Consumers feel more glum in July

NEW YORK (Reuters) -- U.S. consumer sentiment wilted in early July to the weakest since March, when confidence in the financial sector and economy were at a low ebb, the Reuters/University of Michigan Surveys of Consumers showed on Friday.

Consumers' rising concerns about a protracted economic downturn, job security and erosion of wealth were the main factors depressing sentiment, the survey said.

Its preliminary index of confidence for July fell to a reading of 64.6 from the final reading for June of 70.8.

July's preliminary reading was well below economists' median forecast for 70.5 and the first fall in the index since February.

"It underlines the ongoing gloom facing the U.S. consumer and further delays prospects for a near-term recovery. That will weigh heavily on risk sentiment," said Brian Dolan, senior currency strategist with Forex.com in Bedminster, New Jersey.

After the report, stocks lost ground and the dollar extended losses against the yen, while Treasury bond prices added to gains, retesting the session highs on a safe-haven bid.

The survey's index of consumer expectations fell to 60.9 from June's final reading of 69.2.

The index of current economic conditions slipped to 70.4 from June's final reading of 73.2.

"Consumers concluded that the economic downturn would last longer and their personal finances would not recover as quickly as they had previously expected," the Reuters/University of Michigan Surveys of Consumers said in a statement.

Recent income gains were reported by the fewest consumers in the more than fifty-year history of the survey, the statement said.

Stocks' recent pullback has put renewed pressure on household budgets. The S&P 500 index has fallen about 4% so far in July.

0:00/2:08Cities' lucky zip codes

"Consumers reported a larger negative shift in their longer term outlook for the economy. The majority of consumers thought that widespread unemployment would persist over the next five years," the Reuters/University of Michigan Surveys of Consumers statement said.

"People are probably unhappy with the employment situation and the increase in energy prices we saw this spring," said Gary Thayer, senior economist at Wells Fargo Advisors in St. Louis, Missouri.

Consumers are concentrated heavily on reducing outstanding debts. "Overextended finances and job and income uncertainty have made consumers much more saving minded," the Reuters/University of Michigan Surveys of Consumers statement said. 

Job Growth

NEW YORK (CNNMoney.com) -- The battered U.S. labor market took a step backwards last month as employers trimmed more jobs from their payrolls in June, according to a government report Thursday.

There was a net loss of 467,000 jobs in June, compared with a revised loss of 322,000 jobs in May. This was the first time in four months that the number of jobs lost rose from the prior month.

The June job losses were also far worse than the forecast of a loss of 365,000 jobs by economists surveyed by Briefing.com.

The unemployment rate rose for the ninth straight month, climbing to 9.5% from 9.4%, and hitting another 26-year high. Economists had been expecting that the unemployment rate would hit 9.6%.

Nearly 3.4 million jobs have been lost during the first half of 2009, more than the 3.1 million lost in all of 2008.

"It's not the catastrophic numbers we saw earlier this year, but they're still pretty damn lousy," said Keith Hembre, chief economist with First American Funds.

The job losses don't tell the full picture of the pain the labor market either. The average hourly work week fell to 33 hours from 33.1 hours in May, a record low in readings that go back to 1964. Average hourly wages were unchanged, so the shorter week shaved $1.85, or 0.3%, off of the average weekly paycheck.

The so-called underemployment rate, which counts those who are working part-time jobs because they couldn't find a full-time position as well as discouraged job seekers who have stopped looking for work, rose to a record high 16.5%.

0:00/1:36Unemployment's domino effect

Those who have been out of work for six months or more, many who have run out of unemployment benefits, climbed to nearly 4.4 million, also a record high.

Jared Bernstein, the chief economic advisor to Vice President Biden, said the latest figures are disappointing to the administration.

"Less bad is not what we're shooting for," he told CNNMoney.com.

But Bernstein added that the $787 billion economic stimulus package passed by Congress earlier this year has yet to have its full impact on the labor market.

"There's a lot more to go," he said. "We have to let this medicine get into the patient, let this economic activity have the job creation effects we know [are] coming."

Tig Gilliam, CEO of Adecco Group North America, a unit of the world's largest employment staffing firm, said he's concerned about continued sluggish spending by consumers, which will delay any hopes for an economic recovery.

"The 90.5% who have jobs aren't spending," said Gilliam.

But Robert Brusca of FAO Economics said the hopes for a turnaround that accompanied the previous jobs report should not be completely wiped out by the weak June report.

"It's a disappointing month but the trends are still quite positive on the whole," he said, pointing to the smaller rise in unemployment and a three-month average of job losses that continues to slow.

How high will the unemployment rate go?

Others said they see little hope for a quick turnaround in hiring or unemployment.

