Daily News Briefing: Thursday, August 30, 2012

Published by: Clark Barrow

Clark Barrow

 

By CLARK BARROW - Soft manufacturing activity muted the impact of better retail performance, while education-related debt continues to creep toward $1 trillion.

DAILY BRIEFING - SUMMARY

  • FEDERAL RESERVE - The U.S. economy grew "gradually" last month, as improving retail and other service-sector activity was weighed down by softening activity in manufacturing, according to the latest U.S. Federal Reserve Beige Book Report.
  • STUDENT LOANS - Debt from educational loans in the U.S. rose 1.1 percent to $914 billion in the second quarter, according to the Federal Reserve Bank of New York.
  • ISAAC - Tropical Storm Isaac continued to lash New Orleans with heavy rains Wednesday even as it was downgraded to a tropical storm.
  • REPUBLICAN NATIONAL CONVENTION - U.S. Rep. Paul Ryan accepted his accepted his party's vice presidential nomination at the Republican convention on Wednesday.
  • WHITE HOUSE - President Obama called for a constitutional amendment to overturn a Supreme Court ruling that made it easier for businesses to influence elections through large-scale donations.
  • DEPENDENCE - According to an expert analysis by the Cato Institute, at least 106 million Americans currently receive benefits from at least one means-tested welfare program, costing the U.S. government nearly $1 trillion annually.
  • TAXES - Despite a 2004 federal law that sought to curb the practice, more big U.S. companies are reincorporating abroad because of concern of U.S. tax increases.
  • BRITAIN - As part of the global push to tax the rich, Britain is now debating an “emergency” wealth tax. But the idea has hit fierce opposition from conservatives, who say the “politics of envy” hasn’t made the country rich.

WHAT WE KNOW

ECONOMIC NEWS

  • UNEMPLOYMENT - Applications for U.S. jobless benefits were flat last week at a seasonally adjusted 374,000, the U.S. Labor Department said Thursday. Initial claims from two weeks ago were revised up to 374,000 from an original reading of 372,000, based on more complete data collected at the state level.
    • The average of new claims over the past month, meanwhile, rose by 1,500 to 370,250. The four-week average reduces seasonal volatility in the weekly data and is seen as a more accurate barometer of labor-market trends.
    • Continuing claims decreased by 5,000 to a seasonally adjusted 3.32 million in the week ended Aug. 18. Continuing claims reflect the number of people already receiving benefits. About 5.53 million people received some kind of state or federal benefit in the week ended Aug. 11, down 62,253 from the prior week.
  • FEDERAL RESERVE - The U.S. economy grew "gradually" last month, as improving retail and other service-sector activity was weighed down by softening activity in manufacturing, according to the latest U.S. Federal Reserve Beige Book Report.
    • The Beige Book said activity expanded gradually in July and early August across most regions and sectors, compared to the previous assessment of "modest to moderate" growth.
    • The Beige Book’s relative pessimism came as “many” of the 12 Fed districts reported some softening in manufacturing, either a slowdown in the rate of growth or a decline in the level of sales, output or orders. Weakness overseas remains a problem for U.S. manufacturing, the report said, and from Asia as well as debt-crisis-ravaged Europe.
  • GROSS DOMESTIC PRODUCT - The U.S. economy grew 1.7% in the second quarter, somewhat faster than previously reported, according to a revised government estimate by the U.S. Commerce Department. This was an upward revision from the originally reported 1.5% growth in real GDP for the second quarter. Real GDP for the first quarter of 2012 was 2%.
    • The U.S. has grown at below-average rates since exiting the last recession in mid-2009, held back mainly by poor job growth. The nation’s unemployment rate has hovered above 8% for 42 straight months, marking the longest period of prolonged labor-market weakness since the Great Depression.
    • Nor do economists expect growth to accelerate much in the near future. The U.S. is projected to grow 2.0% in the third quarter and 1.9% in the final three months of the year. Soft consumer spending, weakness in the global economy and the threat of higher U.S. taxes and deep spending cuts next year are among the headwinds restraining growth, analysts say.
  • STUDENT LOANS - Debt from educational loans in the U.S. rose 1.1 percent to $914 billion in the second quarter, according to the Federal Reserve Bank of New York.
    • Outstanding student debt increased from $904 billion three months earlier, the New York Fed said today in a report. The loans were taken out by students and their parents, and the majority are backed by the U.S. government.
    • Ninety-day delinquency rates for student loans increased to 8.9 percent from 8.69 percent in the first quarter, the New York Fed said. Since the peak in household debt in the third quarter of 2008, student-loan debt has increased by $303 billion, while other forms of debt fell a combined $1.6 trillion.
  • YOUTH UNEMPLOYMENT - Last week, the U.S. Department of Labor released its Employment and Unemployment Among Youth—Summer 2012 report. While many youths (ages 16-24) found a summer job this year, many did not even try. Fully 39.5 percent of the youth population neither worked nor looked for work this summer. This number has trended upward over time—it is almost double the rate (22.5 percent) from July 1989.
    • Of those who looked for work, many could not find it. The youth unemployment rate in July 2012 was 17.1 percent. By comparison, it was only 12.4 percent in July 2000 and 10.8 percent in July 2007. For men, blacks, and Hispanics, the youth unemployment rates in July 2012 were worse—at 17.9 percent, 28.6 percent, and 18.5 percent respectively.
    • According to the Heritage Foundation, government policies have made this difficult labor market even worse for younger Americans. In 2007, Congress voted to raise the federal minimum wage to $7.25 an hour. Half of minimum wage earners are between the ages of 16 and 24. Raising the minimum wage, in addition to employer paid Social Security, workers compensation, and unemployment insurance prices many young workers out of the job market.
    • Employers looking forward a year and a half to 2014 surely understand that. As stipulated by Obamacare, there will be a $2,000 annual tax for any worker they do not offer health insurance to. Such per-employee taxes contribute to the lack of entry-level positions.
  • The Dow Jones Industrial Average closed up 4.49 points, or 0.03%, at 13,107.48.
  • The Nasdaq Composite rose 4.05 points, or 0.1%, to 3,081.19.
  • The S&P 500 SPX+0.08% added 1.19 points, or 0.08%, to 1,410.49.

