Republican spending cuts will destroy the recovery! Republican spending cuts will revive the economy!
Get ready for more of that kind of partisan rhetoric as the clock ticks down to the next deadline on passage of a 2011 federal spending plan. On Thursday, Vice President Biden kicked off talks with House and Senate leaders of both parties.
Truth is the $61 billion in spending cuts passed by the House GOP last month — which will serve as a baseline in negotiations — might not be as harmful as Democrats predict or as helpful as Republicans claim.
Democrats are touting economic analyses that suggest a reduction of that magnitude could kill off hundreds of thousands of jobs over the next two years and mute an already slow economic recovery.
Until businesses start creating more jobs, government spending is needed to fill the void, the Democrats argue. They point to recommendations of debt commissions and fiscal hawks, who have urged caution at making too many cuts too soon.
Republicans, by contrast, are touting the views of economists who argue that making notable cuts now could encourage businesses to hire and invest because it would be a sign that lawmakers are taking steps toward reining in the country’s debt.
"The high unemployment we are experiencing now is due to low private investment rather than low government spending," Stanford University economist John Taylor wrote in a recent blog post. "By reducing some uncertainty and the threats of exploding debt, the House spending proposal will encourage private investment."
Who’s right? Who knows.
"Both sides are likely overstating their position, which is hardly surprising," said Stan Collender, veteran budget expert and founder of the blog "Capital Gains and Games."
Why it’s not so black and white
Democrats say it would be harmful to reduce government spending this year as much as the House GOP proposed.
In fact, the GOP bill likely will not reduce actual spending in 2011 by $61 billion. That’s because the bill would reduce $61 billion in so-called budget authority, which is the amount permitted but not necessarily the amount spent in a given year.
According to estimates from the Congressional Budget Office, actual outlays this fiscal year under the bill would be $9 billion higher than they were in 2010, and only $17 billion lower than the CBO originally assumed for this year cheap credit report.
The bottom line is that some of the $61 billion reduction wouldn’t take effect until 2012.
Republicans, meanwhile, claim that the House GOP bill would boost confidence among businesses and investors, if not immediately then over time. That’s hard to verify, and the U.S. Chamber of Commerce and the Business Roundtable did not return calls for comment.
But presumably spending cuts would only boost confidence if they meaningfully improve the debt situation, which the House GOP bill will not.
It won’t reduce the deficit by $61 billion. And even if it did, that would represent less than 4% of the anticipated deficit for 2011 and less than 0.4% of the country’s $14.1 trillion total debt accrued to date.
How to really build confidence
What all fiscal experts believe could boost confidence, however, is a long-term, comprehensive debt reduction plan. Federal Reserve Chairman Ben Bernanke said as much in a Congressional hearing on Wednesday.
Bernanke said if the House GOP bill were passed as is in isolation it could cost the economy about 200,000 jobs over two years.
But, he added, "if you coupled that with a long-term plan that really shaved the deficit, I think that the overall effect could be much more favorable."
And economists at Goldman Sachs, who estimate that the $61 billion bill might reduce economic growth in the second and third quarters but didn’t offer job-loss estimates, noted that the debates over the timing of cuts and what could boost confidence might be remedied by imposing new budget rules.
"For instance, imposing hard, enforceable caps on discretionary spending levels for the next few years would likely be viewed by the market as a credible policy and could increase confidence in the sustainability of the U.S. fiscal position."
Right now, a bipartisan group of six senators is working to create a a 10-year debt-reduction plan of spending cuts and tax increases that they can sell to their colleagues. Expectations have been that they will be fighting an uphill battle.
Companies that act as brokers for trucking services are gaining favor with investors as the 20- month-old rebound shifts into a new phase that’s less dependent on inventory restocking.
The so-called asset-lite truckers such as Roadrunner Transportation Systems Inc. and C.H. Robinson Worldwide Inc. lease vehicles for businesses that need to ship goods, so they have more cost flexibility than companies that own and operate most of their trucks. Shares of these brokers have risen 6.9 percent since July 30, 2010, compared with a 1.5 percent decline for operators including Celadon Group Inc. and Werner Enterprises Inc., according to two new Bloomberg indexes.
“We are way past the early cycle rally,” and now see “sustainable elements to the recovery,” said Benjamin Hartford, transportation analyst at Milwaukee-based Robert W. Baird & Co., who co-wrote Baird’s 2011 freight-outlook report. As the rebound matures, investors will find “greater resiliency” in companies with flexible costs.
Trucking demand varies with the economy, accounting for 71 percent of the value, or $8.3 trillion, of U.S. goods shipped in 2007, according to the most recent data from the Department of Transportation.