"The green shoots in the job market are hard to find," said Sung Won Sohn, economics professor at Cal State University Channel Islands. "Businesses are determined to trim costs by cutting payrolls. Employers want to make sure that a sustained economic recovery is here before hiring. The job market will become the Achilles' heel of the coming recovery."

Gilliam, Hembre and Sohn all predicted that the unemployment rate will be above 10% by the end of this year. Brusca thinks it could top out at 9.8%, but wouldn't rule out a 10% reading.

In addition to the continued job losses driving the rate higher, any signs of improvement in the economy can actually boost the unemployment rate. That's because discouraged job seekers no longer counted as unemployed return to the labor force looking for work.

"Some of the rise in unemployment towards the end of the cycle is good news," said Brusca.

The only good news reported by the Labor Department Thursday was that the number of workers filing initial jobless claims fell to 614,000 last week from 630,000 the week before. That was roughly in line with forecasts. 

Trade gap narrows to smallest in a decade

WASHINGTON (Reuters) -- The U.S. trade gap narrowed unexpectedly to $26 billion in May to the lowest reading since November 1999, as exports rose and imports shrank, government data on Friday showed.

The Commerce Department said exports increased 1.6% to $123.3 billion, while imports declined by 0.6% to $149.3 billion.

Analysts polled by Reuters had expected the trade deficit to widen to $30.2 billion in May. The trade gap in April was revised to $28.8 billion from a previously reported $29.2 billion deficit.

May's import level was the lowest since July 2004 and the 10th straight monthly decline, providing further evidence that the recession-mired United States has diminished as a source of demand for the rest of the world.

The auto sector has been hard hit in the economic slowdown and May imports of automotive vehicles and parts slipped to $10.2 billion, the lowest level since March 1996, while auto exports were the lowest since July 1998.

The monthly deficit on goods trade with China grew to $17.5 billion from $16.8 billion in April and was the largest with any single country.

But the U.S. trade deficit with other big trading partners declined, falling to $2.8 billion with the European Union in May, for the lowest reading since March 1999, and retreating to $1.9 billion with Japan, which was the lowest since February 1984.

Imported oil cost $51.21 a barrel in May, up from $46.60 in April. The value of crude oil imports in May declined only slightly to $13.4 billion, despite a sharper decline in the quantity of oil actually imported, to 262 million barrels from 293 million in April, the Commerce Department said. 

California on brink of fresh budget talks

SAN FRANCISCO (Reuters) -- California Assembly Speaker Karen Bass said Wednesday she sees stalled negotiations with Gov. Arnold Schwarzenegger over closing the state's $26.3 billion budget gap resuming by Friday.

California has been burning through its cash without a budget agreement and is issuing IOUs for tax refunds.

The legislature is being urged to consider taxing marijuana to help raise revenues.

Bass, a Democrat, and Schwarzenegger, a Republican, have been at odds in recent days over his demands for overhauling some state operations with new rules, including some to root out and prevent fraud in the state's welfare system, as part of a broader agreement for balancing the state's budget.

0:00/2:26States face budget disasters

"The problems are with the reforms, and I hate to call them reforms because they are really just policy concerns the governor has had for the past few years, that they are just too massive," Bass told Reuters in a telephone interview.

But Bass said she is hopeful budget talks would resume by Friday. "There's some wiggle room," she said. "I do see us back at the negotiation table in the next day or two."

State Senate Republican Leader Dennis Hollingsworth said lawmakers from both parties would welcome budget talks resuming as soon as possible. "There's not a lot of movement," Hollingsworth said of the day's business in the state capital of Sacramento.

Burning through cash. Without a budget agreement, California is going through its cash while suffering its worst slump in personal income tax revenues since the Great Depression because of the recession, rising unemployment and the housing downturn.

The state's cash crunch has grown so severe the state controller is issuing "IOUs" promising payment for tax refunds and vendors in order to have money available to pay priority bills such as payments to debt holders.

One option open to the government of the most populous U.S. state for raising revenue is to tax marijuana, said retiree Nadene Herndon, a 58-year-old retire in Fair Oaks, California. Herdon promotes a tax on pot in a television commercial, paid for by the Marijuana Policy Project Foundation, that began airing on Wednesday in some California broadcast markets.

"I'm a medical marijuana user, but I bake with it. I had several strokes several years ago and have left-sided weakness when I get fatigued ... It helps late at night when I can't get to sleep," she told Reuters by telephone.

Pointing to cigarette smokers, who light up regardless of California's stiff tax on tobacco, Herndon said marijuana could prove a steady source of revenue for the state. "It should be taxed like any other commodity," she said. 

Health tax is in flux. Now what?

