Author: WSJ.com: Real Time Economics

Sen. Christopher Dodd (D., Conn.) said he has reached an impasse over regulatory reform with Republican counterpart on the Senate Banking Committee, Sen. Richard Shelby (R., Ala.). Sen. Shelby released the following statement:

“There are two bedrock principles on which I will not compromise: the safety and soundness of the financial system and taxpayer protection against bailouts. I fully support enhancing both consumer protection and safety and soundness regulation. I will not support a bill that enhances one at the expense of the other, however. In order to strike the appropriate balance they must be integrated with each other, not separated from each other.

“Consumer protection is not the only issue that remains unresolved. We must craft a resolution regime that ensures taxpayers will never again bear the losses for risks taken in the private marketplace. I will not agree to any legislation until I am satisfied this goal is also achieved.

“I remain hopeful that a bipartisan agreement can be reached on these and other outstanding issues, including derivatives regulation and corporate governance. I remain willing to work with Chairman Dodd to see whether that is possible.”

Early reaction from senior Democrats was supportive of a decision by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) to plow ahead with a bill to overhaul financial regulations after announcing talks with Sen. Richard Shelby (R., Ala.) had reached an impasse.

Treasury Department Deputy Secretary Neal Wolin:

“Enacting comprehensive financial reform remains an urgent priority and we believe it is important that the process move forward.”

Sen. Jack Reed (D., R.I.), a senior member of Mr. Dodd’s panel:

“There’s been a real sense on both sides that we have to get legislation passed…We’ve come to the point where there’s some issues we haven’t got a satisfactory, mutual answer. At that point, you could talk forever. You have to say, ‘let’s go down to the Senate floor, and let’s debate it.’”

Sen. Mark Warner (D., Va.)

“It has been almost two years since Bear Stearns collapsed, and 18 months since Lehman Brothers went into Chapter 11 and AIG was bailed-out by the taxpayers. We must move forward to modernize our regulations in order to restore American leadership in global financial markets.”

Economists and others weigh in on the decline in the unemployment rate amid continued job cuts.

• The fall in the unemployment rate was a legitimately good move. It was not driven, as it sometimes is, by labor force dropouts. The labor force rose noticeably, but the household gauge of employment jumped by even more. Controlling for the one-off downward adjustment in the population controls, the labor force grew by 360,000 in January while household employment surged by 784,000, more than reversing the big December decline that we found puzzling and a bit troubling. In 2003 (and to some degree in prior cycles), household employment began to rise well before payrolls. So, the household survey may finally be getting with the program, which would provide another hopeful sign that payroll employment will soon turn up decisively. –Stephen Stanley, RBS
• We judge there is more good news than bad news in this report and we think labor market trends remain on track to show the emergence of job creation in the first quarter. The average job loss over the last three months is only 35,000 (the smallest since March 2008) and hours worked increased 0.2% (the equivalent of creating over 230,000 private-sector jobs). While the fall in the unemployment rate will be good news politically, we think it is a function of the volatility of the household survey (which showed a loss of 589,000 jobs in December and an increase of 541,000 jobs in January) and we would not be surprised if the unemployment rate increases next month. –RDQ Economics
• This report definitely printed on the weak side of expectations, though the guts of the report actually implies a decent monthly jobs report and a broader improvement in the labour market. The net revisions were quite high at -930,000, though the fact that the headline unemployment rate and the alternative U-6 measure of unemployment both turned lower is an encouraging sign. Additionally, the improvements in the manufacturing sector and the service-producing sector in January do indicate a pickup relative to recent trends. While the worst of the recession is likely over, the duration of unemployment remains stubbornly high, though the median measure did post improvement. This was one of those reports where the ‘negative’ column was offset with the ‘positive’ column, leaving us to maintain our view that the U.S. labour market remains on the slow path to recovery –Ian Pollick, TD Securities
• The labor market continues to stabilize and sustained gains in employment could begin this spring. Aside from the battered construction and state-and-local government, employment is on an uptrend. Even in manufacturing, jobs increased for the first time since the recession began… There are other telltale signs pointing to the improvement in the labor market. The workweek, hourly earnings and the hiring of temporary help have risen. These are good omens for the job market. Employers want to be cautious about hiring and test waters before taking on full-time employees. –Sung Won Sohn, Smith School of Business and Economics
• More problematic is the continued surge in temporary hiring. A leading indicator in the past, this category has become a leading employer instead. Perhaps once the health care debate is settled some of these jobs will swap into permanent employment, but in the meantime firms are willing to take on workers but not at the expense of benefits on the way in or severance on the way out. The long duration of this recession may also be creating an army of permanently unemployable, a group of forgotten men (and women) – a legacy problem from the 1930s. –Steven Blitz, Majestic Research
• The big truth of today’s report is not that the job market improved, which it did not. The big truth is that with downward revisions to previous employment reports, there were more jobs lost than had previously estimated. Furthermore, there was also a very large decrease in the number of unemployed workers by 378,000, as most of these people became “permanent job losers,” according to the Bureau of Labor Statistics. In other words, this is not a positive employment report. Clearly, a job-less recovery is occurring. –Jason Schenker, Prestige Economics
• All in all, we see encouraging signs of progress in labor market conditions and expect to see much better payroll performance (ex-census) in coming months. The census worker effect was only +9,000 (vs an expected +25,000). This will become a more important special factor over the course of coming months and should peak in May at an estimated +425,000 on a monthly change basis (or +700,000 on a level basis). These workers will disappear from payrolls over the second half of the year.–David Greenlaw, Morgan Stanley
• Following the huge downward revision of the payroll numbers between April 2008 and December 2009, U.S. employment has declined by 8.4 million (or 6.1%) during the start of the recession in December 2007. And while the bulk of the revisions (930k) were for the period between April 2008 and March 2009, the numbers for the last nine months (April to December 2009) were also revised down by 430k. As a result, the revised payrolls figures for September and October still show declines of 224k and 225k, respectively. Against this backdrop, the swing to -20k in December is a remarkable improvement, and suggests that the labor market is finally approaching its bottom. –Harm Bandholz, Unicredit
• The upward revisions to the monthly job loss data are particularly big for the second half of 2008 and the second half of last year. The latter is very worrying. The bigger declines in 2008 suggest that the economy was in deep trouble before the collapse of Lehman Brothers, undermining claims that a recession could have been averted if the bank had only been saved by the Fed. –Paul Ashworth, Capital Economics
• Turning points in the business cycle data are always difficult to interpret, but the January payrolls added a dollop of Zen like logic to a recovery that is shaping up like no other. An additional 111,000 workers entered the labor force, yet the unemployment rate fell to 9.7% while private sector employment continued to contract. Hours worked, demand for temporary workers and the hiring in the service sector all improved. However, without the benchmark revisions, the unemployment rate would have increased to 10.6% which better captures the condition of an economy that has seen 8.4 million workers displaced during the recession –Joseph Brusuelas

