Author: WSJ.com: Real Time Economics

Sen. Bob Corker (R., Tenn.) said he was very disappointed talks have broken off with Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and blamed health care and White House politics for the problem.

“I think Republicans want to see a good financial reform bill. I think Democrats want to see a financial reform bill. If we cannot do this in a bipartisan way, and I still have hope that we will, we can’t do anything anymore in the United States Senate.”

Today Senate Banking Committee Chairman Chris Dodd (D., Conn.) issued the following statement on financial reform:

“On Monday, I will present to my colleagues a substitute to the original financial reform package, unveiled last November.”

“Over the last few months, Banking Committee members have worked together to try and produce a consensus package. Together we have made significant progress and resolved a many of the items, but a few outstanding issues remain.”

“It has always been my goal to produce a consensus package. And we have reached a point where bringing the bill to the full committee is the best course of action to achieve that end. I plan to hold a full committee markup the week of March 22nd.”

“I have been fortunate to have a strong partner in Senator Corker, and my new proposal will reflect his input and the good work done by many of our colleagues as well.”

“Our talks will continue, and it is still our hope to come to agreement on a strong bill all of the Senate can be proud to support very soon.”

A roundup of economic news from around the Web.

• Consumer Lending: Ellyn Terry on the Atlanta Fed’s macroblog looks at consumer lending. “Is the decline in consumer credit the result of supply- or demand-side forces? Perhaps the answer is both. According to the Federal Reserve’s Senior Loan Officer Survey, demand for all types of consumer loans (revolving and nonrevolving combined) has fallen since the first quarter of 2009. A decrease in demand for consumer loans is plausible because consumers tend to delay big purchases such as cars and vacations when uncertainty about future income increases. Because future income is affected by job prospects, consumer credit demand lags the recession much like employment does.”
• Supply or Demand: Stephen Gandel also wonders whether supply or demand is the main issue with consumer lending. “Credit card lending is falling because banks are cutting consumers off. And so this is much more of a supply side problem. When it comes to credit, neither demand nor supply problems are easy to fix fast. But my guess is that the supply side problem is the easier one to tackle. Banks generally want to lend. They are incentivized to do so. That’s how they make money. What’s more, the Fed has ways to get banks to lend. The government can pump more money into banks. The Fed can even start to essentially lend money itself, by buying up bonds. Yes, it has done a lot of this stuff already and lending has dropped, but not nearly as much you would have expected. And as the economy improves I would suspect that banks will become willing very quickly to lend again. If existing banks are too battered, persistent low interest rates should cause new banks to pop up to fill the void.”
• State and Local Debts: Paul Krugman worries about state and local cuts offsetting the stimulus. “I think it’s fair to say that state and local cuts largely offset federal stimulus. And David Broder thinks this is a good thing, that Washington should be more like the states. What amazes me is that Broder doesn’t even seem to be aware that there’s an argument on the other side, let alone that most economists are dismayed by the effects of fiscal austerity. If Broder is a guide to Beltway conventional wisdom — which he usually is — we’ve got a big problem.”

Compiled by Phil Izzo

In recent weeks, policy makers from President Barack Obama to Federal Reserve Chairman Ben Bernanke have been taking extraordinary measures to remove what they see as a serious impediment to the recovery: A dearth of credit for the small businesses that many economists say must play a leading role in creating new jobs.

David Altig, head of research at the Atlanta Fed, has been in the front lines on the issue, polling small businesses in his region and parsing economic data to figure out what’s really happening. He spoke with Real Time Economics about the extent to which small businesses are in trouble, what banks have to do with it and why we should care.

In 2009, the U.S. experienced the largest contraction in bank lending since 1942. That might not be a problem for big companies, which can borrow on bond markets, but most small businesses have nowhere to go but the local bank. What might that mean for the recovery?

Altig: What this means for the recovery is nothing good. Depending on how you define small businesses, they account for something between one third and two thirds of net job creation. So if there’s some impediment to the growth of such companies, we obviously have the bleaker side of our employment forecasts being the likely outcome.

How big of a role did small businesses play in the latest recession?

Altig: An outsized fraction of the job losses during this recession came from small businesses, particularly very small businesses with less than 50 employees. In the 2001 recession, about 9% of the net job losses came from that small business category. This time around it was 45%.

Why did this recession hit small business so hard?