NEW YORK (CNNMoney.com) -- Lawmakers searching for a way to pay for health care reform are facing some rough waters.

Very rough.

Sen. Max Baucus, chairman of the Senate Finance Committee, has said repeatedly thathealth reform would be paid for with a combination of spending cuts and tax increases.

Baucus and others have made some progress through savings in Medicare, Medicaid and other programs.

On Wednesday, for instance, Vice President Biden said hospitals would reduce costs by $155 billion over 10 years. But nothing is final until that deal between the White House and business -- and a similar one reached with drugmakers last month -- is written into legislation.

And on the revenue side of the equation, there is still no apparent consensus.

This much is certain: Lawmakers must find ways to raise a lot of money.

Congress needs to come up with $320 billion in tax revenue over the next decade to pay for reform, Baucus told reporters Wednesday.

A problem is that one of the biggest revenue-raising proposals might be a no-go for a lot of Democrats and, according to polls, many Americans as well.

At issue is a proposal to scale back the tax break that workers get when their employers help pay for their insurance. Currently, that money is treated as tax-free income to workers. The cost to federal coffers is roughly $260 billion a year.

Taxing individuals on some part of that money could raise tens of billions a year or more.

The proposal is supported by many tax and health policy experts who say the current tax-free treatment contributes to runaway costs. The theory: Workers don't know how much their health benefits really cost because they only pay a portion of the bill. So they are more likely to consume health services they don't really need. Over time, that drives up health costs.

Senate Budget Committee Chairman Kent Conrad, D-N.D., said the idea of taxing health benefits isn't dead. But the proposal could end up being so greatly modified that it would raise far less revenue than originally hoped.

"We are searching for options, and there are a fair number of them that can work," he said Tuesday.

Perhaps, but just as with taxing health benefits, they're almost all bound to be unpopular with one group or another.

In the end, lawmakers may have to be more aggressive about cost containment or finding other revenue raisers, said Linda Blumberg, a senior fellow at the Health Policy Center of the Urban Institute.

"If you take something off the table, you've got to find something to fill the hole," she said, adding that since no option will be universally popular, lawmakers will have to be willing to make tradeoffs.

For instance, she suggested, they could boost sin taxes -- taxing alcohol and cigarettes, as well as sugary drinks, the latter of which has some support in the House but less in the Senate.

Critics say sin taxeswould disproportionately tax low- and middle-income families. But Blumberg noted that they are the same groups that would benefit a lot from health reform. "They'll come out ahead with what they're getting versus what they're paying," she said.

Another possibility might be raising everyone's income tax rates by, say, 1%, Blumberg said.

Or lawmakers could opt to impose a substantive "pay or play" ruleon employers. Such a mandate would require them to provide insurance for their workers or pay into a national insurance exchange to help subsidize their workers' coverage. Several proposals are under consideration -- but like the temperature of the porridge in "Goldilocks and the Three Bears," some are said to be too lenient and others too onerous on employers.

A potentially substantial revenue raiser would be to subject all income -- not just earned income, but also capital gains, dividends and other unearned income -- to the 1.45% Medicare tax paid by individuals. The progressive nonprofit group Citizens for Tax Justice estimates that kind of move -- together with increasing the Medicare tax rate to 2.5% for income over $200,000 ($250,000 for joint filers) -- could raise $500 billion over 10 years.

In a paper exploring different pay-for options, the Senate Finance Committee included expanding the Medicare tax in some ways but not nearly as broadly as applying to all unearned income.

Another idea under discussion on Capitol Hill: Charge an extra income tax known as a surtax on high-income taxpayers.

Lawmakers may also have to reconsider a proposal from President Obama to limit itemized deductions for high-income taxpayers. Neither Democrats nor Republicans liked the idea initially, asserting that it could harm charitable contributions, even though an analysis by the Tax Policy Center suggested the effect would be minimal. The Congressional Budget Office estimated the provision could raise $300 billion over 10 years.

Given how sensitive lawmakers were on the issue of the charitable contributions, however, they could exclude them from the new rule, Blumberg said. But mortgage interest and other popular itemized deductions would still be subject to the limit.

Whatever pay-for options rise to the top for consideration, they'll all face the same litmus test: Who in particular will have to pony up?

Answering that question will cause its own round of skirmishes. The debate is taking place in a very partisan environment, and one in which regional divisions between lawmakers also play a part. Since health care costs vary greatly across the country, paying for reform may disproportionately affect some states more than others. And all that adds up to a very long, hot summer ahead for those on the Hill.

- CNN Congressional producers Ted Barrett and Deirdre Walsh contributed to this report.