Compiled by Phil Izzo

Among the surprises in Friday’s government jobs report: Unemployment fell sharply in January to 9.7% from 10%. The jobless rate rose as high as 10.1% in October. But it’s most likely to move higher, not lower, in the coming months.

The Labor Department estimates the unemployment rate from a survey of households, separate from the survey of employers used to track changes in payrolls. (That figure showed employers cutting 20,000 jobs in January.) The household survey asks people whether they have a job or whether they want a job and searched for one, among other questions. It showed a substantial gain in employment — 541,000 jobs last month.

The Labor Department surveys tend to be volatile, producing figures that jump around between months due to sampling. Last July, joblessness declined to 9.4% from 9.5% — and then rose for three straight months after that. The drop was due in part to a substantial decline in the labor force. Last month, the labor force actually rose by about 111,000.

Some lawmakers — in particular, those with elections in November — might try to use the latest figures to suggest that joblessness is trending lower. And some investors who want the Federal Reserve to tighten policy — as it has done historically only once unemployment starts declining — will do the same. If so, they’re likely to be proven wrong. The jobless rate is likely to rise in the coming months as people who had dropped out of the labor force start looking for jobs again as the economy recovers. That would push the main unemployment rate higher, perhaps back above 10%.

The January report did offer some other hopeful signs. The government’s broader measure of unemployment declined almost a full percentage point to 16.5% from 17.3% in December. People working part-time because they couldn’t find full-time work dropped sharply. That comprehensive gauge of labor underutilization, known as the “U-6″ for its Labor Department classification, accounts for people who have stopped looking for work or who can’t find full-time jobs. It should continue approaching the U-3 figure (the official unemployment rate) as people who were unemployed restart their job hunts.

This had been a tough recession for veterans of the latest war in Iraq.

For the first time Friday, the Labor Department started breaking out data on how veterans are faring in its monthly employment report. The picture isn’t pretty for those who participated in the most recent Gulf War: Their unemployment rate stood at 12.6% in January, compared to 9.7% for the general population.

A large part of the divergence could be explained by the age of veterans of the second Gulf War: They tend to be in their late teens and early twenties, a group in which unemployment rates are relatively high. For people aged 20 to 24 in the general population, for example, the unemployment rate was 15.8% in January. Also, for all veterans, the unemployment rate stood at 9.6%, not too different from the national rate.

Still, certain categories of veterans — particularly women — fared worse. The unemployment rate among female veterans jumped to 11.2% in January from 6.6% a year earlier, compared to a jump to 9.4% from 7.5% for men. In the general population, the trend was much different. Over the same period, the unemployment rate for women went to 8.4% from 6.9%. For men, it rose to 10.8% from 8.5%.

University of Maryland Professor Carmen Reinhart co-authored one of the most important economics books of 2009, “This Time Is Different: Eight Centuries of Financial Folly,” a catalogue of financial crises, their causes and consequences. In January, Ms. Reinhart and her co-author, Harvard Professor Kenneth Rogoff, both former International Monetary Fund economists, produced a sobering follow-on to the book, a new paper called, “Growth in a time of Debt,” which reviewed the painful consequences of the rising government debt loads that often follow financial crises.

We interviewed Mr. Rogoff and Ms. Reinhart in October. With worries about public debt now mounting in financial markets, we decided to catch up with Ms. Reinhart again in Washington D.C. this week. As she sipped on a hot cup of tea, she offered the following sobering assessment of the many challenges ahead for policy makers in the U.S. and Europe:

WSJ: How serious a danger do you see in Greece right now?

REINHART: Since independence in the 1830s, Greece has been in a state of default about 50% of the time. Does that tell you something? They were in a state of default until the mid-1960s. If you relocated Greece right now outside of Europe, anywhere, you plop it down in Latin America or Asia or anywhere else, bet on an Argentina-style default. But it is a part of Europe. The European community sees itself very threatened by this. They’re going to do what they can. What I think is a likely scenario is that rather than have a default with a big bang, we’ll have a quieter type of default. If you look at a Standard & Poor’s definition of a default, it is anything that changes a debt contract to less favorable terms from the original contract to the lenders. In other words, lower interest rates or longer maturities. What we’re already seeing in Greece is the makings of that. We’re going to see a voluntary and less-than-voluntary shifting in Greece from marketable debt to non-marketable debt, with a bit of arm twisting.

WSJ: The market is asking, ‘Who’s next?’

REINHART: There are a lot of scary scenarios out there. Take governments that were virtuous governments, and continue to be virtuous. I’m talking about Ireland now. Their public debts were trending down and they have acted quickly and they’re credible. But external debt in the private sector is huge, more than 300% of GDP. In a crisis environment, private debts become public debts pretty quickly. Who knows what will happen with the Iceland referendum, and whether they vote to default on the Danish and the Brits.

WSJ: Are we seeing a second-wave of financial distress?