Altig: We’re looking for explanations. One obvious candidate is that this was the group that would have more difficulty with a credit event, which clearly this recession was.

We tried to get to the bottom of that by surveying small businesses about access to credit and how big of a problem it was in our district. We didn’t really pick up access to credit as being a big problem for these businesses.

Of course we’re talking about those businesses that have survived. And what we don’t know is how many small businesses are not being formed because of lack of access to credit. A lot of startups depend not on direct business loans, but on loans their owners take out against their homes. With the decline in real-estate values, those loans have become a lot harder to get.

Some surveys have shown that small businesses are more concerned about poor sales than about access to credit. Does this mean that lack of credit isn’t such a big problem, or that they haven’t yet run into it because they’re still reluctant to expand?

Altig: We don’t really know if this will become more of a significant problem once things begin to pick up and businesses decide they want to expand. We did look at whether people were anticipating problems, but unless you’re in construction, we’re still not picking up that sentiment.

We still get lots of anecdotal feedback that people are having credit problems and it is restraining them. It’s our intuition and really it’s embedded in our view of the trajectory of the economy that balance sheet repair and credit tightness is going to be a factor restraining the recovery.

We’re particularly worried that looming issues in commercial real estate will heavily impact the sorts of banks that would serve small businesses. That remains on our radar screen as a concern.

How much can regulators and the government do to get credit to small businesses?

Altig: I think it’s hard to tell what will be effective and what won’t be effective, in part because we’re struggling here, trying to diagnose exactly what the problem is. We’re trying to promote an environment that is conducive to growth and let things sort themselves out.

Greeks are bracing for a long and deep recession ahead as it begins to dawn on them that the cost of fixing the country’s public finances will entail years of economic hardship and high unemployment.

In recent public opinion polls, but also in the media, the business community, and even in ordinary dinner conversation, the feeling is that it will take several years for the Greece to emerge from its economic crisis and that there is much pain to come before things improve.

“I have no doubt that we will remain in recession in 2010, 2011 and 2012 and that the recession will deepen. It won’t be until the first half of 2013 that we will see a recovery,” said Yanos Gramatidis, president of the American-Hellenic Chamber of Commerce. “And I think most people have grasped that.”

The polls seem to show so, too. According to one poll in Sunday’s edition of To Vima newspaper, 37.9% of Greeks expect the recession to last three to four years. Another 19.3% think it could last five to nine years, and 22.4% think it could take a decade or longer for Greece to emerge from recession. Only a small minority, 15.4%, reckon that a recovery will come in the next year or two, the poll showed.

“I used to think that this recession would be short-lived, but I don’t really believe that anymore. I think it is here to stay and for some time to come,” said Alex Pyromallis, 27 years old, who works in a bookshop in the center of Athens. “And things will definitely get worse before they get better.”

How much worse remains to be seen. Greece’s 250 billion euro economy shrank 2% last year, after 15 years of 4% average annual growth rates, and marking the country’s first recession since the early 1990s.

Officially, the Greek government has forecast only a relatively mild contraction of 0.3% in the economy this year and a recovery next year. But privately, people in the government say those forecast figures will be lowered to show a decline of 1.5% or worse this year, with a recovery only due to start in 2012.

But others think even that may be too optimistic. A recent Deutsche Bank report forecasts a 4% decline in Greek gross domestic product this year.

“I think we are in for an even deeper recession than we have had so far,” said Constantine Michalos, president of the Athens Chamber of Commerce and Industry. “There have been some estimates of a 4% decline for this year and I can’t really refute that. I think those estimates are very much on the ball.”

Mr. Michalos and other business leaders say that the recent austerity packages adopted by the Greek government to narrow the budget deficit to 8.7% of GDP this year is only half of the challenge.

Greece also faces years of structural reforms to get its economy back on track and restore its lost competitiveness against its European neighbors. And that kind of deep restructuring will take a long time.

“We will be the last country in Europe to stage a turnaround,” said Panagiotis Hazakos, a 66-year-old engineer who is retired but still runs two small boutique hotels on the resort island of Myconos. “But I think people have started to understand the severity of the situation.”

See the full interactive graphic.

Thirty states and the District of Columbia recorded unemployment rate increases in January from a month earlier, while states registered rate decreases, the Labor Department said. But in a sign the job market is inching toward recovery 31 states added jobs in the first month of the year.

