about how high it could go.

Paul Kasriel, director of economic research at Northern Trust, said he "wouldn't be surprised" if the spread widened by half a percentage point from current levels.

That can have a significant impact on prices by limiting what a buyer can pay for a home. Take the $178,000 median home price of existing homes sold in January. A buyer with a 20% down payment will pay just over $750 a month in mortgage payments for a 30-year fixed loan at today's rate.

Raise that rate by a half point, and the same buyer will only be able to afford a home worth $170,000 to keep payments near the $750 a month level.

The other concern is that even if the spread doesn't increase that much, mortgage rates could still shoot up simply if Treasury yields start to rise. That's possible if the debt problems in Greece and other weaker European countries is resolved in the new few months and investors who moved to U.S. government debt in a flight to quality move out of Treasurys.

End of tax credit to add to problems. The worries about the Fed pulling back support for housing are compounded by the end of up to $8,000 in tax credits for home buyers. To qualify, buyers face an April 30 deadline to sign a sales contract.

Dean Baker, co-director of the Center for Economic and Policy Research, argues that the Fed's program and tax credit for home buyers "ended the free fall in home prices."

But he thinks that the removal of this support could mean that home prices could start to drop by as much as 1% a month again. He also thinks mortgage rates could climb by as much as a percentage point in the coming months.

Jay Brinkman, chief economist for the Mortgage Bankers Association, said even if there isn't a big impact on home sales and prices, higher rates will lead to a plunge in mortgage refinancings.

The MBA now forecasts refinancings will fall to a range of $500 billion to $600 billion this year from $1.4 trillion lastyear. That will mean even less cash available for homeowners to spend on other goods or to reduce debt.

But Brinkman said the Fed is right to do what it is doing, even if the housing market is still in tenuous condition.

"It's kind of like a pain killer. If you stay on it too long, the withdrawal pains may be worse than the pain you were trying to deal with," he said.

But David Wyss, chief economist with Standard & Poor's, said he isn't sure that the Fed will even follow through and stop buying mortgages. If home sales and prices start to tumble sharply once again, the central bank could be back buying mortgages fairly quickly.

"It's like the parent who is teaching a child to ride a bike who carefully lets go while running along side," he said. "The Fed thinks the child is able to balance by himself at this point, but it's still going to be running alongside the bike, just in case."

Home Prices Swaths of Middle TN feel mortgage stress

Retail Sales

The year-to-year increase was more impressive. January retail sales jumped 4.7%, compared to the same month in 2009.

Consumer spending accounts for two-thirds of U.S. economic activity, and related reports such as retail sales are used to gauge whether a recovery is underway.

Sales excluding autos and auto parts rose 0.6% last month. A consensus of economists had projected ex-auto sales to rise 0.5% in January.

General merchandise store sales rose 1.5% in January, rebounding from a 1.1% drop in the prior month, and department store sales were up 0.2% after a 0.4% decline in December.

Non-store sales, which include online retailers, jumped 1.6% last month, following a 2.2% increase in December.

While retail sales in February may be weak given the recent snowstorms in the Northeast, he said he expects sales to improve further into the year.

Tuesday, February 23, 2010

Retail Sales

The year-to-year increase was more impressive. January retail sales jumped 4.7%, compared to the same month in 2009.

Consumer spending accounts for two-thirds of U.S. economic activity, and related reports such as retail sales are used to gauge whether a recovery is underway.

Sales excluding autos and auto parts rose 0.6% last month. A consensus of economists had projected ex-auto sales to rise 0.5% in January.

General merchandise store sales rose 1.5% in January, rebounding from a 1.1% drop in the prior month, and department store sales were up 0.2% after a 0.4% decline in December.

Non-store sales, which include online retailers, jumped 1.6% last month, following a 2.2% increase in December.

While retail sales in February may be weak given the recent snowstorms in the Northeast, he said he expects sales to improve further into the year.