REINHART: Ken and I have been arguing fairly forcefully that historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely. I don’t think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end. But I do think there is still, for reasons that are beyond me, quite a bit of complacency out there. Eastern Europe is another source of concern, and Europe has limited resources. You can rescue one. You can maybe rescue two. But you can’t rescue all of them. The Baltics are very vulnerable. Romania is vulnerable. Hungary is vulnerable. Problems in these countries feed back to their lenders. Austrian bank exposure to Eastern Europe is great. The Italian exposure to Eastern Europe is great. The Swedish exposure is non-trivial. You started out with a major financial crisis in 2007 and 2008, in which some of these countries have seen their worst recessions, in a way that really harms fiscal sustainability, even if you were in a good shape fiscally at the outset of the crisis. It is the pattern that has been prevalent in the past, that these major financial crises have been followed by an afterwave of debt crises.

WSJ: What point, in the hundreds of years of history that you looked at, does this moment look most like?

REINHART: With all of the differences in policy responses taken into account, the Great Depression is still the benchmark. We have not seen an economic downturn so synchronized, a downturn in trade so sharp and widespread, post-World War II. We have not seen this many economies in the advanced world, which accounts for the lions’ share of world GDP, simultaneously have financial crises since the 1930s. Nothing even close.

WSJ: Let’s talk about the U.S. Based on your reading of history, where will the U.S. economy be in five years?

REINHART: What lies ahead is a rough patch. We are going to have a period of subpar growth. We’re all in agreement we’re going to have a recovery. Everything points to a recovery. But debt is very much at the forefront of the subpar growth. There are public debt issues and private debt issues. There is still a lot of serious deleveraging that lies ahead of us. For households, deleveraging implies curbs on spending. And don’t forget that households have been the engine of growth during recoveries from more recent past recessions. Households are overstretched.

WSJ: But households have started to make some progress on deleveraging.

REINHART: How is that being achieved? Not entirely by repayment, but importantly also by default. And default has lasting consequences. Then there is the issue of the toxic debts of the banks. One of the reasons which in my view the Japanese crisis lingers and lingers and lingers, is that the debt overhang problem in banks was never fully resolved. The good news was they didn’t have a blowout recession. But then again, they didn’t recover either. Our attitude of forbearance toward bank debts means the malaise of a toxic debt overhang is persisting. Japan is the relevant comparison there. And we have a prodigious buildup in public debts and that prodigious buildup in public debts begets uncertainty in the private sector about future taxes and public sector benefits. If you’re a firm, you become more cautious about investing. If you’re a household with long-term plans, you’re also more careful. Debts are a big drag on our economy right now, and that is not going to go away quickly.

On that uplifting note, let me add another one. Guess what. Most of the advanced world is in similar shape. My hair stood on end when President Obama said that our exports are going to double. I know some emerging markets are doing well, but if you look at the world’s largest economies, they’re mired and swimming in debt also. This is not gloom-and-doom, things-are-going-­collapse, fall-of-2008. But it is a period in which you have a lot of albatrosses around your neck and those albatrosses are going to weigh down our growth performance. And our political system right now is not dealing with this issue head on. We might need to wait until we get downgraded until we decide we have a debt problem. I’d like to remind people that Japan was downgraded several times after its financial crisis and they lent to the rest of the world. We don’t lend to the rest of the world, we borrow from the rest of the world.

WSJ: I was going to ask you about best case scenarios, but I’m not going to bother.

REINHART: A best case scenario may be that over the near term something like Greece, Iceland, Eastern Europe or a combination of these events, scare enough people about what debt problems are really like that you get more willingness in the United States to tackle the necessary issues.

WSJ: Policy makers have to make a hard choice, between addressing deficits and trying to support growth and jobs.

REINHART: This economy is still frail. One thing that scared me in looking at the Japanese experience was that they declared victory too soon and withdrew stimulus very soon, and wound up with a bigger debt and bigger deficits as a consequence because things rolled over and died and you wound up with the worst outcome. So when I talk about fiscal discipline, it is not that we go out and implement belt tightening tomorrow. But we plan to, and develop a plan that puts the deficit and debt on a sustainable path. That is necessary today. I would attach a higher weight to getting the recovery going first. You stay the course on the fiscal side but you come up with a plan that puts fiscal footing on a sustainable path. That is easy for me to say, but hell for anybody to implement. You’ll have politicians from every angle, whose time horizon not what happens in five years, but what happens five weeks from now.

WSJ: The Fed has been very aggressive about articulating its exit strategy but also aggressive about reassuring people that they’re not going to start it now.

REINHART: The Fed can do that with one voice and in a way that is credible. With the divisions that we have in the political spectrum right now …

WSJ: That is the key test for fiscal policy makers.

REINHART: Yes.

WSJ: Your research shows that when public debt hits about 90% of GDP, that is almost like a threshold for slow growth. There is some disagreement about where we are on that spectrum. If you take just debt held by the public, it is in the 60s. But if you look at all debt, gross debt, including debt held by government agencies like Social Security, it’s much higher. Where are we on that spectrum?

REINHART: Debt is debt. We’re very close to that 90%. Other government agencies are holding government debt and netting that out, but in the end the federal government is going to be liable. And gross debt of the federal government still doesn’t take into account the massive guarantees (by government-owned Fannie Mae and Freddie Mac). If anything, 90% is a generous measure.

What the data seem to reveal is that at lower ranges of debt, you really can’t make a link between debt and growth. But once you hit a certain threshold, you hit a wall. You can pile on the debt for a while, and you’re not seen as risky. You can accumulate a certain amount of debt without a threat to your debt sustainability. But then you reach a point where that debt sustainability is called into question. It becomes an issue.

WSJ: You and Ken Rogoff have been working together for nine years on these issues. What are the areas where you disagree most?

REINHART: I think Ken may have a little more faith in markets than I do. Unfortunately, I don’t have faith in the government either.

How much faith should you put in the Federal Reserve’s forecasting acumen? No more than you’d put in the average economist, if 2009 is anything to go by.

For The Wall Street Journal’s annual ranking of economists, we use five criteria: their estimates for GDP growth from the fourth quarter of 2008 to the fourth quarter of 2009; their inflation estimates, as measured by the price index for personal-consumption expenditures including and excluding food and energy prices; their estimates for the fourth-quarter average unemployment rate; and their year-end forecast for the Fed’s target rate. All but the last of those — the target rate — are things that the Fed forecasts as well.