In January, the overall U.S. unemployment rate fell to 9.7% from 10% a month earlier, while the nation’s economy shed 26,000 jobs. The job losses continued in February amid strong weather effects, but the jobless rate remained at 9.7%.

Michigan continued to have the highest unemployment rate in the nation, though the state posted a month-over-month decline of 0.2 percentage point. Mississippi notched the biggest gain in its jobless rate, increasing 0.4 percentage point to 10.9%.

Unemployment Rate, by State

Source: Labor Department

A roundup of economic news from around the Web.

• Fed Seats: Mark Thoma asks why so many Fed seats are unfilled. ” For whatever reason, the administration has not taken full advantage of its chance to shape monetary policy during the downturn. The number of open positions is a large fraction of the Federal Reserve Board, and it skews the balance of power on the Federal Open Market Committee (where monetary policy is decided) toward the regional banks. Many of the regional bank presidents are inflation hawks, more so than the Governors, so this may have affected the Fed’s policy choices. By filling the open positions, president Obama could have given the current Board a better chance of dealing with the many complex problems it needs to address, and it could have shaped the types of policies that have been enacted.”
• Ryan’s Budget Plan: Writing for the Tax Policy Center’s TaxVox blog, Howard Gleckman notes that Republican Rep. Paul Ryan’s budget plan falls short of meeting his goal of balancing the budget and paying off the national debt by 2080. “TPC found Ryan’s plan generates much less revenue than he projects. If all taxpayers chose the simplified system, it would produce about 16.8 percent of GDP by 2020, far below the 18.6 percent he figures for that year. If taxpayers chose the system most favorable to their situation, the Ryan plan would produce even less revenue—about 16.6 percent of GDP. What does that mean in dollars? CBO’s most realistic projection of revenues (assuming most Bush tax cuts are extended and many middle-class families continue to be exempted from the Alternative Minimum Tax) figures the existing tax system would raise about $4.2 trillion in 2020. By contrast, Ryan’s plan would generate about $3.7 trillion, or $500 billion less in that year alone. While TPC didn’t model the Ryan plan beyond 2020, the pattern of revenues it generates suggests it would be decades before it reaches his goal of 19 percent of GDP—very likely sometime after 2040. Top-bracket taxpayers would overwhelmingly benefit from Ryan’s tax cuts.”
• Benefits and Unemployment: On EconLog, David Henderson agrees with Paul Krugman that the real problem in the employment market is a lack of jobs, but extended unemployment benefits could still be keeping some people from working. ” For it not to apply during the recessions, it would have to be the case that workers literally can’t find jobs so that whether the benefit is zero or $500 a week, the person remains unemployed either way. Is it really plausible that this applies to all workers? Ask yourself this. You lose a job that paid, say, $40K a year ($800 a week) before tax and now you can get $25K a year ($500 a week) before tax–and, moreover, you don’t pay the 7.65% employee portion of the payroll tax on that $500. You see a job that pays, say $30K a year. Do you think you might hold out for one that pays, say, $35K? There’s nothing in this analysis that says you’re lazy. What it says is that, in economists’ usage of the language, “You’re rational.” Here’s the test: Can you find people getting unemployment benefits who have turned down jobs?”

Compiled by Phil Izzo

Anirvan Banerji, director of research at Economic Cycle Research, joins the News Hub to discuss why he believes the U.S. economy will experience more frequent recessions ahead.

Young people are worried about losing their jobs and paying their bills, but they’re still holding out hope that conditions will improve.

Some 60% of 18- to 29-year-olds said they were worried about paying their bills and meeting other obligations in this economy as fear of job loss still looms large, a new poll by Harvard’s Institute of Politics shows. Nearly half, 46%, said they’re concerned about losing their jobs.

An even larger share – 67% — said they feared that family members or friends might lose their jobs. And 58% said they were personally concerned about being able to afford housing.

Those college students surveyed also said they were worried about being able to stay in school. Of the young adults that were enrolled in four-year colleges, 45% said they were concerned about their ability to stay in college. Another 34% said they weren’t concerned.

They were even more pessimistic about the state of the labor market once they graduate. Just 14% of those college students said it would be easy to find a permanent job after graduation, whereas 85% said it would be difficult. That’s down from nearly a third who said finding a job would be easy in the spring of 2008.