The Baird report shows the recovery spanning 26 months so far, based on the Institute for Supply Management’s manufacturing index, which hit a recession low in December 2008. That’s more than halfway through an average of 40 months, which the current expansion may exceed, Hartford said. The recession that ended in June 2009 was the longest since the 43-month slump during the Great Depression, according to the National Bureau of Economic Research.
Expanding Economy
The U.S. economy likely will expand at a 3.2 percent rate this year, according to the median estimate of 63 economists surveyed in February by Bloomberg News, with exports and business spending on equipment and software poised to generate most of the growth, said Joseph Carson, director of economic research at AllianceBernstein LP in New York.
When the rebound began in the third quarter of 2009, growth was driven by government spending, along with companies that were building stockpiles and needed truckers to move their products. This made the operators more appealing to investors because their profits rise more quickly in this stage of recovery.
“I tend to favor the asset-based guys” early in the cycle, because they “are able to get rate increases as well as higher volumes,” said Kevin Sterling, an analyst in Richmond, Virginia, at BB&T Capital Markets.
Rising Stock
Indianapolis-based Celadon’s stock more than tripled to $14.79 at the end of last year from $4 payday loans for bad credit.47 on March 9, 2009, as the operator reported net income of $2.86 million in the quarter ended Dec. 31, compared with a loss of $2.08 million in the January-March 2009 period.
Freight volumes peaked in September and have dropped 10 percent since then, as measured by the Cass Freight Shipments Index. Momentum for Celadon stock has slowed as well; it has fallen 2.6 percent since the end of December.
The Bloomberg U.S. Truckload Trucking Index tracks the performance of Celadon, Werner and seven other operators. The Bloomberg U.S. Non-Asset Based Trucking Index tracks Roadrunner, C.H. Robinson and six other brokers. The two indexes show that shares of the operators rose 25 percent between May 30, 2008, and July 31, 2010, compared with a 16 percent decline for the brokers.
The asset-heavy companies also outperformed in 2001 and 2002, coming out of the recession that ended in November 2001. As the recovery matured, the asset-lite truckers outperformed from 2003 to early 2008.
Slashing Costs
When freight volumes started to cool off in 2007, Roadrunner responded quickly to protect profits, adopting cuts that slashed its vehicle-leasing costs by 17 percent over two years.
“The advantage we have is we don’t run empty miles,” said Peter Armbruster, chief financial officer of the Cudahy, Wisconsin, company. If customers “go from needing to do eight trips instead of 10 between our Milwaukee terminal and southern California, we just do eight. It is more efficient.”
Inventory building aided economic growth for five consecutive quarters through the third period of 2010, when it contributed 1.61 percent to the 2.6 percent gain. When companies stopped adding to their stockpiles in the fourth quarter, the reduction subtracted 3.7 percent from growth, the most since the first quarter of 1988.
Adjust Expenditures
John Wiehoff, chief executive officer for Eden Prairie, Minnesota-based C.H. Robinson, said the broker’s lower-cost model allows it to adjust expenditures rapidly in response to demand.
“We’re very proud that we were able to manage through the recession with an earnings increase in each of the past two years,” he said on a Feb. 1 conference call with investors. “We think that’s a pretty visible statement about our business model.”
Brokers like C.H. Robinson “have higher returns, very little debt and a lot of cash on the balance sheet,” along with “more financial flexibility” and fewer capital-expenditure requirements, according to Sterling, who said BB&T Capital Markets is recommending investors purchase the Minnesota company and Roadrunner.
C.H. Robinson announced in December a 16 percent increase in its cash dividend to 29 cents a share. It had $398.6 million in cash at year-end, compared with $11.1 million for Celadon.
“The asset-lite guys can act countercyclically,” said Peter Nesvold, managing director and senior equity research analyst in New York at Jefferies & Co. “As fundamentals start to improve, we have a long way we can ride.”
Growth in Europe’s services and manufacturing industries accelerated to the fastest pace in more than four years in February.
A composite index based on a survey of euro-area purchasing managers in the 17-nation euro region in both industries rose to 58.4 from 57 in January, London-based Markit Economics said in an initial estimate today. That was the highest since July 2006 and above the 56.9 forecast by economists in a Bloomberg News survey. A figure above 50 indicates expansion.
“Growth has accelerated sharply since hitting a low last October, with manufacturing continuing to lead the renewed upturn in February as production rose at a pace only marginally below the 10-year peak seen in April of last year,” Markit said in a statement.