At its January 2009 meeting, members of the Board of Governors and the presidents of the Federal Reserve Banks submitted economic forecasts. Taking the midpoint of the central tendency (which excludes the three highest and three lowest projections), they were looking for GDP to fall 0.9%, for the unemployment rate to hit 8.7%, for overall prices to rise 0.7% and for prices excluding food and energy to rise 1%.

Using those four criteria, and The Wall Street Journal’s ranking methodology, the Fed places 21st out of 52 forecasters. Depending on your mood, you can call that average or you can call it middling.

Morgan Stanley’s Richard Berner and David Greenlaw took top honors in The Wall Street Journal’s annual ranking of economists, topping 50 other forecasters.

Morgan Stanley economists David Greenlaw (l.) and Richard Berner (r.)

Economists were ranked based on their 2009 forecasts for inflation, the Federal Reserve’s rate, the change in gross domestic product and the unemployment rate, based on a methodology put forth in a 2002 by economists at the Federal Reserve Bank of Atlanta. More than anything else, it was their bearish forecast for an average fourth-quarter unemployment rate of 9.4% — not far below the actual 10% — that pushed the Morgan Stanley duo to the top of the rankings. (See related story.)

This year, they’re more upbeat, expecting GDP to be 3.2% above its year-ago level by the fourth quarter, and unemployment to ease. They also see the Fed raising its target rate to 1.5% — far higher than most other economists — as a result of mounting inflation pressures.

Here’s how they answered a few questions on their 2009 forecast, and what they see happening next.

At the start of 2010, what did you see that made you so negative on the job market?

Berner: I’m not sure it’s any one thing. We obviously saw a weak economy. There was general sense from companies on the need to cut costs aggressively. It seems so long ag, but there was something bordering on panic. The political uncertainty was high. We had a new administration coming in. The fed had yet to put in place its large scale asset purchase program.
One of the things that kept us from thinking it would be even worse was our belief that the global economy would provide some support.

Greenlaw: I think we had some correct assumptions on how backloaded the stimulus would be.

What did you miss?

Greenlaw: I’d say the steeper falloff in activity in the first half of the year. It turned uglier than most people thought right after you collected that forecast.

Berner: If you’d asked us in October of 2008, even in the midst of the crisis, would we have cuts of 700,000 jobs a month, that would have been a tough thing to expect.

What are the risks this year?

Berner: There are lots, obviously. There is a shadow inventory of yet-to-be foreclosed homes. If foreclosures were to accelerate, for whatever reason, that imparts some downside risks.
But lets not forget about the upside risks. Parts of the rest of the world could be even stronger than we anticipate. The influence of that on manufacturing and production are positive.

Greenlaw: Both from the standpoint of domestic capital spending and exports.

Berner: About a third of our profits come from overseas. If profits are rising globally, that makes a difference.

Greenlaw: There are plenty of economic uncertainties, but the policy uncertainty also remains quite strong.

As the government mulls banking reform efforts officials hope will prevent a replay of the financial crisis of recent years, more than a few observers are worried about the growing threat created by those who trade stocks at lightning speed.

This so-called high-frequency trading engages in extremely fast buying and selling of stocks to generate profits. The few who do it account for significant amounts of volume for the word’s major stock exchanges, and as a result, are a potential source of system wide trouble.

A new paper published Wednesday by the Federal Reserve Bank of Chicago takes a look at the issue. While much of the piece, written by staffer Carol Clark, simply explains what high-frequency trading is, it also offers a few suggestions that could mitigate the risks of the strategy.

The threat is potentially real–some 70% of U.S. stock market’s total volume was driven by high-frequency trading, despite only 2% of trading firms engaging in the pursuit, according to research cited by the paper.

While this style of trading has an upside in creating liquidity in the stock market, critics worry that bad programming and human error could create catastrophic market moves. High-frequency trades are measured in nearly microscopic time intervals. Distance is also the enemy of these investors, who need to locate their operations next to major exchanges, because remoteness introduces enough too much of a lag into their activities.

The combination of blinding speed and machines is scary. “The high-frequency trading environment has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment,” Clark wrote.

Most of the marquee screw ups of the high-frequency trading world, as identified by the paper, deal with humans telling machines to do the wrong thing. While those errors have thus far been limited, they have on several occasions driven big market swings. Given that the financial crisis was defined by excessive borrowing that turned bad investments into huge bank-destroying losses, it’s natural to worry about strategies that can turn small mistakes into very big ones.

To prevent future snafus, the paper says a well-run high-frequency firm strategy must contain controls for order size and prices. Meanwhile, the system itself should be made more transparent. “Of paramount importance is the speed at which clearing members receive post-trade information from the clearinghouse and incorporate this information into their risk-management systems so that erroneous trades can be detected and stopped,” the paper said.

Clark warns, however, that when some entity places limits on high-frequency trading efforts, those firms could simply pick up and go where the rules are more friendly and less restrictive.

The Chicago Fed paper is primarily academic and deals with an area in which the Federal Reserve has little oversight, with stock exchanges overseen by other parts of the government.

That said, central bank officials have been arguing vociferously for the creation of some sort of entity that could ensure the stability of the financial system as a whole. This entity would be able to identify and remedy threats to stable market functioning. If high-frequency trading were to be seen as a potentially destabilizing force, this future regulator would likely act to rein in activity.

Senate Banking Committee Chairman Christopher Dodd (D., Conn.) had some tough words for the White House on Tuesday, warning it not to bog down the effort to overhaul financial regulation with any new complicated ideas.

On Thursday, he had quickly shifted his glare to the banking industry.

He said the effort by the banking industry to kill the legislation “borders on insulting to the American people.” He also said “too many people in the industry have decided to invest in an army of lobbyists whose only mission is to kill the common sense” changes.

Sen. Dodd’s “determined as ever to get this strong bill to the [Senate] floor,” he said.

Many large retailers reported their January sales numbers this week, with most of them coming out the morning of Thursday, Feb. 4. Following an announcement last May, Wal-Mart and its units no longer publish monthly sales figures. Updates to come as more retailers report sales. (Last updated Feb. 4, 2009)

Sort the chart below by company name, category, change in total or same-store sales, and total sales. Also, see December’s chart.

