Daily News Briefing: Thursday, July 19, 2012

Published by: Clark Barrow

Clark Barrow

DAILY BRIEFING - SUMMARY

  • FEDERAL RESERVE - U.S. Federal Reserve Chairman Ben Bernanke told lawmakers Wednesday that the Federal Reserve's efforts to bolster growth have helped lift the U.S. economy out of the Great Recession, but he also acknowledged that growth remains weak.
  • FISCAL CLIFF – A new report by the American Action Forum estimates that failure to extend any current tax rates would cause a 6 percentage point drop in GDP and would increase unemployment by 2 percentage points, or to over 10 percent, resulting in an additional 2.8 million people unemployed.
  • OBAMACARE - According to the American Enterprise Institute, many advances in the U.S. health care services are the result of innovators who risked capital in search of profits. But provisions in the president's health care plan directly penalize investment returns earned on the delivery of health care. These approaches are foiling the entrepreneurial ecosystem that creates disruptive new health care companies in the first place.
  • CONGRESS - The U.S. House approved legislation on Wednesday that would give the Obama administration 30 days to provide details on how it will deal with a required $109 billion cut to 2013 spending, which the administration must impose under last year's debt-ceiling agreement.
  • WHITE HOUSE - President Obama’s Jobs Council hasn’t met publicly for six months, even as the issue of job creation dominates the 2012 election.
  • WHITE HOUSE - The Obama administration unveiled plans Wednesday to create an elite corps of master teachers, a $1 billion effort to boost U.S. students' achievement in science, technology, engineering and math.
  • ISRAEL - An explosion tore through a bus packed with Israeli tourists in a Bulgarian beach-resort city Wednesday, killing at least six people, wounding more than 30 others and raising tensions in a Middle East already on edge as Israel quickly blamed Iran and vowed revenge.

WHAT WE KNOW

ECONOMIC NEWS

  • UNEMPLOYMENT - U.S. jobless claims jumped 34,000 last week to 386,000, unwinding a sharp drop in the prior week, amid typical summertime fluctuations in auto-industry employment, the U.S. Labor Department reported Thursday.
    • The four-week average reduces seasonal volatility in the weekly data. Meanwhile, continuing claims inched up by 1,000 to a seasonally adjusted 3.31 million in the week ended July 7. About 5.75 million people received some kind of state or federal benefit in the week ended June 30.
  • FEDERAL RESERVE - U.S. Federal Reserve Chairman Ben Bernanke told lawmakers Wednesday that the Federal Reserve's efforts to bolster growth have helped lift the U.S. economy out of the Great Recession. But he acknowledged that growth remains weak and the Fed can only do so much.
    • The Fed said in its latest beige book report that the U.S. economy expanded at a moderate pace in June and early July but the jobs market showed only "tepid" gains.
    • The economy has weakened since the start of the year, and Bernanke said the Fed is prepared to take further action if unemployment stays high. He didn't signal what steps the Fed might take or whether any action was imminent.
    • Many economists interpreted his comments to mean the Fed will likely launch a third round of bond purchases, perhaps in the fall. The bond purchases seek to lower long-term interest rates and encourage more borrowing and spending.
    • Meanwhile, Chairman Ben Bernanke on Wednesday rebutted Republican lawmakers pushing a bill that would give Congress the ability to review monetary policy decisions, saying it could compromise central bank independence. Bernanke said it would be a "nightmare scenario" if politicians decided to second-guess monetary policy.
  • FISCAL CLIFF - The American Action Forum released a study examining the economic effects of the fiscal cliff, a $600 billion combination of tax increases and across-the-board spending cuts, scheduled to go into effect on January 1, 2013.
    • The report estimated that failure to extend any current tax rates would cause a 6 percentage point drop in GDP and would increase unemployment by 2 percentage points, or to over 10 percent, resulting in an additional 2.8 million people unemployed, with large losses in California, Texas, Florida, and New York.
    • An increase the top effective rate from 35 percent to 42 percent would lower the probability that a small business entrepreneur would add to payrolls by roughly 18 percent.   For those that do manage to hire, the growth in payrolls would be diminished by over 5 percent. The increase in tax rates would reduce the probability that a small business undertakes expansion by nearly 15 percent, and reduce the capital outlays of those who do by almost 20 percent.
    • To put the size of the fiscal cliff into perspective, consider that the U.S. economy will produce over $15 trillion worth of goods and services in 2012, or about two percent (or roughly $300 billion) more than it produced last year. In other words, the level of contractionary fiscal policy that would hit the U.S. economy were we to reach the fiscal cliff without any resolution is roughly twice the estimated economic growth of 2012. In fact, the negative fiscal shock presented by the fiscal cliff exceeds gross domestic product (gdp) growth in any year over the last two decades.
  • The Dow Jones Industrial Average rose 103.16 points, or 0.8%, to 12,908.7.
  • The S&P 500 added 9.11 points, or 0.7%, to 1,372.78.
  • The Nasdaq Composite rose 32.56 points, or 1.1%, to 2,942.60.