COMMODITIES

  • The U.S. national average for a gallon of regular gasoline is $3.82.
    • When President Obama was inaugurated, in January 2009, the U.S. national average for a gallon of regular gasoline was $1.85. Average gasoline prices are currently 106 percent higher than they were when Mr. Obama became president.
  • Crude oil for October delivery declined 84 cents, or 0.9%, to $95.49 a barrel on the New York Mercantile Exchange.
  • Gold for December delivery GCZ2-0.67% retreated $6.70, or 0.4%, to $1,663 an ounce on the Comex division of the New York Mercantile Exchange.

NEWS TO WATCH

  • ELECTION - As of today, there are 68 days until the November 2012 presidential election.
  • ISAAC - Tropical Storm Isaac continued to lash New Orleans with heavy rains Wednesday even as it was downgraded to a tropical storm.
    • Rescuers in boats and trucks plucked a handful of people who became stranded by floodwaters in thinly populated areas of southeast Louisiana. Authorities feared many more could need help after a night of slashing rain and fierce winds that knocked out power to more than 600,000 households and businesses.
    • In Plaquemines Parish, a rural area with about 25,000 residents south of New Orleans, officials ordered new evacuations as Isaac’s slow movement and heavy rains put more neighborhoods at risk.
  • THREAT - Former U.S. Secretary of State Condoleezza Rice was twice interrupted by hecklers on Wednesday who were protesting her role in the Bush administration that began the wars in Iraq and Afghanistan.
    • Two attendees at the Republican National Convention were thrown out of the convention center in Tampa on Tuesday after throwing nuts at a black CNN camerawoman and saying, "this is how we feed the animals."
    • Tampa officials expected 15,000 protesters for the Republican National Convention. So far, Tampa police say the city has seen no more than a couple thousand protesters so far.
  • REPUBLICAN NATIONAL CONVENTION - U.S. Representative Paul Ryan accepted his accepted his party's vice presidential nomination at the Republican convention on Wednesday, drawing repeated roars from delegates with promises to challenge President Obama's economic policies.
    • A fiscal conservative and budget expert, Ryan said the White House race would offer "the clearest possible choice" at the November 6 election about possible economic remedies.
  • THURSDAY - For Thursday, August 30, 2012, RNC officials said the theme would be "We Believe in America." Additional themes for Wednesday include:
    • Governor Mitt Romney is uniquely qualified to handle the challenges facing our nation at this critical time:
      • He is a devoted and loving family man whose wife, children and grandchildren form the core of his values and are the foundation for his life.
      • He is a generous and caring member of the community, counseling others through life’s challenges, from unemployment and illness to helping them find spiritual meaning in their lives.
    • He has a proven record of real-world job creation, which is what we need to turn our economy around and strengthen the middle class:
      • He spent a lifetime creating good, high-paying jobs, helping start and build successful businesses and turning around failing ones, including well-known companies like Bright Horizons, Sports Authority and Staples.
      • He rescued the scandal-plagued 2002 Winter Olympics from deep debt by overhauling its leadership, trimming its budget and regaining the public’s trust.
      • His leadership averted a potential national embarrassment and transformed the Salt Lake City Olympics into one of the best-run Games ever.
      • While he was Governor, Massachusetts added tens of thousands of jobs and the state’s unemployment rate fell below 5%.
      • Over the course of his term, Massachusetts moved up 21 spots in job creation, from 51st in the nation to 30th.
      • The state added more than 40,000 payroll jobs during his final year in office – the best year of job growth in the state in the last decade.
      • During Governor Romney’s time in office, per capita income grew by 14%, outpacing the country at large.