Lodged among their long list of concerns, though, were hints of optimism. The majority, 52%, said their personal financial situation was good, compared to the 45% who said it was bad. An even larger 57% said their parents’ financial situation was also good.

Nearly half, 46%, also said they expect to be better off financially than their parents. Just one in 10 expect to be worse off.

They were divided on how soon the economy would turn around. Nearly a quarter of young people said the economy would get worse in the next year. Another 38% said it would stay the same and 36% said it would get better.

The survey was conducted between Jan. 29 and Feb. 22. It covered 3,117 young adults and has a margin of error of plus or minus 2.3 percentage points.

Sales at Caterpillar Inc. are expected to rise 10%-25% this year on inventory restocking and a stronger global rebound than was initially expected, James W. Owens, the company’s chairman and chief executive, said on Tuesday.

Caterpillar expects sales to rise on a better-than-expected global rebound. (Associated Press)

Yet Mr. Owens, who will be retiring as CEO in June, cautioned the outlook remains uncertain and assigned a 25% chance to a “Great Recession”-type of event in which Caterpillar’s sales, which were $32.4 billion in 2009, increase to just $35 billion by 2012.

The company’s current “base case” scenario is for sales to reach $55 to $60 billion by 2012, said Mr. Owens, speaking before a lunchtime crowd at a conference held by the National Association for Business Economics in Arlington, Va. “We have to be really nimble,” he said.

Asked about price pressures, Mr. Owens said he expects them to be minimal. In 2009, the company’s total material costs declined on a world-wide basis, and he said he expects that to happen again this year.

“We’re not seeing a lot of risk of inflation,” said Mr. Owens, an economist by training who has served as Caterpillar’s chief executive since 2004.

Avoiding deflation, a situation in which prices and wages enter a downward spiral, “is critically important,” said Mr. Owens. “Modern industrial economies don’t know how to deal with deflation… I think the Fed gets that.”

The biggest force driving the company’s sales increase this year is the inventory cycle, he said. Caterpillar reduced nearly $3 billion in dealer inventory last year, and the absence of a similar decline this year “means a big pop in sales.” Mr. Owens had high praise for the Federal Reserve’s actions during the credit crisis under Chairman Ben Bernanke. “I don’t think I could be more complimentary of what the Federal Reserve has done, in particular seeing us through this horrific recession,” he said. “The decisions… may not have been perfect but I think they have served us extraordinarily well in preventing an outright depression.”

He said he wished more of the roughly $800 billion stimulus package had been directed at infrastructure investment, which the U.S. sorely needs, but said he supported the stimulus package overall and such criticisms were largely just “picking at the margins.”

He also underscored the need for keeping corporate taxes low so the U.S. can retain multinational firms, and going forward with free-trade agreements that promote exports and create U.S. jobs.

Caterpillar, the world’s largest manufacturer of construction and mining equipment known for its signature yellow machinery, also has been diversifying from a manufacturing to service-oriented company.

Its service businesses accounted for nearly 50% of the company’s sales in 2009, Mr. Owens said, thanks to divisions in financial services, renting and leasing, refurbishing of used or broken equipment, and recent acquisitions such as Progress Rail, which provides world-wide maintenance of railroads.

For some time now, Federal Reserve officials have been hesitant to put a precise time frame on when they will begin to tighten policy, except to note the action lies well into the future.

But on Monday, one of their chief lieutenants, the man charged with implementing Fed policy, offered a pretty clear take on the likely timing of a move up in interest rates. The official, New York Fed Markets Group chief Brian Sack, has no formal role in setting monetary policy. But his position elevates his importance, and he suggested in a speech some sort of rate tightening will occur by late year.

“The current configuration of yields and asset prices incorporates expectations that short-term interest rates will begin to rise around the end of this year,” Sack told a group of economists in Virginia. “The markets seem prepared for the risks toward tighter policy,” he said, adding a “decent-sized term premium” on longer-dated yields suggests low chances of a “sizable upward shift in yields’ when that tightening comes.

Why is this observation important? Sack’s speech was entitled “Preparing for a Smooth (Eventual) Exit” from the current state of very stimulative monetary policy. If the Fed wants a tranquil exit from its current stance of 0% interest rates and if it thinks market are priced for the move, then it’s reasonable to believe a late-year increase in rates is what policy makers have penciled in.