COMMODITIES

  • The U.S. national average for a gallon of regular gasoline is $3.42.
    • 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 85 percent higher than they were when Mr. Obama became president.
  • Crude for August delivery advanced 65 cents, or 0.7%, to end at $89.87 a barrel on the New York Mercantile Exchange.
  • Gold for August delivery declined $18.70, or 1.2%, to settle at $1,570.80 an ounce on the Comex division of the New York Mercantile Exchange. 

NEWS TO WATCH

  • PROTESTORS – The Occupy Wall Street protests continue around the world, now in their 302nd day.
  • OBAMACARE - According to the American Enterprise Institute, many advances in the U.S. health care services are the result of innovators who risked capital in search of profits. But provisions in the president's health care plan directly penalize investment returns earned on the delivery of health care. These approaches are foiling the entrepreneurial ecosystem that creates disruptive new health care companies in the first place.
    • Under Obamacare, these efforts aren't just a policy of frugality — an effort to cut costs in the health care system by capping profitability. Like the president's attacks on free enterprise, it's the reflection of a much broader political philosophy.
    • Obamacare dictates fixed caps on margins earned by health insurers (their medical loss ratios) and arbitrarily cuts the payment rates of broad swaths of providers. The law empowers an insular agency (the Independent Payment Advisory Board) to survey the profitability of industry segments like nursing homes and hospice providers, and sand down payment schedules when any one of these provider groups enjoys profit margins that exceed some arbitrary norm.
    • The report found that the result is that bold new ideas aren't getting started. Most of the endeavors formed in recent years are pursuing small concepts, such as fashionable plays on health care information technology. Venture capital flows into starting new health care services ventures have dropped sharply, from $1.2 billion in 2010 to $541 million in 2011 according to data from Dow Jones Venture Source and the National Venture Capital Association. Only about 30 venture-stage health care services companies got funded last year, compared to hundreds in previous years. Investments in new, facility-based health care start-ups have virtually ended.
    • By 2013, less than a third of physicians will still be in private practice, according to a recent survey by Accenture Health. Most will be salaried employees of hospitals. Yet the best way to drive innovation and productivity is to have entrepreneurial providers who actually understand what things cost. Once they become salaried employees, their incentive to find new efficiencies floats off into the ether.
  • CONGRESS - The U.S. House approved legislation on Wednesday that would give the Obama administration 30 days to provide details on how it will deal with a required $109 billion cut to 2013 spending, which the administration must impose under last year's debt-ceiling agreement.
    • The bill enjoyed broad support from both parties and passed easily in a 414-2 vote. The two "no" votes came from Democratic Reps. Eliot Engel (N.Y.) and Maurice Hinchey (N.Y.).
    • Under the sequester, the Office of Management and Budget must by Jan. 2 cut $109 billion from 2013 mandatory and discretionary spending accounts unless Congress provides a different plan.
  • WHITE HOUSE - President Obama’s Jobs Council hasn’t met publicly for six months, even as the issue of job creation dominates the 2012 election.
    • The last official meeting of the 26-member President’s Council on Jobs and Competitiveness took place Jan. 17 in the White House complex. Obama and a slew of other administration officials attended, including his then chief of staff, Bill Daley
    • Obama named General Electric CEO Jeffrey Immelt to head the panel in January of last year as the president tried to mend his frayed relationship with the business community and highlight his commitment to job creation. Part of the council’s political value was to show Obama working closely with top business leaders on behalf of the American people. But the White House insisted that the council’s recommendations would lead to real action.
  • WHITE HOUSE - The Obama administration unveiled plans Wednesday to create an elite corps of master teachers, a $1 billion effort to boost U.S. students' achievement in science, technology, engineering and math.
    • The program to reward high-performing teachers with salary stipends is part of a long-term effort by President Obama to encourage education in high-demand areas that hold the key to future economic growth - and to close the achievement gap between American students and their international peers.
    • Teachers selected for the Master Teacher Corps will be paid an additional $20,000 a year and must commit to participate multiple years. The goal is to create a multiplier effect in which expert educators share their knowledge and skills with other teachers, improving the quality of education for all students.