The euro-area economy is gaining strength after expanding less than economists forecast in the fourth quarter. With companies stepping up output and hiring to meet export demand, consumers are growing more optimistic even as governments toughen budget cuts cheapest personal loan rates. PPR SA, the French owner of Gucci, on Feb. 17 forecast “robust revenue growth” in 2011.
Germany, Europe’s largest economy, has powered the region’s expansion as countries from Spain to Ireland stepped up spending cuts to plug budget deficits. German investor confidence rose for a fourth month in February and unemployment dropped to the lowest in almost two decades last month. In France, business confidence increased more than economists forecast last month.
A foundering bond insurer on Thursday filed a civil fraud suit against Goldman Sachs over the same exotic mortgage-securities deal in which Goldman paid $550 million last summer in a settlement with the Securities and Exchange Commission.
ACA Financial Guaranty Corp. charged that Goldman helped a major client, hedge fund Paulson & Co., rig the billion-dollar deal by allowing the firm to pack it with securities backed by highly risky mortgages in early 2007 as the housing market was beginning to collapse.
ACA invested heavily in the deal, known as Abacus 2007-AC1, in the belief that Paulson had agreed to absorb the first losses, while Goldman concealed that the fund was actually betting the so-called synthetic securities would default, the suit said same day payday loans.
Goldman initially bet on the failure of the underlying bonds in the deal, but secretly sold its position to Paulson.
Paulson ultimately racked up $1 billion in profits on the deal while ACA and European banks lost that much. Besides investing $42 million, ACA wrote $909 million in insurance on the securities in the deal. When the insurer ran into financial problems, the European bank, ABN Amro, reinsured ACA’s position at Goldman’s insistence, the suit said.
Global demand for U.S. stocks, bonds and other financial assets fell in September from a month earlier, the Treasury Department reported.
Net buying of long-term equities, notes and bonds totaled $81.0 billion during the month compared with net buying of $128.7 billion in August, according to data issued today in Washington. Including short-term securities such as stock swaps, foreigners purchased a net $81.7 billion compared with net buying of $11.2 billion the previous month.
“The U.S. is still an attractive place for foreign investors, but U.S. yields were pushed lower relative to some foreign markets in anticipation of the Federal Reserve’s quantitative easing,” said Gary Thayer, chief macro strategist at Wells Fargo Advisors LLC in St. Louis, by telephone after the data were released. “That may have reduced the attractiveness a bit. Longer-term, we’re still the reserve currency of the world and that continues to support inflows.”
The Treasury’s reporting on long-term securities captures international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy home mortgages.
China remained the biggest foreign holder of U cash advance companies.S. Treasuries, after its holdings rose by $15.1 billion to $883.5 billion in September from $868.4 billion in August, according to the Treasury’s statistics.
The yield on the 10-year Treasury note, which moves inversely to its price, fell to 2.87 percent at 9:34 a.m. from 2.96 percent late yesterday.
Japan, Hong Kong
The Treasury’s statistics on other countries showed Japan, the second-largest holder, increased its holdings by $28.4 billion to $865 billion in September from $836.6 billion in August.
Total foreign purchases of Treasury notes and bonds were $78.3 billion in September compared with purchases of $117 billion in August. Foreign demand for U.S. agency debt from companies such as Fannie Mae and Freddie Mac registered net selling of $8.2 billion in September after buying of $4.6 billion in August.
Net foreign purchases of equities were $20.7 billion in September after net purchases of $4.8 billion in August. Investors purchased a net $578 million in U.S. corporate debt in September after buying $10 billion in August.
Republican Senator Bob Corker called for Congress to consider narrowing the Federal Reserve’s mandate to stabilizing prices and said Congress should consider setting a target for inflation.
Corker, who met yesterday with Fed Chairman Ben Bernanke, said today in an interview the Fed’s dual role of fighting inflation and maintaining full employment “can create sort of a bipolar mentality as it relates to the Fed” that’s “confusing to the market.”
The Tennessee senator, a member of the Senate Banking Committee, said his proposal would not prevent the Fed from addressing any threat of deflation or its program to buy $600 billion in Treasuries. The Fed cited low inflation for its decision to buy government debt securities to inject money into the lagging U.S. economy.
Congress should consider voting to set inflation targets because the Fed’s actions can cause “a lot of confusion for all concerned” he said. “The next question, do we actually vote on the Senate floor” on “an actual target for inflation?” Corker said.
“My sense is that might be a very good idea,” he said. “I am going to be talking to colleagues” about it, he said. “But minimally changing the mandate to price stability is a step in the right direction.”