Job Growth

But, at the same time, the Labor Department revised its previous estimates for the number of jobs that have been lost over the past 25 months. What they found wasn't pretty.

Since the recession began in December 2007, the economy has lost 1.4 million more jobs than previously believed. The adjustments also showed losses for 2009 alone came to 4.8 million jobs, more than 600,000 additional lost jobs than previously estimated.

"We're coming out of a very, very steep downturn," said Dean Baker, co-director of the Center for Economic and Policy Research. "The revisions show that we have a really big hole to come out of."

The revision came about because the government had been dramatically underestimating the number of businesses that were closing due to the recession.

Signs of improvement, but steep hill to climb

Economists estimate that the country needs to create at least 125,000 jobs per month just to keep up with the nation's expanding job force. That translates into 11 million jobs just to get back to the 5% unemployment rate from before the recession.

The downward revisions of past job losses are a stark reminder of how much the economy needs to turn around. There are now 14.8 million unemployed Americans, who have been jobless for an average of 30 weeks -- an all-time high.

"Even as today's numbers contain signs of the beginning of recovery, they are also a reminder of how far we still have to go to return the economy to robust health and full employment," said White House economist Christina Romer in a statement.

"It is important not to read too much into any one monthly report, positive or negative," Romer added. "It is essential that we continue our efforts to move in the right direction and replace job losses with robust job gains."

There were signs in January's report that the worst of the labor decline is largely over, and many businesses are beginning to hire again.

The manufacturing industry created 11,000 jobs last month, and the services industry was the biggest jobs creator, with a net gain of 48,000 jobs. Of those services gains, 42,100 came from the retail sector, suggesting businesses are hopeful that the recent growth in consumer spending wasn't a fluke.

Perhaps the most encouraging sign from January's report was the addition of 52,000 temporary workers, whose hiring often signals that employers are starting to gear up again.

Employers also brought many workers on reduced hours back to full-time work status in January, another step seen as a precursor to hiring new workers. The number of workers who were seeking full-time employment but were working only part-time hours plunged by 9%, pushing the so-called under-employment rate down to 16.5% from 17.3% in December.

That resulted in longer hours for workers: The hourly work week rose by an average of 6 minutes to 33.9 hours in January. With a modest 4-cent gain in the average hourly salary, the average weekly paycheck rose by $1.36 to $761.06.

Employers still cautious

Still, it wasn't all good news. Several sectors continued to shed jobs, including the hard-hit construction industry, which shed another 75,000 jobs in January. The transportation and financial industries also lost in excess of 10,000 jobs, and the government shed a net 8,000 positions in January.

0:00/3:03What is America's middle class?

"Employers are still very cautious about hiring people and adding to their payrolls on a permanent basis," said Joanie Ruge, senior vice president at outsourcing firm Adecco Group North America, a unit of the world's largest employment staffing firm. "Many companies are looking to make sure they don't aggressively add staff -- and then the economic turnaround doesn't last, and they're force to lay off again."

Economists were cautious in their optimism as well. Though the unemployment rate fell to 9.7% from 10%, economists were skeptical that a month of job loss could muster such a large decline in the jobless rate.

Many experts chalked up the decline to the recent round of revisions impacting the estimated number of people in the workforce.

"January's rate showed an exaggerated sense of improvement in labor market," said Mark Vitner, economist at Wells Fargo. "But there is improvement. I don't want to take that away."

The big jobs hole U.S. jobless rate dips below 10 percent

The Fed's great rate debate

There are plenty of experts who argue that the Fed should move sooner rather than later to raise the federal funds rate, its key lending rate that is used as a benchmark for the interest paid on credit cards, home equity loans and many business loans.

Keeping that rate, also known as the fed funds rate, low is one of the tools used by the central bank to try to spur economic activity. This rate has been near 0% since December 2008.

In its most recent statements, Fed policymakers said they expect the rate will stay "exceptionally low" for an "extended period." It repeated that assurance Thursday.