  • CONGRESS - U.S. House Majority Leader Eric Cantor (R-Va.) on Wednesday predicted the GOP will increase its U.S. House majority. Cantor told The Hill that Republicans could win 10 more U.S. House seats this year.
    • Earlier this week, National Republican Congressional Committee political strategists told reporters covering the GOP convention in Tampa that they could win a net of four to eight seats.
    • Democrats need to win 25 seats to regain control of the House, which they lost in the crimson-wave election of 2010.
  • WHITE HOUSE - President Obama called for a constitutional amendment to overturn a Supreme Court ruling that made it easier for businesses to influence elections through large-scale donations.
    • The groups, known as Super PACs, "threaten to overwhelm the political process over the long run and drown out the voices of ordinary citizens," added the president, who spoke out strongly against the court's 2010 Citizens United ruling. The court ruled the issue was protected under the constitutional amendment that guarantees free speech.
    • Obama has urged Congress to vote to force Super PACs to reveal the names of their donors, but a related measure has so far been blocked.

PRESIDENT’S SCHEDULE

  • In the morning, President Obama will receive the Presidential Daily Briefing at the White House.
  • In the afternoon, the president will have lunch with Vice President Biden.

HAPPENING IN THE U.S. CONGRESS

U.S. SENATE

  • The U.S. Senate is not in session today.

U.S. HOUSE OF REPRESENTATIVES

  • The U.S. House is not in session today.

TOPICS OF INTEREST

FEDERAL GOVERNMENT

  • DEPENDENCE - According to an expert analysis by the Cato Institute, at least 106 million Americans currently receive benefits from at least one means-tested welfare program, costing the U.S. government nearly $1 trillion annually. The Food Stamp program currently has more than 46 million beneficiaries (1 out of every 7 Americans). By contrast, the program had 1 in 50 beneficiaries in the early 1970s.
    • According to an analysis from the U.S. Republican Study Committee, instead of being used to “help them lift themselves out of the ruts of poverty,” the welfare state punishes earned success. Implicit marginal tax rates for the working poor often exceed 100%.
    • The marginal tax rate illustrates how much money someone can keep, after accounting for taxes, from an extra dollar earned. Counting the income tax, the payroll tax, and state and local taxes, the top marginal tax rate comes close to 50% in many states (see here for an analysis from the Tax Foundation on this point). But the welfare state adds another dimension to this. Many individuals, especially lower-income and working-class families, face not just higher taxes but also less government benefits for each dollar earned. When both: 1) higher taxes and 2) foregone government benefits are accounted for from an extra dollar earned, you get the implicit marginal tax rate.
    • But the U.S. Republican Study Committee said Obamacare made this problem worse. President Obama's health care overhaul created new subsidies in excess of $100 billion a year to buy insurance under the law’s insurance exchanges. Families between 134% and 400% of the poverty line are eligible for these subsidies
  • TAXES - Despite a 2004 federal law that sought to curb the practice, more big U.S. companies are reincorporating abroad because of concern of U.S. tax increases.
    • Companies cite various reasons for moving, including expanding their operations and their geographic reach. But tax bills remain a primary concern. A few cite worries that U.S. taxes will rise in the future, especially if the U.S. federal government revamps the tax code next year to shrink the federal budget deficit.
    • Since 2009, at least 10 U.S. public companies have moved their incorporation address abroad or announced plans to do so, including six in the last year or so, according to a Wall Street Journal analysis of company filings and statements. That's up from just a handful from 2004 through 2008.
    • Lawmakers of both parties have said the U.S. corporate tax code needs a rewrite and they are aiming to try next year. One shared source of concern is the top corporate tax rate of 35%—the highest among developed economies. By comparison, Ireland's rate is 12.5%.

