Sorry, this came in a little later than usual this week...
Deller's two cents: Ever heard that the Fed Govt can run deficits because they can just print money to pay for it? Well, that's what the Federal Reserve Bank is doing. This is how it works. The federal govt runs a deficit. To pay for it it must incur debt by selling treasury bonds-notes. Now who buys those bonds-notes? During the 1980s it was Japan, lately China (well, lots of people do, but you get the picture). The past few weeks the Federal Reserve Bank has said they will buy those bonds-notes. How does the Fed Res Bank pay for it? "Print money". The argument against printing money like this? Inflation. But with inflation very low (deflation anyone?) "printing money" like this seems like a good way to kick the economy along a little bit.
Economic Week in Review: The Fed goes shopping November 05, 2010
After weeks of anticipation, the Federal Reserve announced that it would buy Treasury bonds in an effort to stimulate economic growth. The announcement coincided with a week of generally good economic news. Reports on the manufacturing and service sectors show expansion is continuing, and the week's jobs report was better than expected. Even so, unemployment remains stubbornly high. For the week ended November 5, the S&P 500 Index rose 3.6% to 1,226 (for a year-to-date total return--including price change plus dividends--of about 11.8%). The yield of the 10-year U.S. Treasury note fell 5 basis points to 2.58% (for a year-to-date decrease of 127 basis points).
Jobs report features bright spots amid the gloom
The unemployment rate in October remained stuck at 9.6% for the third straight month, and about 42% of unemployed Americans have been out of work for more than six months. The October job results included welcome bright spots, however. Nonfarm payrolls, which had declined for four straight months, grew in October by 151,000-more than double expectations. Moreover, results for the previous two months were revised upward. The job growth largely came from the service sector, while manufacturing lost jobs for the third straight month. Other positive signs came from a slight increase in pay, a continuation of growth in average workweek hours, and the breadth of employment gains across industries.
The Fed begins a big bond-buying program
The Federal Reserve unveiled a huge, new bond-buying program aimed at helping boost economic growth, reducing unemployment, and preempting deflation. The Fed will purchase $850 billion to $900 billion of Treasury bonds, concentrated among intermediate-maturity issues, through the second quarter of 2011. The eight-month-long program has two components: the addition of $600 billion of Treasuries to the Fed's balance sheet, along with the replacement of maturing mortgage-backed and mortgage-agency securities it purchased in a $1.7 trillion bond-buying program that ended in March.
"The Fed's new program has been successful in terms of its central goal, which was to curb deflationary expectations," said Vanguard economist Roger Aliaga-Díaz. "It remains to be seen how much of this policy will translate into job creation and economic growth. Some of the policy's side-effects-a lower dollar (which will help exports) and a boost to the financial markets-may help at the margin. What's ultimately needed, however, is a substantial increase in business sentiment and consumer confidence."
Personal income slides and spending decelerates
Personal income fell 0.1% in September, the first decline in about a year. The unexpected fall was primarily because of a drop in emergency unemployment benefits, which were artificially elevated by the payment of backlogged claims in August. Reduced income affected consumption:
September's 0.2% growth rate was less than half that of the prior two months, although analysts were encouraged that spending continued despite the lower income. Americans' preference for saving over spending (the latter viewed as essential to stimulating economic growth) continued, as the savings rate stayed over 5%. In the decade before the financial crisis of 2008, only one month saw the savings rate reach 5%.
Construction spending, factory orders beat expectations
Construction outlays grew 0.5% in September instead of declining as expected. Driving the first gain in three months was spending on public projects. Also beating expectations were factory orders, which grew 2.1% in September for the third monthly gain in a row. A major boost to orders came from sales of nondefense aircraft and parts.
Manufacturing and service sectors show gains
Manufacturing activity posted a stronger-than-expected reading in October, as measured by the manufacturing index published by the Institute for Supply Management (ISM). The ISM index increased to 56.9 in October from 54.4 a month earlier, as new orders (ending a four-month slowdown) and production made significant gains. Overall, the manufacturing sector has been expanding for 15 months, but appeared to slow beginning in May. The latest month's activity seems to have reversed that trend, analysts said.
A separate ISM index of service-sector activity rose to 54.3 in October from 53.2 in the prior month-the tenth month of expansion in the sector. The employment measure was in expansionary territory for the second month in a row, the first time that's happened since the recovery began.
Productivity springs back
Nonfarm business productivity snapped back in the third quarter, climbing 1.9% after dropping 1.8% in the second quarter. The gain reflects efforts to do more with current staffing levels and invest (aided by low interest rates) in equipment that enhances productivity. At the same time-because of the soft labor market created by the recession-unit labor costs continued a decline that began in the third quarter of 2009, dropping 0.1%.
The economic week ahead
The light upcoming week will feature the international trade report on Wednesday.
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Steven C. Deller
Professor and Community Development Economist Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension Madison, WI 53706
608-263-6251
"I started out with nothing and I have most of it left."
Seasick Steve