Sack’s speech also laid out a path for the unwind. He sees the Fed draining reserves on a temporary basis, then raising rates, all the while allowing the $1.7 trillion in mortgage and Treasury assets it will have purchased by end-March to mature. Any active sales will come much later. Importantly, he said the tools to drain reserves temporarily will be in place by midyear, lending additional heft to the idea the Fed can start easing rates up off 0% by year end.

The Fed “will engage in reverse repos and term deposits in midsummer followed by a rate hike in September,” said Barclays Capital economist Michelle Meyer.

To be sure, some Fed officials like St. Louis Fed President James Bullard have suggested a rate increase may not come this year, or even in 2011. Others, like New York Fed President William Dudley, San Francisco Fed President Janet Yellen and Dallas Fed President Richard Fisher, haven’t made predictions and have simply affirmed the need for low rates to be maintained for an extended period.

In a speech Tuesday, Chicago Fed President Charles Evans said, “I think six months is a good time period…we’ll continue to have accommodative policy like we have today,” largely because the still-troubled state of the labor market requires that stance.

However, in light of the labor market’s relative resilience in the face of massive snowstorms in February, some economists are starting to expect better times for hiring, saying that could move forward the timing of a policy tightening.

Deutsche Bank is now predicting as much as a 350,000 job gain in March, which will likely be followed by more hiring the following months. Given unemployment’s centrality to Fed interest-rate decisions, the bank’s economists told clients “to the extent that the labor market improves beyond what policymakers project, the rhetoric from FOMC participants should shift toward earlier rate increases.”

There’s a good chance that will happen according to Deutsche Bank, because it sees the unemployment rate falling to 9% by the fourth quarter, against the Fed’s current projection of it ranging between 9.5% and 9.7%.

The latest readings from consumers and small business owners indicate economic sentiment isn’t improving, despite signs of a factory rebound and less gloom on the labor front.

On Tuesday, the National Federation of Independent Business said its optimism index for small business owners fell back in February to its December reading of 88.0, and the IBD/TIPP Economic Optimism Index dropped 3% to 45.4 in March, well below its average of the past year.

What’s behind the setback? For tiny firms, it is the lack of customers. “Poor sales” was cited as the top problem among small-business owners. For consumers, job jitters and the lack of vigor in the economy are contributing to the gloom. Households also think their personal finances are worsening.

Uncertainty breeds inertia. Consumers won’t spend if they aren’t sure they’ll have a paycheck down the road. And businesses won’t hire or expand operations if they don’t expect sales growth. Both consumer demand and business investment are needed for the U.S. recovery to gain traction.

So far, Washington and its stimulus policies haven’t done much to break the doldrums. Recent surveys show both consumers and small business owners are disappointed in government policies or don’t expect them to help much.

A roundup of economic news from around the Web.

• Too Big to Fail: The New Yorker’s James Surowiecki looks at Treasury’s reluctance to designate specific companies as too big to fail. “The simple reason why [Assistant Treasury Secretary Herbert] Allison refused to say whether Citibank is systemically significant, then, is because he had no legal authority to do so. On top of that, though, it also makes economic sense for the government to refuse to answer the question, because doing so gives it far more bargaining power in the event that another big financial institution gets into trouble. The problem with having the government say publicly that it has a TBTF policy… is that this would effectively commit the government to guaranteeing the debts of the country’s major financial institutions. If it did so, and, say, Citibank were to get in trouble again, it would be much harder for the government to make creditors take a haircut, because they would be able to point to Treasury’s public guarantee. Given that one of the sharpest criticisms of the government’s actions during the crisis was that, in the case of companies like AIG, it failed to leverage its bargaining power, it’s peculiar to attack Allison for not giving away the store in advance.”
• 4% Inflation: Writing for voxeu Daniel Leigh supports the idea of a 4% inflation target. “Olivier Blanchard, the IMF’s Chief Economist, recently broached the idea that central banks should target an inflation rate of 4% during the good times to leave more room for nominal rate cutting during bad times. This column supports this view, presenting new research showing that a higher inflation target could have halved the output loss of Japan during its “Lost Decade.””
• Commercial Real Estate: Paul Kedrosky quotes Michael Cembalest on commercial real estate. “One CEO panelist whose company runs 20 mm sq ft of retail also owns 30 mm sq ft of office space. He’s optimistic: he notes the smaller oversupply problem compared to prior recessions, and faster speed of price adjustments. For the most part, I agree… Compared to two prior cycles, less commercial property was added, and that the pipeline as a % of the existing stock is low (exception: Madrid)… [There is a] rapid speed of price declines this time around, compared to the 1991 real estate recession. So both arguments are supported empirically.”

