Saturday, December 24, 2016

1--U.S. Economy Approaches Year’s End on Lackluster Note   Income growth, consumer spending and inflation weakened in November

Stock prices may have soared since the November election, but the U.S. economy is ending 2016 on an anemic note. Measures of economic vitality including income growth, consumer spending and inflation weakened last month following a short-lived spurt.

Household spending rose just 0.2% in November from the month before, a slowdown in growth from the previous two months, while incomes flatlined, the Commerce Department said Thursday. Inflation readings, which had perked up, didn’t budge last month, and demand for factory-made goods remained soft.

For now, that leaves the U.S. economy in the middling trajectory that has marked the seven-year expansion.

“Underlying support for the consumer sector remains fragile at best,” said Lindsey Piegza, economist at Stifel Nicolaus & Co. “The reality the consumer is facing at this point is still modest wage gains and a continued loss of momentum in income growth.”

Forecasting firm Macroeconomic Advisers estimates the economy is growing at a 1.7% rate in the final three months of 2016. Federal Reserve policy makers expect the economy to grow 1.9% this year and 2.1% next year, a forecast the central bank has barely changed since the election of Donald Trump.

About two-thirds of total U.S. output goes toward domestic consumer spending. Solid household outlays during the summer helped propel economic growth to a 3.5% annual pace in the third quarter, the best quarterly increase in two years, according to revised data released Thursday. But income growth has softened: Wage and salary income rose 3.5% in November from a year earlier, the slowest year-over-year gain since December 2013.

Without stronger support from consumers and more investment by businesses, third-quarter growth momentum could wane.

"Clearly, our consumers’ budgets are pinched,” Dollar General Corp. Chief Executive Todd Vasos told investors earlier this month. The combined effects of a smaller share of adults holding jobs and increased housing and health-care expenses “appear to have taken a noticeable toll on their spending,” he said.

Donald Trump’s election raised hopes of tax cuts and deregulation, measures that could boost businesses, consumers and economic growth. But how those promises will be implemented—and how businesses and households respond—remain uncertain.

“There is some optimism that is beginning to develop,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “Though if I were a business and I had major projects in the planning stages, I wouldn’t pull the trigger until I knew the new corporate tax structure.”...

The U.S. dollar, which has continued to strengthened since the election, poses a challenge to manufacturers seeking to sell products into foreign markets. Orders for long-lasting durable goods are down slightly in 2016 compared with last year, despite overall economic growth....

Price inflation remains another puzzle for businesses and central bankers alike.

The personal-consumption expenditures price index, the Fed’s preferred inflation measure, was unchanged in November and up 1.4% from a year earlier. The measure had risen at a modest pace each month since March, reflecting stabilizing energy prices and somewhat firmer consumer demand allowing businesses to pass along price increases.

That firming helped support the Fed’s move this month to raise its benchmark interest rate for the first time in a year. Officials indicated the pace of rate increases could quicken in 2017. But inflation readings for now are holding well below the central bank’s 2% target.

November’s softer inflation reading could be temporary. Gasoline and oil costs slumped in November from the prior month, but rebounded in December after oil-producing countries agreed to cut production.

2--Part-time work: The new normal? Welcome to Obama's "gig economy"--No job security, no benefits, no retirement, no health care, no vacation, no nothing

Dan Kopf at Quartz highlights some updated research from economists Alan Krueger and Lawrence Katz (whose work we’ve looked at before) finding that from 2005 to 2015, almost all of the new jobs created in the US economy were not traditional full-time jobs but rather temporary, contract, or “gig economy” work:

“We find that 94% of net job growth in the past decade was in the alternative work category,” said Krueger. “And over 60% was due to the [the rise] of independent contractors, freelancers and contract company workers.” In other words, nearly all of the 10 million jobs created between 2005 and 2015 were not traditional nine-to-five employment. …


Katz and Krueger found that each of the common types of alternative work increased from 2005 to 2015—with the largest changes in the number of independent contractors and workers provided by contract firms, such as janitors that work full-time at a particular office, but are paid by a janitorial services firm.


The decline of conventional full-time work has impacted every demographic. Whether this change is good or bad depends on what kinds of jobs people want. “Workers seeking full-time, steady work have lost,” said Krueger. “While many of those who value flexibility and have a spouse with a steady job have probably gained.”