Company name	Category	Same-store sales change	Overall sales change	Overall sales (millions)	Comments
Abercrombie & Fitch	Apparel	8%	16%	$222.8	The company’s increase in sales was unexpected as it has struggled for months. As of Jan. 30, it has completed the closure of its Ruehl brand stores. The namesake Abercrombie & Fitch stores posted a 12% jump in sales.
Aeropostale	Apparel	11%	15%	$111.2	The company posted raised its earning outlook based on the results. The retailer said gift-card redemptions added $7.7 million to sales.
BJ’s	Discount	2.9%	13%	$742.6	The company noted that it faced a negative effect from the Superbowl falling during the February reporting period this year, compared to January last year. Sales increased in all regions, with the strongest rises in the Southeast and Upstate New York. Food and gas sales were stronger, while merchandise sales were flat. (Same-store sales change excludes gasoline.)
Buckle	Apparel	-1.2%	4.4%	$50.2	The teen-apparel retailer has posted its first drop in same-store sales in more than three years. It had previously been on a 39-month streak of gains.
Costco	Discount	0%	10%	$5,620	Costco said higher gasoline prices and strengthening foreign currencies had a positive impact on January’s comparable sales. (Same-store sales change is for U.S. and excludes gasoline.)
Gap	Apparel	5%	5%	$798	The company said its earning will be higher than First Call estimates. The discount Old Navy stores posted a 10% increase in sales, while the flagship Gap stores posted a 2% gain in same-store sales. The high-end Banana Republic chain experience a 4% jump.
Hot Topic	Apparel	-13%	-11%	$39.8	The company said that its earnings outlook will be on the low-end of last month’s reduced guidance. Despite gains in other parts of the teen segment, Hot Topic wasn’t a beneficiary.
J.C. Penney	Department	-4.6%	-4.4%	$940	Women’s apparel and fine jewelry were the top performing merchandise divisions, while children’s experienced the weakest sales. The central region was the company’s best performing region in January, and the northwest region had the softest sales.
Kohl’s	Discount	6.5%	10.7%	$798	The company raised its earnings outlook. The Southwest the strongest part of the country, as the footwear and accessories categories performed best.
Limited Brands	Apparel	6%	5.2%	$622.6	The Victoria’s Secret brand posted the strongest same-store sales increase, rising 17%. Limited Brands stores’ sales were up 6%, but La Senza and Bath & Body Work reported flat sales from a year earlier.
Macy’s	Department	3.4%	3.4%	$1,255	The company increased its fourth-quarter earnings outlook again. CEO Terry Lundgren credited strong sales at the company’s Bloomingdale’s chain and a shift in the organizational structure with boosting results.
Neiman Marcus	Luxury	4.5%	8.3%	$242	Sales were strongest in the Southeast and Northeast. The merchandise categories that performed best included precious jewelry, women’s couture apparel and dresses, shoes, handbags and men’s.
Nordstrom	Luxury	14%	16%	$543	The company posted a 4.2% decline in same-store sales for its fiscal year, smaller than many others in the luxury sector.
Ross Stores	Apparel	8%	13%	$411	The discount apparel retailer raised its fourth-quarter earnings outlook on stronger-than-expected sales. The home department and shoes were the strongest categories, while the Mid-Atlantic and Mountain regions performed the best for the company.
Saks	Luxury	7%	8%	$158.9	The strongest categories at Saks Fifth Avenue stores were women’s designer and “gold range” apparel, women’s shoes, handbags, fashion jewelry, men’s apparel, and men’s shoes.
Target	Department	0.5%	3.6%	$4,289	The company said lower clearance sales held down year-over-year performance. Apparel and home categories were the strongest.
TJX	Discount	12%	20%	$1,300	TJX raised earnings guidance for the fourth quarter. The company said customer traffic accelerated in January.
Zumiez	Apparel	1.8%	9.2%	$22.1	The youth retailer followed the trend in its sector, posting an increase in sales from the year-earlier period.

The International Monetary Fund stands ready to help Greece, which is struggling to stabilize its public finances, but understands that other members of the euro-zone currency bloc want to resolve the matter among themselves, the fund’s managing director said.

Greece recorded a budget deficit of nearly 13% of gross domestic product in 2009, far above the European Union’s 3%-of-GDP limit.

“If I’m asked to step in, we’ll do it, but I completely understand the Europeans who want to try to resolve the problem among themselves,” Dominique Strauss-Kahn said in an interview with RTL radio, without elaborating.

Involving the IMF would effectively be an acknowledgment that the euro zone’s own procedures for keeping members in check aren’t strong enough, and it would also suggest that the euro zone is the kind of place that has to go to the IMF for help.

Greece’s debt woes haven’t weakened the euro zone overall, Mr. Strauss-Kahn said.

“I think it’s the euro zone’s first real test, and I think it will get through it,” he said. “[It] would seem [that the euro zone] can’t allow itself not to help Greece in one way or another, so I’m rather confident.”

He also expressed confidence in Greek Prime Minister George Papandreou to take the necessary measures.

A roundup of economic news from around the Web.