Compiled by Phil Izzo

Small-business owners in the U.S. turned slightly more pessimistic in February, although employment readings grew a shade more positive.

The Small Business Optimism Index lost 1.3 points to 88.0 last month, reported the National Federation of Independent Business in a press release Tuesday. The NFIB noted that only two of 10 components posted gains last month.

The subindex covering expected business conditions dropped 10 points to a -9 reading, and sales expectations dropped three points to zero.

The report said the drop in sales expectations may explain why fewer owners planned to increase inventories. The inventory index dropped three points to -7 in February. Small-business owners saw some improvement in earnings, although the trend remained negative. The index for better earnings rose three points to -39.

The job-creation index was unchanged at -1 in February. But the pace of layoffs slowed dramatically, and slightly more owners, on net, reported job openings were hard to fill. Consequently, the report said, “Net job creation will appear in coming months, but the gains will be painfully slow.”

Inflationary pressures were nearly nonexistent last month. Seasonally adjusted, the net percentage of owners raising prices was -21%, down 3 points from January; more small businesses were cutting prices than raising them.

The Federal Reserve pumped more than $1 trillion dollars into the economy at a lightning pace, but it plans to take it out glacially, a senior Fed official said in a speech Monday.

Brian Sack, who runs the markets group at the Federal Reserve Bank of New York, laid out more detail on the Fed’s plans to reduce its massive holdings of mortgage backed securities and Treasurys in a speech to the National Association of Business Economics in Washington.

The Fed is on course to own more than $1.25 trillion worth of mortgage backed securities by the end of March. As the economy improves it wants to reduce those holdings, but officials don’t want to do it in a jarring way. Mr. Sack noted that some of these holdings will run off naturally. By the end of 2011, more than $200 billion worth of mortgage securities mature or will be prepaid by borrowers. The Fed can shrink its balance sheet by not reinvesting proceeds from these securities as they’re paid off by borrowers, helping its own balance sheet to “shrink meaningfully.”

Mr. Sack noted that another $140 billion worth of Treasury securities mature by the end of 2011. Right now the Fed is reinvesting cash it gets as Treasury securities mature, but it could decide to let those securities run off too, shrinking its balance sheet even more, he noted.

“With this approach, the FOMC would be shrinking its balance sheet in a gradual and passive manner,” he said. “That, in my view, is a crucial message for the markets.

“A decision to shrink the balance sheet more aggressively could be disruptive to market functioning,” he said, adding, “A more aggressive approach would risk an immediate and substantial rise in longer-term yields that, at this time, would be counterproductive for achieving the (Fed’s economic growth) objectives.”

Mr. Sack also offered noteworthy insights into how the Fed believes markets are positioning for possible interest rate increases in the months ahead.

“The current configuration of yields and asset prices incorporates expectations that short-term interest rates will begin to rise around the end of this year,” he noted. “Thus, the markets seem prepared for the risks toward tighter policy.

Mr. Sack doesn’t make decisions about interest rates, but he does give Fed decision makers important guidance on how they can expect markets to react if the Fed moves rates higher. The message here seems to be that markets wouldn’t be jolted if rate hikes come later in the year.

“Looking out to longer maturities, the shape of the Treasury yield curve appears to incorporate not only expectations of policy tightening, but a decent-sized term premium on longer-term securities,” he noted.
“Indeed, the term premium is well above the levels observed over most of the past several years, even though inflation is likely to be low and upside inflation risks are limited. This should help to diminish the chances of a sizable upward shift in yields.”

Translation: Don’t expect long-term yields to shoot higher if the Fed nudges short-term rates up.

Strong levels of productivity are calling into question the U.S. economy’s ability to generate jobs, a new report from the Federal Reserve Bank of San Francisco warns.