Been to the mall lately? What has changed that you like or dislike? We want to hear about your experiences. E-mail your story to realstories@cnnmoney.com and you could be part of an upcoming article. For the CNNMoney.com Comment Policy, click here .  

Why prevention won't cure health care

NEW YORK (Fortune) -- A useful principle of political analysis is to be suspicious when everyone agrees. Which is why the bipartisan paeans to "prevention" in this summer's health care debate have me scratching my head. It's the one reform on which Henry Waxman and John Boehner can join hands. Don't get me wrong: officials are right to say our system is crazily tilted toward paying docs and hospitals for curing people only after they've gotten terribly sick. But when they jump from this to the idea that America's overdue prevention agenda will be the fix for soaring national health costs (and even help pay for expanded coverage), they're blowing smoke.

The main reason is something Victor Fuchs, a health economist at Stanford, pointed out long ago. The bulk of most people's lifetime health spending comes in the last five years of life, when one body part after another begins to crumble, often in tandem. That's when we roll out the heroic medicine, as endlessly inventive technology is applied to stave off the day of death. Nothing on the prevention agenda alters this end-of-life dynamic.

"Prevention gives you a better quality of life," says Uwe Reinhardt, a health economist at Princeton, "but I have never seen any analysis that shows that in the long-run a society that uses a lot of prevention will have lower health care costs."

0:00/1:12Health care: Where are we now?

A prevention nirvana that delays some costs but can't eliminate them means any savings will be akin to the one-time shakeout we saw from HMOs in the 1990s. Pushing costs back is good, no question. But to put it crassly, success here means trading cheaper, earlier cardiac deaths for more expensive deaths from cancer and chronic diseases down the road. This is a great thing for our loved ones, but it won't stop health costs from passing 20% of GDP.

Some forms of preventive care, like childhood immunizations, don't cost much and boast big payoffs. But many are costly. The problem, experts say, is that any intervention you use too much of (because it's hard to target who'd really benefit) ends up delivering low bang for the buck. Annual check-ups and health maintenance programs are good things, for example -- but they also require upfront investments in health care professionals and imaging, often for patients who haven't had such resources devoted to them before.

"The few studies that have compared preventive care to treatment have shown that either form of care can be cost effective -- or not -- depending on how it's used," says Alan Garber, director of the Center for Health Policy at Stanford. "There's no magic to the idea of prevention, except that it sounds good."

Prevention in the chronic disease context likewise tends merely to defer costs. Diabetics get eye exams and have their feet checked by podiatrists to stave off awful complications like blindness, or the need for amputation. Folks with heart disease may take statins and aspirin and blood pressure meds. All these measures improve quality of life, but they don't reverse disease, they delay its progression. Fuchs's iron law still holds: We all get expensively sick eventually.

The potential game-changer over the long-term isn't prevention per se but behavior change. Prevention -- taking meds and getting special checkups and the like -- may be good for us, but it also imposes societal costs that may outweigh any savings, and often involves folks who've already got serious ailments to manage.

Healthy behavior is the Holy Grail: If it starts early enough in life, it has the potential to fundamentally lower the odds that we'll get multiple costly chronic illnesses to the same degree. And behavior change is possible.

That's what Mike Huckabee, whose hundred-plus pound weight loss made him an authority on the subject in the 2008 presidential campaign, always stressed. Huckabee told audiences that "if we were having this meeting 40 years ago, half of you would be smoking and the other half wouldn't care." The fact that no one's smoking today, he'd say, proves we can change the way we think and act. Changing the way kids view fruits and vegetables versus potato chips and candy bars could eventually bend the cost line, says Len Nichols of the New America Foundation. If we reduce obesity and the incidence of new chronic ailments over time -- and thus cut the presence of super-costly multiple chronic conditions when people reach the end of their lives -- Nichols says, "the impact could be profound."

But that's a long way off, if we're lucky. For now, the only way to get serious about health costs is to re-engineer the delivery of care in a system researchers agree is radically inefficient. Yet as politicians know, getting doctors, nurses, hospitals, health plans, and drug and device makers to change the way they do things is a thankless task -- especially when every dollar of health care "waste" is somebody's dollar of income.

That's why prevention is the faux panacea in the debate. "It's irresistible for politicians to say we can cut costs while making people healthier," says Stanford's Garber. "But if that were so easy to do someone would have done it already."

Matt Miller is a senior fellow at the Center for American Progress and author of The Tyranny of Dead Ideas.  

Service sector shrinks less in June

NEW YORK (Reuters) -- The service sector contracted in June, but at a slower pace than in May, according to a report released Monday.

The Institute for Supply Management's services index rose to 47.0 last month from 44.0 in May, above economists' median forecast for a rise to 46.0. The dividing line between growth and contraction is 50.

The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.