A mail bomb intercepted last month at an English airport could have exploded over the East Coast of the United States, British police said Wednesday. Forensic evidence showed the device, originally sent from Yemen by way of Cologne, Germany, was timed to be detonated about six to seven hours after the cargo aircraft carrying it left the U.K. for the U.S. The package was removed by police in Britain during transit.
“If the device had not been removed from the aircraft, the activation could have occurred over the eastern seaboard of the U.S.,” police said.
In Washington, the White House said the British finding showed how serious the attack was. Earlier this month, a senior U.S. official had said that while the exact aim of the attack was unclear, evidence pointed to a plot to blow up cargo planes inside the U.S., either on runways or over American cities.
The UPS cargo plane intercepted in England left the country without the package at 3:20 a.m. GMT on Oct. 29 (11:20 p.m. EDT on Oct. 28), two hours after landing, police said. The device was timed to be activated at 9:30 a.m. GMT. (5:30 a.m. EDT), said British police.
Authorities on both sides of the Atlantic said they only narrowly thwarted the plot, in which terrorists in Yemen hid two powerful bombs inside printers and shipped them to addresses in Chicago aboard two cargo planes fast payday loan. The printer cartridges were filled with PETN, an industrial explosive that, when X-rayed, would resemble the cartridges’ ink powder.
One bomb was intercepted at central England’s East Midlands Airport and the other was discovered at a FedEx cargo facility in Dubai.
The Yemen-based al-Qaida in the Arabian Peninsula has claimed responsibility for the bombs and has vowed to send more explosives-packed parcels.
In Washington on Wednesday, White House spokesman Nicholas Shapiro said: “We greatly appreciate the highly professional nature of the U.K. investigation and the spirit of partnership with which U.K. authorities have pursued this matter.”
He praised the efforts of intelligence and law enforcement professionals in the U.K., the UAE, Saudi Arabia and the United States, and said they will continue to work together “to address and counter the threat posed by al-Qaida in the Arabian Peninsula.”
The 2010 Minnesota Cup entrepreneurial competition has awarded its grand prize to EarthClean Corp., a Minneapolis-based start-up that makes an environmentally friendly fire retardant.
EarthClean received the Minnesota Cup, along with a $20,000 grand prize, at an awards ceremony Monday evening at the University of Minnesota.
The company has developed a patented gel called TetraKO that firefighters can pump through existing hoses to make water better adhere to surfaces. The company claims the gel is easier to use and more environmentally friendly than the polymer-based foams firefighters presently use to douse out fires fast cash loans. To visit EarthClean's website, click here.
EarthClean had already won $20,000 as the competition's clean tech and renewable energy division winner. To win the grand prize, it beat out four other division winners announced earlier this month. Division finalists were announced in August.
The first major newspaper endorsement has been issued in the race for New York governor — even before the Republicans pick a candidate.
The New York Daily News has endorsed the Democratic nominee, Attorney General Andrew Cuomo, saying that he is far superior to either Republican contender.
"There is no point in taking further stock of the candidates vying for the Republican nomination in next month's primary," the Daily News said. "Rick Lazio and Carl Paladino have been that awful."
Most of the newspaper's editorial was devoted to the Republicans' perceived shortcomings, rather than Cuomo's attributes.
The Daily News charged that Lazio, a former congressman from Long Island, "has thrown substantive ideas to the wind in favor of demagoguery free business cards." And it accused Paladino, a Buffalo developer, of offering "proposals [that] range from ill-informed to illegal."
The editorial also referred to two controversies that dogged Paladino's campaign earlier in the year.
"Paladino is also given to insensitivities that would divide New Yorkers," it said. "He has forwarded racist and pornographic emails, including some using the N-word, and contemptibly compared [Assembly Speaker Sheldon] Silver, an Orthodox Jew, to the anti-Christ and Hitler."
KBR has won two contracts by the Republic of Iraq Ministry of Oil through the South Refineries Co.
KBR will provide licensing and basic engineering services for the construction of fluid catalytic cracking and solvent deasphalting units at the planned grassroots Maissan Refinery in Maissan, Iraq. Financial terms were not disclosed.
Houston-based KBR (NSYE: KBR) plans to license its FCC Technology for an anticipated 47,500 barrels per day FCC unit and its “Rose” technology for a 45,000 barrels per day SDA unit poor credit personal loans.
KBR and ExxonMobil Research and Engineering Co. have formed a joint marketing alliance to work on the FCC unit.
“These awards mark the first wins for KBR’s technology business in Iraq and provide KBR the opportunity to introduce two of its leading refining technologies into an important, emerging market,” Tim Challand, president of KBR Technology, said in a statement.
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