The paper, released Monday, follows Friday’s release of the January non-farm payrolls report. The U.S. lost 36,000 jobs and maintained its unemployment rate at 9.7% in the first month of the year. Financial markets greeted the data as a positive, largely because the month’s series of major snow storms had been expected lead to big job losses. Hiring’s relative resilience in the face of this pressure raised hopes a recovery in growth will soon be attended by rising payrolls.

The San Francisco Fed research raises questions about that outlook. Written by staff economists Mary Daly and Bart Hobijn, the paper looked at the relationship between strong rates of productivity growth and hiring, and found reason to be worried.

“Anecdotal evidence suggests that efforts to contain costs and remain nimble in the face of uncertainty have become a fixture in business strategy,” the paper said. “If productivity keeps on growing at an above-average pace, then unemployment forecasts…could continue to be overly optimistic.”

The paper explained there’s been a breakdown in how economists view the relationship between gross domestic product growth and hiring. At issue is Okun’s Law, a forecasting rule used by economists. According to this tool, for every 2% real GDP is below trend, the unemployment rate should rise by 1%.

The economists note that over 2009 real GDP was essentially flat while trend GDP rose by 3%. Under Okun’s Law unemployment should have increased by 1.5%, when instead it rose by 3%.

“The surge in labor productivity allowed employers to keep output steady while shedding workers and reducing hours of work in the economy,” the paper said. “As such, it allowed unemployment to rise much more than expected given the change in GDP, breaking the normal pattern between the two measures observed over the past 60 years.”

The paper does not offer a prediction of what will happen with unemployment, except to say what many economists think will happen may be too optimistic.

Meanwhile, while investors have gotten more upbeat about hiring, officials at the Federal Reserve expect that it will take a long time to get the unemployment rate to fall. They believe businesses, burned by their experiences over the last several years, will be hesitant to hire new workers, and will do so slowly even as demand picks up. That’s a big reason why policy makers are so reluctant to raise interest rates.

What’s more, the jump in economic growth that happened in the closing months of last year was largely tied to the rebuilding of stocks drawn down during the recession, and as such, the gains were unsustainable. A cooler pace of growth is very likely for 2010.

Still, for many economists, it remains an open question whether firms will be able to continue to push workers in the way they are now. Just as temporary factors made late 2009 GDP better than expected, it’s possible firms will have to start hiring to better balance their output against demand.

So while the jobs outlook is challenging just about any way you slice it, it remains an outlook fraught with uncertainty.

When times get tough, complain.

If the newest numbers from the Better Business Bureau for company complaints are any indication, that’s exactly what consumers are doing.

Call centers have been busy fielding complaints during the recession. (AFP/Getty Images)

Overall, complaints at the Better Business Bureau were up 10% in 2009 with nearly one million complaints filed. Banks have seen a whopping 42% increase in complaints in 2009, further helping to explain the ire toward Wall Street, with complaints spanning from credit cards to checking accounts to mortgages. But even with the surge in financial complaints, the cellphone industry was the most complained industry of last year, with 37,477 total complaints.

The jump in bank complaints “is a sign of our times,” says Alison Southwick, a BBB spokeswoman.

The cellphone industry was also the most complained about in 2008, with grievances still ranging from device malfunction to billing. Because cellphones are now so widespread, they garner broader complaints than some of the more obscure of the nearly 4,000 BBB complaint categories like accordions, shoelaces or fur storage. However, nebulous billing practices in the cellphone industry even sparked attention from the Federal Communications Commission this year. The good news, Ms. Southwick says, is that cellphone companies have a high resolution rate with consumers who file complaints with the BBB.

Cable and satellite TV companies were the second most complained about, with banks coming in at number three. New-car auto dealers came in fourth, internet shopping fifth, collection agencies sixth, used auto dealers seventh, telephone companies (those that deal with landlines) at eighth, furniture retail at ninth and auto repair and service tenth. You can read all the statistics for this year and going back to 2002 here.

Ms. Southwick also says that complaints for online “free trials” for things like weight-loss supplements, credit scores and teeth whiteners are on the rise. Most of these programs enroll consumers is fee-based subscription programs and continue to charge them until they cancel, a process which can be riddled with fine print and customer-service-call nightmares.

Although the BBB doesn’t break down the complaints by company, individual company profiles on the site do list the number of complaints received in a year and if they were resolved or not. Last year, more than 65 million consumers vetted business on the BBB site, an increase of two million from last year.