3--Slow-to-No Business Investment Growth Seen

Business investment is slowing down dramatically amid a sputtering global economy, heightened political uncertainty, a contraction in trade, and low commodity prices, according to the Equipment Leasing & Finance Foundation...

Sluggish growth in equipment and software investment projected over the short term by this latest analysis is indicative of the slowdown in business fixed-investment reported by federal government data over the past several quarters,” said Ralph Petta, foundation president and CEO of the Equipment Leasing and Finance Association. “This slow-growth scenario, in all likelihood, will continue for the rest of the year as many ELFA members report soft business conditions.”

4--Corporate America Is Drowning in Debt  Lethal incentives? Low rates create an incentive for Corporate bosses to put their company's future at risk

Studying S&P's universe of more than 2,000 nonfinancial corporations, S&P's researchers found that corporate issuers of debt had on hand a record $1.84 trillion in cash. But that statistic doesn't tell us very much about the health of individual companies, because it appears cash is more concentrated at the top than ever. The top 1% of corporate cash holders, which translates in to 25 large companies—a group dominated by big tech companies like Apple (aapl, +0.18%), Microsoft (msft, -0.49%), and Google-owner Alphabet (googl, -0.23%)—have slightly more than half of the total cash pile of Corporate America. That's up from 38% just five years ago.
If you remove the top 25 cash holders, you'll find that for most of Corporate America, cash on hand is declining even as these companies rack up more and more debt at historic rates. The bottom 99% of corporate borrowers have just $900 billion in cash on hand to back up $6 trillion in debt. "This resulted in a cash-to-debt ratio of 12%—the lowest recorded over the past decade, including the years preceding the Great Recession," the report reads.

One obvious reason for Corporate America's debt binge is low interest rates. With investors willing to lend companies money for so little in return, it makes sense that firms would turn to debt to finance things like share repurchases rather than, for instance, bringing cash earned from overseas, which would then be taxed at a high rate.
But investors should be cautious all the same. "Given the record levels of speculative-grade debt issuance in recent years," the report reads, "we believe corporate default rates could increase over the next few years, especially given diminished growth prospects in China, weak commodity and energy prices globally, and the sizable universe of lower-quality nonfinancial corporate debt outstanding."

5--Wall Street likes Trump's repatriation holiday idea

Big bonus for tax dodgers

6--Stocks That Ignore Defaults Are Cruising for a Bruising

A worrying trend is developing in the corporate bond market: Even with borrowing costs at or near their lowest ever, companies are increasingly unable to pay their debts. There have already been enough defaults around the world this year to suggest that the record set in 2009 might be beaten. And that should ring alarm bells for traders and investors who continue to push benchmark equity indexes to record highs....

But here's the worrying thing: That 2009 default record was set at a time when borrowing costs were much, much higher than they are now. Yields on the debt of investment-grade U.S. companies in the first half of 2009, for example, were twice as high as they are today:

I really don't think that the stock market is looking at the credit markets in the last few months as they did at the beginning of the year when things really looked grim and I think that's a mistake because the credit markets are still not strong with respect to the outlook.

7--Business investment is in a slump and its hurting the economy Big Biz is not recycling earnings into future production

Capital spending fell 6.2% at an annual rate in the first quarter following a 2.1% drop late last year, its worst such stretch since 2009 and a big reason the economy nearly stalled in that period, Commerce Department data shows. Recent reports augur little relief in the short term, with orders for capital goods excluding aircraft and defense — a proxy for business investment — declining 0.8% in April.

Business outlays were sluggish throughout 2015, rising 2.8% compared to an average 4.5% clip during the seven-year-old recovery. That, however, was largely chalked up to a pullback by energy companies amid the plunge in oil prices and, to a lesser extent, by manufacturers and other multinationals hammered by a weak global economy and strong dollar.

But the investment slump has widened in recent months across a diverse array of U.S. companies and sectors, according to Howard Silverblatt..

Business spending typically makes up 12.5% of economic activity but has an outsized impact on the economy and stock market. Purchases of equipment and software, and the construction and renovation of buildings, create thousands of jobs for manufacturers. And such investment makes up nearly 30% of the sales of Standard & Poor’s 500 companies, says David Bianco, Deutsche Bank’s chief U.S. equity strategist. He expects revenue of S&P 500 firms to increase 3% to 4% this year and in 2017. Healthy business investment typically would mean at least 6% sales growth for the S&P 500, he says.

Instead, public companies are plowing their large cash reserves into stock buybacks and dividends despite low borrowing costs.