PRESIDENT’S SCHEDULE

  • In the morning, President Obama will depart Washington, D.C. and travel to Jacksonville, Florida.
  • In the afternoon, the president will deliver remarks at a campaign event at the Prime F. Osborn III Convention Center in Jacksonville, Florida.
  • Later in the afternoon, the president will depart Jacksonville, Florida and travel to West Palm Beach, Florida.
  • In the evening, the president will deliver remarks at a campaign event at the Century Village at West Palm Beach in West Palm Beach, Florida.
  • The president will remain overnight in Manalapan, Florida. 

HAPPENING IN THE U.S. CONGRESS

U.S. SENATE

  • The U.S. Senate is in session today.

U.S. HOUSE OF REPRESENTATIVES

  • The U.S. House is in session today.

TOPICS OF INTEREST

FEDERAL GOVERNMENT

  • U.S. POSTAL SERVICE - While lawmakers continue to fight over how to fix the ailing U.S. Postal Service, the agency's money problems are only growing worse.
    • The Postal Service repeated on Wednesday that without congressional action, it will default—a first in its long history, a spokesman said—on a legally required annual $5.5 billion payment, due Aug. 1, into a health-benefits fund for future retirees. Action in Congress isn't likely, as the House prepares to leave for its August recess.
    • Most everyone agrees the Postal Service needs an overhaul. It had a loss of $3.2 billion in the second quarter of this fiscal year; it is to report third-quarter results on Aug. 9. The agency blames factors including declining mail volumes and the unusual 2006 mandate by Congress that it annually set aside billions for future retirees. But while the Senate has passed legislation to overhaul the agency, the House says it doesn't expect to take up its own proposal until after August.

FOREIGN POLICY

MIDDLE EAST

  • ISRAEL - An explosion tore through a bus packed with Israeli tourists in a Bulgarian beach-resort city Wednesday, killing at least six people, wounding more than 30 others and raising tensions in a Middle East already on edge as Israel quickly blamed Iran and vowed revenge.
    • Plumes of dark smoke rose over the parking lot of an airport in Burgas, on Bulgaria's Black Sea coast, after the blast engulfed the vacationers' bus and triggered fires in other nearby vehicles. Israel's foreign minister said his Bulgarian counterpart told him a bomb had been planted on the bus.
    • Israeli Prime Minister Benjamin Netanyahu issued a sharply worded statement just hours after the explosion Wednesday declaring that "this is an Iranian terror attack that is spreading throughout the entire world," and adding: "Israel will respond with force."
  • SYRIA — With the growing conviction that the Assad family’s 42-year grip on power in Syria is coming to an end, Obama administration officials worked on contingency plans Wednesday for a collapse of the Syrian government, focusing particularly on the chemical weapons that Syria is thought to possess and that President Bashar al-Assad could try to use on opposition forces and civilians.
    • Pentagon officials were in talks with Israeli defense officials about whether Israel might move to destroy Syrian weapons facilities, two administration official said. The administration is not advocating such an attack, the American officials said, because of the risk that it would give Mr. Assad an opportunity to rally support against Israeli interference.
    • Meanwhile, the U.N. Security Council delayed a vote on a new Syria resolution until Thursday in a last-minute effort to get key Western nations and Russia to reach agreement on measures to end the dramatically escalating violence.
  • IRAN - The United States and Britain will not tolerate Iranian attempts to block the strategically important Strait of Hormuz, defense chiefs from the two Western powers said Wednesday.
    • U.S. Defense Secretary Leon Panetta and his counterpart Philip Hammond spoke about Iran’s “destabilizing behavior” during a bilateral meeting, Panetta told reporters at a joint news conference.
    • Fears of a closure of the Strait of Hormuz — through which about a fifth of the world’s traded oil passes — intensified earlier this year after Iran threatened to close it if Western governments kept up efforts to rein in Tehran’s controversial nuclear program by choking off its oil exports.
  • IRAQ - Billions of taxpayer dollars are vanishing in Iraq as the government fails to properly monitor its spending. The U.S. has wasted an estimated $6 to $8 billion in its reconstruction effort in Iraq, largely due to poor reviews of contractor invoices.
  •  
    • In its final audit report, the Office of the Special Inspector General for Iraq Reconstruction Funds (SIGUR) said that of the $51 billion effort to reconstruct Iraq, “the precise amount lost to fraud and waste can never be known,” largely due to poor record keeping by the Pentagon and the Department of State.
    • Inspector general Stuart Bowen, whose office spent more than $200 million tracking the reconstruction funds and producing reports, said a significant sum was wasted on inaccurate or inefficient service costs charged by contractors.