Still, the Fed surprised markets by raising its discount rate, which is what banks pay to borrow directly from the Fed, to 0.75% Thursday. The move is largely symbolic since that rate affects virtually no borrowing at present.

0:00/1:52The Fed's first steps to normalcy

But Kansas City Fed President Thomas Hoenig argued at the Fed's most recent meeting last month that the promise of low rates risks creating new bubbles in financial markets and lays the groundwork for unacceptably high inflation. He suggested that raising the federal funds rate "modestly higher" soon would lessen those risks.

Many doubt benefits of low rates. Many other experts argued that keeping the fed funds rate this low does not really help the economy. They said it only subsidizes bank profits by keeping their cost of funds exceptionally low.

These critics of Fed policy contend that many consumers and investors have been hurt by the low rates and that they are a reason banks have not been lending.

"One of the reasons lending is having such a hard time getting off the ground is that interest rates are so low," said Brian Wesbury, chief economist at First Trust Portfolios. "Why would someone lend to a risky small business at 3.5%, especially if you expect rates to go up?"

Others argue it's not the level of interest rates that is determining the amount of lending taking place, but banks' concerns about losses on previous loans coupled with borrowers' worries about their ability to repay loans. In other words, a rate hike might not hurt loan demand as long as the economy is improving.

"The Fed economists assume that the cost of money is all that matters. But when you have losses as high as today, that's all the bankers have time to think about," said Christopher Whelan, managing director of Institutional Risk Analytics.

Few businesses or consumers who are looking to borrow to today's rates would be priced out of the market if rates rose one or even two percentage points, according to Richard Bove, a bank analyst at Rochdale Research.

"If I'm a business and I believe the economy is growing, the fact that the fed funds rate is 0% or 1% won't impact my decision to hire people or restock inventory," Bove said.

But few expect the Fed will boost the fed funds rate any time soon. Fed fund futures on the Chicago Board of Trade were little changed Friday even after the rise in the discount rate. The futures forecast only about a 50% chance of an increase to 0.5% by September of this year.

St. Louis Fed President James Bullard said at a speech Thursday night that the rise in the discount rate should not be considered "a warning shot" of higher rates to come, and that the fed funds rate is likely to stay unchanged for the rest of this year.

Low rates have their advocates. There are still plenty of Fed policymakers and other economists who say it's important to keep this rate as low as possible as long as possible, given continued weakness in the U.S. economy.

Fed Chairman Ben Bernanke, who is an expert in the history of the Great Depression, has warned several times that a much stronger recovery early in the course of that downturn was choked off by the Fed tightening too soon. Other central bank policymakers say they want to avoid making that mistake again.

"This stance is necessary to support a recovery that is in an early stage and, in my view, still fragile," said Fed Governor Elizabeth Duke in a speech Thursday night.

Those who believe the low rates are justified say with unemployment still near 10% and consumer prices basically in check, there is no need for the Fed to raise rates.

"I think a rate hike in the near-term would be very disruptive," said Mark Zandi, chief economist with Moody's Economy.com. "Businesses are still very shell-shocked and nervous."

Zandi said even modestly higher rates could lift mortgage rates, which could quickly choke off a recovery in home prices and send mortgage foreclosures higher still.

Kevin Giddis, managing director of fixed income at Morgan Keegan, added that rate hikes are only justified when the Fed needs to slow economic growth in order to battle inflation.

"You see pockets of improvement, but I would stop short of saying we're in recovery," Giddis said. "We're playing with psychology here too. The feeling is we need to see some sustainable improvement in housing and employment before we can take even a small increase in rates."

Price drop means low interest rates Fed: Slow go on jobs recovery

Monday, February 22, 2010

How Obama will pay for health reform

The White House cost estimates were based on Congressional Budget Office (CBO) estimates of Congress' bills. The CBO, however, will not be doing a separate analysis of the president's proposal, at least not unless it is formally introduced as a bill at some point.

