Around the Street
Experts on Jobless Claims, Philly Fed, and Taxes
What did Wall Street experts have to say about Thursday's data and other key topics? BusinessWeek staff compiled comments from economists.
Beth Ann Bovino, Standard & Poor's
The U.S. index of leading economic indicators rose 0.6% in July, to 101.6 from 101.0 in June, which is the fourth straight monthly increase. The reading was in line with market expectations. Six of the 10 components were up, paced by the yield curve, jobless claims, and the workweek. Consumer expectations and the money-supply component were weak.
While the report is in line with expectations, the data continue to support the recovery story.
The U.S. Philadelphia Fed index jumped to 4.2 in August, more than offsetting the 5-point drop to -7.5 in July. The reading was also much better than the -1.0 that markets had expected, though the stronger-than-expected Empire State reading suggested upside risk. The index is well above the -12.7 last August and the 19-year low of -41.0 seen in February. The employment index rose to -12.9 from -25.3. The new orders increased to 4.2 from -2.2. Prices paid rose to 10.0 from -3.5, while price received jumped to -1.5 from -21.5. The six-month general business conditions index rose to 56.8 from 51.9.
Overall, the data are much better than expected to support stocks and provide upside pressure to bond yields.
Michael Englund, Action Economics
The 15,000 rise in U.S. initial claims to 576,000 in the third week of August, which is also [the week the government collects data for the month's employment report], extended the 7,000 rise to 561,000 (was 558,000) in the prior week, and further reduced the net improvement in claims as we emerged from the three-month auto-distortion period of heightened job loss in May and June that was unwound in July.
Some remain encouraged by the drop in claims following the auto-related spike to 643,000 in the second week of May, and the earlier March cycle-highs of 658,000 for the monthly average and 674,000 for the weekly gauge. Yet it remains troublesome that claims aren't closer to 500,000 if payroll declines are indeed diminishing from the 247,000 July drop. Indeed, we need claims in the 450,000 area in Q4 if the consensus view is correct that we will see positive monthly payroll changes by yearend.
The only good news in recent reports is that continuing claims have sustained most of their big July drop-off…[t]hese lower figures suggest that the rise in joblessness is slowing.
Alec Phillips, Goldman Sachs
Over the next year, Congress will undertake three separate tax debates: (1) the estate tax, which probably will be extended in the next few months; (2) the expiration of the Bush tax cuts, which expire at the end of 2010; and (3) a possible debate on tax reform, which could start next year but is unlikely to be enacted ahead of the midterm elections in November 2010. Policymakers face conflicting goals: avoid the severe fiscal drag that expiration of existing tax policies would impose, while putting the federal budget back onto a sustainable long-term path.
While spending cuts may help to narrow the budget gap, tax increases seem likely to do the heavy lifting, as receipts over the last few years have been further out of line than spending with their long-term average share of GDP. The challenge is to identify practical ways to raise revenue.
The tax changes that seem most likely over the next year are (1) an increase in top marginal tax rates, potentially to above their pre-2001 levels; (2) an increase in the capital gains and dividend tax rates, probably to above the 20% rate the Administration has proposed; and (3) an extension of the estate tax at its 2009 parameters. Two other changes that are less likely but clearly possible are (1) tax hikes on households with incomes less than $250,000, and (2) an increase in the corporate tax burden.
Other proposals that have received a good deal of attention recently, such as a national value-added tax (VAT) and limitation of the mortgage interest deduction seem likely to be considered only if fiscal pressures become more acute.