• Last Year: On the Big Picture, David Rosenberg compares last year to this year. “A year ago, China was embarking on a massive fiscal and credit stimulus plan that would send commodity prices and global exports surging. Today, the People’s Bank of China (PBoC), along with other Asian central banks, is now withdrawing the stimulus (India as well). Is the near 10% correction in the Chinese stock market telling us something about the Chinese economic outlook? Something tells us the Reserve Bank of Australia was on to something when it didn’t hike rates yesterday when the market was fully priced for another move — after all, China is Australia’s most important customer… A year ago, the S&P 500 was undervalued by 18%, on a Shiller normalized P/E basis. Now, it is overvalued by 25%. A year ago, we were coming off a -6.4% real GDP print in the U.S. and a 35 ISM reading and only ‘green shoots’ lay in our path. Today, we are coming off a +5.7% GDP headline and a 58.4 ISM index and the days of “sequential improvement” are clearly over.”
• Forecasts: Menzie Chinn of Econbrowser compares government and private forecasts. “The CBO’s forecast for 2011 is noticeably more pessimistic than either the Blue Chip or Administration forecast. The CBO’s forecasts of particularly sluggish growth are driven by the following three (familiar) points: *Economic growth will probably be restrained by the aftermath of the financial and economic turmoil. Experience in the United States and in other countries suggests that recovery from recessions triggered by financial crises and large declines in asset prices tends to be protracted. *Although aggressive action on the part of the Federal Reserve and the fiscal stimulus package enacted in early 2009 helped moderate the severity of the recession and shorten its duration, the support coming from those sources is expected to wane. In addition, under the assumption that current laws and policies remain unchanged — an assumption that is reflected in CBO’s forecast — tax rates will increase in 2011, further hampering growth. *Household spending is likely to be dampened by slow income growth, lost wealth, and constraints on households’ ability to borrow. Investment spending will be slowed by the large number of vacant homes and offices.”
• Payroll Taxes: On his Director’s blog, CBO’s Doug Elmendorf writes about how payroll-tax cuts can encourage employment. “The agency analyzed the effects on employment of several policy options, including giving employers a one-year, nonrefundable credit against their payroll tax liability for increasing their payrolls in 2010 from their 2009 levels. (To finance Social Security, employers and employees each pay 6.2 percent of an employee’s annual earnings up to a maximum.) Such a tax cut would lead to increased employment through a number of channels. For example, some firms would hire more people because hiring would be less expensive; others would lower prices to increase sales, thus spurring production and increasing the demand for labor; still others would increase compensation for employees, which would encourage more spending.”

Compiled by Phil Izzo

In response to rising concerns about the state of Spain’s economy and its public finances, Finance Minister Elena Salgado said Thursday that Spain’s situation isn’t like that of Greece.

“Spain’s situation is not like that of Greece, not in terms of public debt nor in terms of economic strength,” Ms. Salgado said in an interview with La Cope radio.

Greece has been forced into a draconian debt- and budget-deficit reduction program by the European Commission after the country admitted last year its deficit was much higher than previously thought. Greece’s troubles have raised concerns about other countries, like Spain, with high deficits and low economic growth prospects.

Joaquin Almunia, European economic affairs commissioner, said at a meeting with journalists Wednesday that Greece, Spain and other countries share some of the same problems. “In those countries, we’ve seen a continuous decline in competitiveness since they joined the euro,” Mr. Almunia said.

Spain is grappling with the collapse of a decadelong housing boom that has pitched the wider economy into a deep recession, sending tax revenue plummeting and social welfare costs soaring. Last week, the government said its 2009 budget deficit likely stood at 11.4% of GDP, far in excess of the 3%-of-GDP limit for EU countries.

But Spain also has a relatively low level of debt over gross domestic product and, up until the crisis struck, a good track record of fiscal management. “In the case of Greece, there has been a problem with its statistics,” Ms. Salgado said. “There is no similar problem with any other E.U. countries, certainly not with Spain,” she said.

The following is an interview with Christoph Rieger, the co-head of rate strategy at Commerzbank AG. Rieger spoke with Dow Jones Newswires in Frankfurt ahead of the European Central Bank’s policy meeting Thursday. The ECB is widely expected to leave its benchmark interest rate and extraordinary liquidity measures unchanged.

Christoph Rieger of Commerzbank says many banks still rely on ECB funding.

The ECB says extraordinary liquidity measures will be withdrawn “gradually.” What is the likely time-frame for the ECB’s exit?

Rieger: Members of the ECB’s governing council, including Axel Weber, have stressed that an exit will not be time-dependent. In other words, it will depend on developments in the economy and, more importantly, financial markets. We’ll need to see convincing signs of a recovery in repurchase and interbank lending before the ECB will end its full-allotment policy, especially for its main weekly refinancing operations. I don’t see this happening any time soon.

What makes you so skeptical? Could you please elaborate?

Rieger: Many financial institutions still rely on ECB funding. Although the number of banks that participate in the ECB’s weekly tenders has fallen significantly, bids still top 50 billion euros, with the ECB honoring all bids. But why pay 1% for secured ECB funds if you can get the unsecured cash elsewhere for just one-third of that price, or around 0.35%? That would be silly, or wouldn’t it? The simple answer is that many houses can’t get the funds in the interbank money market. That’s one reason why the ECB can’t afford to revert to competitive tenders for now. It would risk upsetting fragile financial markets that are already spooked by Greece’s debt woes.

Which banks would be affected most? Could you give names?

Rieger: The ECB doesn’t disclose the names of the banks that participate in its refinancing operations. I don’t want to point fingers either, because it’s a politically charged issue. But I’d like to stress that anybody who claims markets are almost back to normal is simply not reading the figures properly. I personally wouldn’t be surprised if the ECB kept its full-allotment policy for its MROs [main refinancing operations] in place until next year to help struggling institutions.

Some people argue there is a risk to leaving interest rates low and liquidity abundant for too long. It will eventually fan inflation, they say. Do you support this view?

Rieger: I can’t see signs of inflation anywhere across the euro zone, and I don’t know where it should come from over the ECB’s policy horizon. Aggregate demand is the determining factor for inflation. The recent economic pick-up was largely driven by excessive government spending. But this pillar of support will break away next year, at the latest, and I don’t think the private sector will be ready to take up the slack. Unemployment is still rising and some households will only feel the pinch later this year. Further, I don’t expect households to run down their savings to fund consumption. More evidence of a muted inflation outlook comes from the ECB’s survey of professional forecasters: It shows two-year-ahead inflation expectations below the ECB’s objective. Even five-year-ahead expectations are below 2%, so very subdued.

Against this backdrop, when do you expect the ECB to hike interest rates?

Rieger: If everything goes to plan, the ECB could be in a position to reduce its extraordinary accommodation later this year, and we have a first rate hike penciled in for December.

Federal Reserve governor Kevin Warsh said Wednesday that reforming the financial regulatory system will require international cooperation, if those efforts are to be successful.