The president's proposal aims, among other things, to subsidize health insurance coverage for a majority of the roughly 45 million uninsured Americans and to guarantee insurance coverage for anyone regardless of health status.

It also would subsidize state costs for an expansion in Medicaid and create an insurance supermarket where those buying policies on their own could easily comparison shop and where members of Congress would have to buy their policies.

The president's proposal, like the Senate and House bills, also offers a series of health care delivery system reforms that hold the promise of reducing health care costs over time, and to reducing waste in Medicare spending.

But many of the changes the proposal calls for aren't free. Obama proposes to pay for the additional burden on the federal coffers in several ways. Among those that would have a direct bearing on individuals and businesses, he would:

Tax high-cost medical plans: Obama would impose an excise tax on insurers offering high-cost health insurance policies.

The idea behind the tax is to persuade workers and employers to choose lower cost plans. While technically it's a tax on insurers, insurers are expected to pass along those costs to their policyholders.

0:00/3:47Address obesity first

Once employers start spending less money on health care they will use the money saved to pay workers higher wages, or so the economic theory goes. The workers will then owe income tax on those higher wages, providing revenue to help pay for health reform.

Relative to the Senate bill, the president's proposal raises the thresholds for plans that would be subject to the tax -- to $10,200 for singles, up from $8,500; and to $27,500 for families, up from $23,000.

Higher thresholds would apply to plans that provide coverage to high-risk professions such as firefighters. And they would be adjusted to account for plans that cover a disproportionate number of women or older workers, since those groups tend to be charged higher premiums.

Obama's plan would also delay enactment of the new tax by five years relative to the Senate bill, from 2013 to 2018.

Increase Medicare tax on high-income households: Currently, the Medicare payroll tax is 2.9% on all wages -- with the worker and his employer each paying 1.45%.

The president's proposal would raise the percentage paid by high-income individuals by 0.9 percentage points, so they would pay 2.35%.

Obama's proposal also would subject the investment income of high-income households, such as dividends, interest and rent, to the full 2.9% Medicare tax as well. Those filers would foot the full 2.9% on investment income themselves.

High-income is defined as those making more than $200,000 ($250,000 for couples filing jointly).

Require insurance coverage: The president would impose a financial penalty on most Americans who don't buy health insurance.

Individuals would pay the greater of $325 or up to 2% in income in 2015; and the greater of $695 or up to 2.5% in 2016 and beyond. The $695 penalty would adjust for inflation after 2016.

Require employers to pay if they don't provide coverage: The president's proposal would also impose requirements on employers with more than 50 employees to pay into the system if they do not provide their workers with coverage, or if they provide a plan but it proves unaffordable for some workers.

Companies would only have to pay on behalf of those employees who then qualify for taxpayer-supported health insurance subsidies when they buy a policy on their own.

The penalties would be $3,000 per full-time worker if the coverage offered at work is unaffordable; or $2,000 per full-time worker if the company doesn't offer a plan.

During an initial transitional period, companies would only have to pay penalties on a portion of the employees who qualify for subsidies.

While the president's proposal doesn't define what is meant by "small businesses," his plan would offer $40 billion in tax credits to encourage them to offer coverage, and if they have fewer than 50 employees they would be exempt from having to pay into the system.

Impose new fees on the health industry: The president's proposal would impose new fees on health care companies such as drugmakers, medical device makers and insurers. The fees would be in exchange for the new business that will come their way as a result of the expected influx of Americans who will obtain health coverage and use more medical services.

The proposal would also "limit excessive compensation paid by certain health insurance companies."

Trim various health-related tax breaks: The president's proposal would impose an additional 10% penalty for non-health withdrawals from tax-advantaged health savings accounts.

It would limit to $2,500 the amount of money workers may contribute to flexible health spending accounts at work. It would also increase how much the non-elderly and the non-disabled would have to rack up in medical expenses before being allowed to deduct expenses above that amount on their federal income tax return.