EDUCATION

  • TEACHERS UNION - The Chicago Teachers Union issued a 10-day strike notice Wednesday, saying teachers in the nation's third-largest school district are ready to walk off the job for the first time in 25 years.
    • The school district has offered teachers a four-year contract with raises of 2 percent a year, which school board spokeswoman Becky Carroll said would cost $160 million. Lewis has repeatedly said the raise offered by the board is not acceptable.
    • The district also wants the union to agree to a joint committee to come up with a new system to pay teachers, other than automatic raises based on seniority. The district said that doesn't mean pay raises would necessarily be based only on merit.

FOREIGN POLICY

MIDDLE EAST

  • SYRIA - President Bashar al-Assad said he was making progress in the war against Syria's opposition but needed more time to conclude the battle, in a rare media appearance since four of his top security aides were killed and fighting erupted in Damascus and Aleppo last month.
    • Mr. Assad and members of his regime have consistently framed the more than 18-month conflict in Syria as a battle against an armed and political opposition receiving orders and financing from the West, Gulf Arab states and Turkey.
    • As Mr. Assad made his comments, residents of the Damascus suburb of Daraya, where the regime launched a sweeping assault over the weekend, were still counting their dead. The activist network, called the Local Coordination Committees, and the opposition coalition, known as the Syrian Revolution General Commission, both said the number of those killed in Daraya over a three-day period starting Friday has surpassed 400.
  • IRAN - U.N. chief Ban Ki-moon met Iran's president and supreme leader in Iran on Wednesday to urge them to take concrete steps to prove the country's nuclear program is peaceful and to use their influence to help end Syria's 17-month conflict.
    • Ban arrived in Tehran on Wednesday for a three-day visit to attend a meeting of some 120 non-aligned nations. He defied calls from the United States and Israel to boycott the event.
    • Last week the United Nations said Iran appears to be supplying Syria with weapons, as the 17-month conflict that began as a popular uprising against Assad slides deeper into civil war. The United States, which along with other western nations has been extremely wary of Iran's efforts to solve the Syria crisis, said that it agreed Tehran has a role to play.

ASIA

  • NORTH KOREA - North Korea could be heading towards a crisis similar to the 1990s when a million people are thought to have died after a series of natural disasters brought widespread famine, said an aid worker, just back from a tour of the impoverished state.
    • North Korea has suffered heavy floods this year, including from a typhoon earlier this week and another storm heading in its way, and has little capacity to deal with any more damage, said Kim Hartzner, managing director of Mission East, a Danish aid group which focuses on providing food aid to children.
    • A famine in the 1990s killed an estimated million people and North Korea has continued to endure chronic food shortages, which many experts say reflect systemic failings in the reclusive country's heavily centralized economic system, which has sapped farmers' productivity.

EUROPE

  • BRITAIN - As part of the global push to tax the rich, Britain is now debating an “emergency” wealth tax. But the idea has hit fierce opposition from conservatives, who say the “politics of envy” hasn’t made the country rich.
    • Deputy Prime Minster Nick Clegg, leader of the Liberal-Democrat Party, has proposed a one-time tax on the wealth (rather than the incomes) of high-net-worth Britons. The details aren’t clear, but Clegg says the country is facing an economic war caused by a prolonged recession, and needs to tax the rich in order to avoid social unrest.
    • Britain has already hiked taxes on the rich to 50 percent but amid a weak economy and reports of wealth flight, the tax was ratcheted down in April to 45 percent.