“I wouldn’t say there’s one size that fits all” when it comes to reforming bank oversight, Warsh said. But even so, “the need to coordinate with our G-20 colleagues is essential,” and what’s been seen so far has been good, the official said.

Warsh’s comments came in response to audience questions after a speech given before the New York Association for Business Economics.

Warsh’s formal remarks centered on the matter of regulatory reform. Congress is currently mulling proposals that could see the Fed stripped of its bank oversight powers, a possibility that worries many central bankers. In an opinion piece in the Financial Times published Wednesday, Warsh argued in favor of the Fed maintaining its current portfolio, and offered his thoughts on the best way forward for reform.

In his prepared remarks, Warsh had warned against trying to “micro-manage” banks. “The U.S. economy runs grave risks if we slouch toward a quasi-public utility model.” His remarks come as President Barack Obama’s administration is pushing for a $90 billion tax on big banks to make up for taxpayer money spent on rescuing the financial sector and tighter rules aimed at limiting risky behavior by lenders to prevent a new financial crisis.

“In a global economy with integrated financial markets, big is not bad,” Warsh said, adding that it is better to foster competition among banks so that smaller lenders can take market share than to “bully” large banks.

Warsh told the audience he was heartened by the tone he has heard in Washington over recent weeks when it comes to reform overall. He also said that Main Street supports reform.

“If I leave places like Washington and New York and go to places in the real part of the country where there are real businesses that are trying to get their wits about them” and grow and hire, “they are finding credit availability isn’t what they wish it were,” Warsh said.

“I find the message of trying to bring real competition to financial services is incredibly well received,” the official said, explaining he hopes government also allows Wall Street the space to heal some of its own troubles.

While he didn’t address the economic outlook, Warsh spoke as financial markets await Friday’s key nonfarm payrolls for January, which investors hope will offer clues about how solid the U.S.” move out of recession is.

While growth has returned to the economy, it has thus far been relatively muted and has only led to a moderation in the pace of job losses. Policy makers and many private sector economists worry the moderate growth expected over the course of the new year won’t do much to help lower the unemployment rate from its currently elevated level.

This uncertain outlook is keeping the Fed on the sidelines when it comes to interest rates. It’s seen keeping that near the current zero% level at least until summer, if not longer. The more immediate question for central bankers is what they need to do with the soon-to-end mortgage securities buying program. Some feel it should be extended beyond March, to give the economy more room to transition to higher growth, while other officials feel the program has done what it can do.

While he made no direct comments on monetary policy, Warsh did flag what he believes is the Fed’s most important tool.

“The most valuable asset that the Federal Reserve had a generation or two ago and today is our credibility,” Warsh said. “We have a $2.3 trillion balance sheet and people think the source of the power comes from the ability to grow your balance sheet, to run your printing press,” the official said. But that’s wrong, because the real power is consistent behavior and “our credibility to live up to our dual objective, both in respect to price stability and employment,” he said.

In other comments, Warsh said the U.S. banking system, even with its proliferation of huge banks, compares favorably to the systems seen in many other large nations. Warsh also said that trading conditions in derivative securities had improved, although there was more distance to go on that front.

The service sector grew last month but remains feeble as high unemployment and tight credit put pressure on consumers and businesses alike.

The Institute for Supply Management’s non-manufacturing index, which primarily covers the service sector, rose to 50.5 from 49.8 in December, the industry group said Wednesday. Levels above 50 indicate expansion.

Shifting into growth mode is a move in the right direction, but service sector activity, which accounts for the bulk of U.S. economic output, is still at depressed levels. The non-manufacturing reading comes just days after a separate ISM index of manufacturing activity showed it was growing at a much faster pace than its service counterpart.

“Our best guess is that the non-manufacturing index is being weighed down by the continuing weakness of retail sales and domestic demand in general,” Paul Ashworth, a Capital Economics Ltd. economist said in a note to clients. “The non-manufacturing survey is also doing a better job of picking up the continuing difficulties at small firms, who can’t get the credit from their banks to boost employment or investment.”

The details of the report didn’t offer signs of a vigorous rebound. New orders expanded at a faster pace last month and business activity continued to expand, albeit at a slower rate. But just four out of 15 industries reported growth and the orders backlog contracted at a faster pace.

The employment index improved but stayed below the 50-level as companies continue to be hesitant to add workers until it’s clear that the recent improvement in business activity is sustainable.

“Companies are really going to take that wait and see approach,” said Anthony Nieves, chair of the non-manufacturing survey committee. He noted that, in their comments, companies said there were maintaining hiring freezes and leaving open positions unfilled.

Internal devaluation may sound like something you talk to your therapist about, but it’s serious business for Latvia, according to a paper from the Washington-based Center for Economic and Policy Research.

And it could be a major problem for countries in the euro zone, too, one of the authors says.

Latvia, economists Mark Weisbrot and Rebecca Ray note, “has seen a world-historical drop in GDP of more than 25%.” With another 4% decline expected this year, its output loss will be even greater than the Great Depression. A “large” reason, the authors say, is an overvalued fixed exchange rate the country maintains in the hopes of being able to join the euro.

“With the nominal exchange rate fixed, the adjustment in the real exchange rate takes place through pushing down prices and wages,” they wrote.

The end result? “The economy is trapped in a deep recession in which all of the major macroeconomic policy variables — the exchange rate, fiscal policy, and monetary policy — are either pro-cyclical or cannot be utilized to help stimulate the economy. This makes it very difficult to get out of the recession,” they wrote.

Internal devaluation has become something of a buzzword in other parts of Europe, too. And though its effects aren’t nearly as extreme as in Latvia, it could weigh heavily on peripheral euro-zone countries like Portugal, Ireland, Greece and Spain. Ireland is already going through a process of “internal devaluation,” note economists at BNP Paribas, in which fiscal tightening coincides with a period of very low inflation or even outright deflation.

The euro zone’s periphery — or PIGS as they’re known — were hit hard by the collapse of the housing bubble, and their deficits have ballooned as a result (Ireland, Greece and Spain are all in double digits as a percentage of GDP; Portugal is nearly there). At the same time, they face major competitiveness challenges after years of wage and price increases and lagging productivity.