Shoulda, coulda - now gotta - curb debt Long-term care insurance bill’s prospects diminish

Don't 'discount' Fed's rate hike

One might have expected a big move down: Higher rates equal increased borrowing costs and that equals a sluggish economy. So the logic goes.

Investors may be dismissing the Fed's boost to the so-called discount rate as largely a symbolic move because the Fed has not indicated any willingness to raise its more important federal funds rate anytime soon.

But make no mistake. The days of ridiculously easy money appear to be coming to an end. Can I get an Amen to that?

The Fed is still taking a slow and steady approach to rate hikes. That's probably smart. Rates are going to remain near historic lows for a long time.

So it seems silly to worry about how future rate hikes could kill the nascent consumer spending recovery and lead to a double-dip recession.

Instead, it may be time to salute the Fed for at least getting the rate hike wheels in motion. It seems to finally realize that it is time to pull back on stimulus programs that, while necessary at the worst of the credit crisis, could cause inflation problems down the road.

"This is good news. Presumably this is a sign of strength and confidence but It's also a sign of necessity," said Karl Mills, the manager of the Counterpoint Select Fund and president and chief investment officer for Jurika Mills & Keifer in Oakland, Calif. "The Fed has to improve its balance sheet. The only way to get the fiscal house of the U.S. in order is to do that."

Concerns about heavy debt levels in Greece and other nations in Europe have dominated the financial headlines this year. But the United States also has a rising debt load, and some experts worried that the Fed was going to make matters worse.

That no longer seems to be as big of a concern.

"We have this scenario where the recovery is working. It's not monstrous but it's good enough. So some of the stimulus can be removed," said Jason Pride, director of investment strategy for Glenmede, a Philadelphia-based asset management firm. "This is a very surgical step. The Fed wants to signal it is tightening but doesn't want to move too fast."

Sure, the Fed isn't likely to raise the federal funds rate, the overnight lending rate that influences many consumer and business loans, just yet.

It's probably going to hike the discount rate, which is what banks pay to borrow directly from the Fed in an emergency, two more times before boosting the federal funds rate.

That will put the spread between the discount rate and the federal funds rate back to is normal level of 1 percentage point. The discount rate is now at 0.75%, while the federal funds rate stands at between 0% and 0.25%.

0:00/1:52The Fed's first steps to normalcy

But widening that spread is going to be key. The fact that many big banks enjoyed gargantuan profits last year was in large part due to the Fed keeping rates so low. And that has led to a populist backlash against the financial services sector and the Fed itself.

By raising the discount rate, even by just this tiny fraction, Federal Reserve chairman Ben Bernanke appears to be sending the message that it's time to stop treating banks with kid gloves. It's time to reward fiscally responsible individuals and defend the dollar as well.

Low rates punished anyone trying to earn interest in a savings account. Low rates also helped to weaken the dollar and fuel a rise in commodities prices, most notably oil and gas. But the dollar is finally showing some signs of life -- a recognition of the bigger fiscal problems in Europe.

If that trend continues, oil prices could head lower. And the signal from the Fed that more tightening is inevitable should lead to more gains for the greenback. While a stronger dollar may worry some investors, it's welcome news for consumers.

"The stock market has been going up but people on Main Street haven't been getting a lift," said Keith McCullough, CEO and founder of investment research firm Hedgeye Risk Management and a vocal Fed critic.

"With higher rates, people with savings accounts will earn more and with the dollar going up, you'll pay less at the gas pump," he added. "I've been tough on the Fed but I have to give Bernanke a pat on the back."

Reader comment of the week: You don't have to agree with me to get a shout-out. Nearly all of the reader feedback on Thursday's column about Sirius XM came from fans of the company who think I'm crazy to suggest the stock's amazing run may soon end.

My favorite comment was this one from Joseph Pippins: "I am tired of people and 'analysts' trying to drive down the stock price of this company. Every time I have heard someone talking trash about a monopoly stock such as SIRI it has always bit them. This stock is gold now and was gold at .05 cents a share. Get out of the way and stop spewing negative garbage," he wrote.