8--U.S. Economic Confidence Inches Up to New High

Americans' confidence in the economy continues to gradually strengthen after last month's post-election surge....

Americans' assessments of current conditions and their outlook for the economy are the most positive they have been in nine years. Thirty-one percent of Americans rated the economy as "excellent" or "good" last week, while 22% said it was "poor," resulting in a current conditions score of +9.

The latest economic outlook score of +11 is the result of 53% of Americans saying economic conditions in the country are "getting better," and 42% saying they are "getting worse."...

The new political course for the U.S. has spurred public confidence in the economy

9--US Army document on urban warfare advances strategy for “contemporary Stalingrads”

10--Trump names billionaire corporate raider Icahn to slash regulations on business

11--Berlin terror suspect was well known to security forces

12--Growing signs of state foreknowledge of attack on Berlin Christmas market

13--No “Peace on Earth” in 2016

14--Brookings lays out the path to escalation in Syria

Collaborating with Russia to defeat terrorist groups can only work if the U.S. has a vision for what comes afterward. This plan must also be acceptable to Sunni Muslims, Kurds and countries like Turkey, Jordan, Lebanon, Israel, Iraq and the Gulf states. The vision needs to be explained publicly at the same time that any new U.S.-Russian military collaboration is announced. Specifically, Sunni Arabs and Kurds must be promised an alternative to living under the murderous Assad regime. Never again should they have to salute a leader who has committed genocidal acts against their families and neighbors.

To achieve peace, Syria will need self-governance within a number of autonomous zones. One option is a confederal system by which the whole country is divided into such zones. A less desirable but minimally acceptable alternative could be several autonomous zones within an otherwise still-centralized state—similar to how Iraqi Kurdistan has functioned for a quarter-century.

Ideally, Mr. Assad would go. But the prospect of his ouster is not realistic now, given recent battlefield trends and Russia’s role. More plausibly, he could rule an autonomous zone in a new confederation. Less desirably, he could remain president of the country for a time, provided that Sunni and Kurd areas did not have to suffer his direct rule or the presence of his security forces again.

Yet the fall of Aleppo has complicated the situation. Mr. Assad effectively controls the country’s big cities, and he is unlikely to relinquish this power voluntarily. There are two potential paths forward. First, the moderate opposition could be militarily strengthened and assisted to the point where battlefield dynamics shift, and some of the main cities again become contested. But Mr. Trump seems uninterested in such an approach.

A second option is to propose only limited security assistance to moderate groups while literally rebuilding some of the ravaged cities in new locations—the way China has created major metropolitan areas out of nothing—largely for Sunnis and Kurds. Mr. Assad and Russia would be enticed to support this approach with the prospect of an end to the war combined with reconstruction aid. The embattled president would keep the cities he now controls but could be persuaded not to seek to extend his rule further.

This arrangement should be codified by negotiation and upheld in part by international peacekeepers. That force could include Russians in the country’s west, Turks in the north where they are now. Arab, South Asian and European infantry could also contribute. Americans could help with overall command and control, as well as logistics and ongoing counterterrorism operations.

Security in the Sunni Arab and Kurdish autonomous zones would be provided by local police and perhaps paramilitary forces raised, trained and equipped with the direct support of the international community. They would need only limited amounts of heavier arms, making the concept more negotiable with Mr. Assad. Outside powers would agree to stop giving insurgent groups the capacity to attack Damascus or other government-held centers, and would instead channel their security-related aid only to the official and well-supervised local police or constabulary forces.

Foreign assistance for this reconfigured Syrian state should be provided primarily to the autonomous regions themselves. That would enhance the international community’s leverage with the new, regional governments. For Mr. Assad to see any such aid from European, American, and Gulf states flow to the regions that he or his associates controlled, they would not only have to accept autonomy for Sunni Arab and Kurdish zones, but commit to a plan to quickly reduce Mr. Assad’s future role in country’s central governance.

Many Syrians will not like the idea of a confederal nation, or even of a central government controlling half the country with the other half divided into three or four autonomous zones. But such arrangements need not be permanent. The deal could include a provision that calls for a constitutional convention in 10 years to consider whether a stronger central government should be restored.
Many details, such as the borders of future autonomous zones, could be dealt with during a future peace process. But the broad vision should be developed soon. If Mr. Trump joins his plans for Russian collaboration with the creation of a new Syria, he could be the president who finally brought this tragic conflict to an end.

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