The easy route — currency devaluation — isn’t available, since all four are part of the euro, which despite its recent losses remains very high historically. Another, monetary expansion, isn’t either since interest rates are set by the ECB. Neither is fiscal policy, since euro zone countries are bound to strict budget rules. That leaves internal devaluation in the form of wage cuts, government spending reductions and a lengthy period of either very low inflation or outright deflation.

It’s painful, though at the end of the process countries like Spain, Ireland and Greece should be more competitive and able to achieve sustainable growth. Still, while they aren’t likely to become larger versions of Latvia, internal devaluation suggests years of sub-par growth in those once fast-growing peripherals that used to drive demand in Europe as a whole.

The euro zone’s periphery “is analgous” to what’s going on in Latvia, Mr. Weisbrot told the Journal. And the lesson for Latvia, he says, is that the problem doesn’t go away if and when they join the euro.

Private donations to U.S. colleges and universities dropped a sharp 11.9% in the recessionary year of 2009 from the previous year to $27.85 billion, according to the Voluntary Support of Education Survey released this week by the Council for Aid to Education.

The 20 institutions that raised the most in 2009 received $7.28 billion — $1.13 billion less than the top 20 institutions raised in 2008, the Council said. (The ranks of the top 20 weren’t exactly the same, it noted.) In 2009, Stanford University raised more from private donors ($640 million) than any other school.

“The economy was so bad the only thing that would have been a surprise is if it had been a really good year,” said Ann E. Kaplan, the survey’s director, told the Chronicle of Higher Education. She predicted this year will be better.

Last week a survey, by the National Association of College and University Business Officers and Commonfund, Inc., noted college endowments fell sharply for a second year in a row, raising doubts of a recovery any time soon.

Institution	2009 Amt. Raised (in millions)	2008 Amt. Raised (in millions)	Percent change from year earlier	2009 Rank	2008 Rank
Stanford University	$640.11	$785.04	-18.5%	1	1
Harvard University	$601.64	$650.63	-07.5%	2	2
Cornell University	$446.75	$409.42	09.1%	3	9
University of Pennsylvania	$439.77	$475.96	-07.6%	4	5
Johns Hopkins University	$433.39	$448.96	-03.5%	5	7
Columbia University	$413.36	$495.11	-16.5%	6	3
University of Southern California	$368.98	$409.18	-09.8%	7	10
Yale University	$358.15	$486.61	-26.4%	8	4
University of California, Los Angeles	$351.69	$456.65	-23.0%	9	6
University of Wisconsin-Madison	$341.81	$410.23	-16.7%	10	8
New York University	$334.79	$387.61	-13.6%	11	12
University of Washington	$323.55	$302.77	06.9%	12	18
Massachusetts Institute of Technology	$319.07	$311.90	02.3%	13	16
Duke University	$301.65	$385.67	-21.8%	14	13
University of California, San Francisco	$300.42	$366.07	-17.9%	15	14
University of Minnesota	$272.35	$307.61	-11.5%	16	17
University of North Carolina at Chapel Hill	$270.11	$292.39	-07.6%	17	19
University of Michigan	$263.33	$333.45	-21.0%	18	15
University of California, Berkeley	$255.10	$285.35	-10.6%	19	20
University of Chicago	$248.80	$256.90	-03.2%	20	24

A roundup of economic news from around the Web.

• Stimulus Debate: Scott Sumner says the debate over stimulus is too focused on fiscal, not monetary, stimulus. “I happen to favor more stimulus, although I understand that some thoughtful economists disagree with me. I happen to think monetary stimulus is preferable to fiscal stimulus, and in this case there aren’t any thoughtful economists who disagree with me. Not one. If there was going to be one, it would be Paul Krugman. But even he admitted late last year that monetary stimulus is the first choice, and you only move on to fiscal stimulus is the Fed won’t play ball. So here is the debate: Do we need more monetary stimulus, or should we let the economy recover naturally. But DeLong wants to say the debate is between fiscal stimulus and stagnation. How can he do that? Buy simply assuming away monetary stimulus. Presumably he would say that Obama doesn’t control monetary policy, so he can hardly be blamed for relying on fiscal stimulus. Has Obama made a single public statement calling on the Fed to promote higher NGDP growth, or higher inflation, or higher whatever? And then there is the little problem that Obama just re-appointed Ben Bernanke last month. Bernanke’s now his guy at the Fed.”
• Volcker Rule Loopholes: Felix Salmon notes loopholes in the proposed Volcker rule. “Firstly, the Volcker rule seems to apply only to depositary institutions: if you don’t take deposits, then you’re exempt. The result is that it’ll be easy for Goldman Sachs and Morgan Stanley to get around the rule just by returning their current (tiny) deposit base and voluntarily withdrawing from access to the Fed’s discount window. But the point here is that banks with deposit bases are already insured and regulated, by the FDIC. The definition of a bank isn’t an entity which takes deposits; it’s an entity which borrows short and lends long. So long as the likes of Goldman Sachs can fund themselves in the wholesale market and continue to lend money to large clients in things like the syndicated loan market, they’re banks, and they should be subject to rules like Volcker’s which apply to banks. Secondly, it seems that banks might be allowed to continue to own hedge funds, private-equity funds, money-market funds, and the like, just so long as they’re run for clients, with client money, rather than being vehicles for the investment of the bank’s own capital. This too is dangerous, because the history of the financial crisis is clear: Bear Stearns ended up bailing out its internal hedge funds even when it didn’t legally have to.”
• Econobloggers: The Kauffman Foundation surveyed econobloggers and found them to be a pessimistic lot. “The bloggers expect the greatest growth prospects over the next three years to be in interest rates, inflation and the budget deficit. U.S. output and jobs are expected to increase, but with about half the intensity of growth in global output. The panel assesses conditions as “bad” or “very bad” for small business (52 percent) and bank lending to business (51 percent) and individuals (50 percent). The outlook for entrepreneurs is a relative bright spot, with opinions mixed between bad conditions (36 percent) and good (26 percent).”

Compiled by Phil Izzo