In my defense, I don't think it's "negative garbage" to point out risks for a stock that's on a tear. That's just reasonable caution. But Pippins and other Sirius XM fans are correct to note that I've been wrong about the stock in the past.

What's more, I have no position in the stock and actually love the company's service. (I'm not technically a subscriber but I get some Sirius XM music channels via DirecTV.) So I'd be happy to eat crow later this year if Sirius XM keeps rising.

-- The opinions expressed in this commentary are solely those of Paul R. La Monica.

Price drop means low interest rates Fed raises emergency funding rate

Senate eyes 15-day jobless benefit extension

Without an extension beyond the Feb. 28 deadline, people receiving state jobless benefits won't be able to apply for additional federally paid unemployment insurance, and anyone already receiving those checks could be cut off. They also won't be able to sign up for the 65% federal subsidy for COBRA unemployment insurance.

Lawmakers were on track in mid-February to introduce legislation that would have extended the deadline for the two benefits to May 31, at a cost of $25 billion over 10 years. But Senate Majority Leader Harry Reid, D-Nev., then decided to offer a slimmed-down job creation package that did not include the provision.

In December, the House passed a $154 billion job creation package that extended the deadline to June 30. Speaker Nancy Pelosi, D-Calif., last week urged her Senate colleagues to pass a more comprehensive jobs measure.

The 15-day extension would give lawmakers more time to enact a longer fix, but it left them the object of scorn from consumer advocates, who want benefits extended through 2010.

"The extended benefits program will be needed for another year at least, so a 15-day extension makes no sense," said Ross Eisenbrey, vice president of the Economic Policy Institute. "Extending the program for only 15 days will force the states to twist themselves into knots to restart the program while simultaneously preparing to shut it down again. This is waste and abuse."

Essential benefits

About 11.5 million people currently depend on jobless benefits. Nearly one in 10 Americans are out of work and a record 41.2% of the jobless have been unemployed for at least six months. The average unemployment period lasts a record 30.2 weeks.

While unemployment benefits now run as long as 99 weeks, depending on the state, not everyone will receive checks for that long a stretch. Those who run out of their 26 weeks of state-paid coverage after Feb. 28 would not be able to apply for federal benefits, unless an extension is approved.

Without an extension, the jobless currently receiving extended federal benefits, who are divided into tiers, would stop getting checks once they complete their tier.

One million could lose jobless benefits South’s jobless seek work in Tennessee

Sunday, February 21, 2010

Consumer prices rise 2.6%

The core CPI, which is more closely watched by economists because it strips out volatile food and energy prices, rose 1.6% over the past year. That's the lowest level since September, when prices rose at a rate of 1.5%.

January: For the month of January, overall prices rose 0.2%. Economists surveyed by Briefing.com had forecast a 0.3% rise.

In a surprise drop, the core CPI fell 0.1% in the month, the largest decline since December 1982. Analysts had expected a 0.1% increase.

The drop came amid falling prices of housing and shelter, which fell 0.5%. The index for lodging away from home fell the most -- 2.1%, while rent prices were unchanged.

The drop in overall core CPI for January was a bit of a fluke because of the volatile lodging prices, said Mark Vitner, an economist at Wells Fargo Securities.

"We're probably seeing a lag response of businesses cutting back on meetings and traveling, and that's weighing on the core CPI," he said. "So the number is a little exaggerated -- we're not going to get declines like this month over month."

Prices of new vehicles and airline fares dropped as well, while medical care prices rose the most since January 2008 and the index for used cars and trucks climbed higher for the sixth-consecutive month.

Overall consumer prices were boosted by rising energy prices. Gasoline prices rose 4.4%, pushing the energy index up 2.8% in January, the ninth-consecutive month of increase.

Fuel oil and natural gas prices rose as well, while electricity prices fell. Higher prices of dairy products and fruits and vegetables boosted the food index up 0.2% in January.

Despite the overall rise in consumer prices, Vitner said inflation is unlikely to become a problem this year as housing costs fall, vehicle prices level off and airline fares drop.

"But that doesn't mean [inflation] won't become a problem in the future," said Vitner. "While I expect continued good news in 2010, some of the factors restraining inflation this year will likely swing the other way in 2011."

Price drop means low interest rates Consumer Confidence

One million could lose jobless benefits

Without an extension, people receiving state jobless benefits won't be able to apply for additional federally paid unemployment insurance, and anyone already receiving those checks could be cut off.

Justin Julian is one the 1 million people who are desperate for Congress to take action next week. If they don't, he and his wife won't have a place to live.

The Lewisville, Texas, resident lost his software position in August and will miss the deadline to apply for additional federal benefits by only a few days. He currently receives $1,600 a month in unemployment benefits, which he uses to cover rent, car payments and the electricity bill. He must borrow money from friends and family to pay for food.

"Without the unemployment insurance, we can't pay any of our bills," said Julian, 39, whose wife is disabled. "It's kind of doomsday for us. We'll wind up sleeping on friends' couches."

Stalled in the Senate0:00/3:40Job market: gradually growing

Lawmakers were on track last week to introduce legislation that would have extended the deadlines to May 31 at a cost of $25 billion over 10 years. But Senate Majority Leader Harry Reid, D-Nev., decided Thursday to offer a slimmed-down job creation package that did not include the provision.

But Reid plans to address the jobless benefits deadlines when Congress returns next week, a Senate Democratic aide said.

"We also hope to pass an extension of expiring provisions, including unemployment insurance and COBRA, next week," the aide said. "With Republican cooperation, we should be able to do so."

In December, the House passed a $154 billion job creation package that extended the deadlines to June 30. Speaker Nancy Pelosi, D-Calif., last week urged her Senate colleagues to pass a more comprehensive jobs measure.

Black hole: Where do all the resumes go?

While extending the deadline generally enjoys bipartisan support, passing a bill to do so is an entirely different matter. Last year, it took seven weeks for legislation extending unemployment benefits to get through the Senate. But when lawmakers finally took up the measure, it passed by a 98-0 vote.

Potentially out of luck

"These are essential benefits that people spend on food, utilities and housing," said Judy Conti, federal advocacy coordinator at the National Employment Law Project.

The law project would like to see the deadline extended to the end of the year so "workers don't fall hostage" to the machinations within Congress, Conti said. Julian agrees, saying waiting for lawmakers to act has been "a living hell."

State agencies are expected to start mailing notices to the jobless to alert them to the impending end of their benefits.

While the economy is slowly recovering, hiring is expected to remain slow in coming years. The unemployment rate is expected to remain at about 10% this year, according to the White House Council of Economic Advisers, and won't fall back to its 2008 level of 5.8% for another seven years.

Bernanke slammed, but wins 2nd term Countdown to a new job … 211 days

Economic news

Sunday, February 28, 2010

Retail Sales

Doctors threaten Medicare backlash

Regulators ease up on small business loans

Saturday, February 27, 2010

Administration proposes help for middle class

Home Prices

Jobless benefits start ending on Sunday

Friday, February 26, 2010

Come visit the U.S. - and create jobs!

Hired! Aggressive networking gets the job done

Airlines ripe for another merger, experts say

Fed probing Goldman trades with Greece

Financial reform: Do-or-die time

Bernanke's audit olive branch

Wednesday, February 24, 2010

Public college tuitions spike 15%, even 30%

GDP

Home Prices

Get ready for higher mortgage rates

Retail Sales

Tuesday, February 23, 2010

Retail Sales

Job Growth

The Fed's great rate debate

Monday, February 22, 2010

How Obama will pay for health reform

Don't 'discount' Fed's rate hike

Senate eyes 15-day jobless benefit extension

Sunday, February 21, 2010

Consumer prices rise 2.6%

One million could lose jobless benefits

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