For things like cellphone and bank fees, there are plenty of free online tools to help shave needless expenses from your budget. If you’re one of the millions in a consumer-company kerfuffle, here’s a guide for how to complain and get results. You can also vet companies and charities on the BBB’s database at BBB.org.

“No company is perfect,” Ms. Southwick says, “but what’s important is how they resolve the issue.”

The U.S. federal budget deficit is on a trajectory that poses “significant economic risks” and will become unsustainable, Douglas Elmendorf, director of the Congressional Budget Office, said on Monday.

CBO Director Douglas Elmendorf (Getty Images)

In a presentation delivered before the National Association for Business Economics, Mr. Elmendorf noted that the choices needed to address the medium and long-term budget deficit will be “larger and more fundamental” than in the past.

“U.S. fiscal policy is on an unsustainable path that can’t be resolved through minor tinkering,” he said. “The problem posed by the federal budget deficit not at its current level but on this trajectory… poses a growing risk to the recovery.”

Mr. Elmendorf said that if current tax policy is extended — including the tax cuts enacted by President George W. Bush in 2001 and 2003 which look increasingly likely to be extended beyond their 2010 expiration — the deficit will swell from the $6 trillion baseline forecast by 2020 to just shy of $10 trillion.

In addition, the debt held by the public with current tax policies extended would soar to 90% of GDP by 2020, Mr. Elmendorf said, making the U.S. public debt load one of the world’s highest.

“The U.S. is entering unfamiliar territory in its level of public debt,” said Mr. Elmendorf. “It will be larger over the next decade than it’s been in half a century… and also unfamiliar by the standards of other developed countries.” The choice is not whether to change course from current policy, he noted, but “how quickly and in what way.” President Barack Obama has already declared a spending freeze on discretionary, nonessential outlays, but that only amounts to roughly 17% of total spending. Much of the rest of federal spending is for entitlement programs including Social Security, Medicare and Medicaid, defense spending and interest payments on the federal debt.

The size of U.S. entitlement programs has grown sharply since 1970, from 3.8% of GDP to 8.2% as of 2007, and is expected to hit 11.1% of GDP by 2020 thanks to an aging population of Baby Boomers and fewer workers in the system to help pay for their benefits.

Mr. Elmendorf said one reason entitlements have grown over the last few decades without being accompanied by an obvious increase in taxes or reduction in government spending is because defense spending, which few Americans directly observe, has fallen by half during the same period of time, to 4% of GDP in 2007.

That same pattern can’t be repeated in coming years, Mr. Elmendorf said. “We’ll have to pay for future growth in Social Security, Medicare and Medicaid through a visible increase in the tax burden, a visible reduction in other programs or a visible reduction in these [entitlement] programs themselves,” he said.

Federal Deposit Insurance Corp. Chairman Sheila Bair outlined on Monday three points she said must be part of any financial regulatory overhaul, but said market incentives must also be realigned to make credit markets function properly over the long term.

“Fixing regulation can only accomplish so much,” she said in a speech to the National Association for Business Economics. “Rules and regulations can help constrain our ‘animal spirits,’ but unless economic incentives are also appropriately aligned, regulation alone will fail.”

Ms. Bair’s three key items for legislation:

1) Ending “too big to fail” — Should include a pre-funded resolution mechanism and a “clear mandate” to close large troubled firms that could threaten the broader economy. Shareholders and creditors would bear losses, not the public. “The lack of a resolution mechanism for these companies is not some minor loophole that needs to be closed. On the contrary, it was a fundamental cause of the financial crisis and the enormous economic costs resulting from it.”

2) Plugging gaps in regulation — Create a systemic risk council to share data and knowledge about financial markets.

3) New consumer protections – Create uniform regulatory standards for banks and nonbanks and ensure customers are well-informed

A roundup of economic news from around the Web.

• Geithner: Joshua Green of the Atlantic has an interesting profile of Treasury Secretary Tim Geithner. “The antithetical reactions to Geithner — agent of socialism or lapdog of Wall Street — stem partly from how little is known about him. He lacks the fully realized public persona most government officials develop by the time they’re chosen for important Cabinet positions. He doesn’t look like a Treasury secretary. He lacks presence. He’s trim and small, practically elfin, and, at 48, young for the job (he looks even younger). He doesn’t fit the Treasury secretary’s typical profile, either, since he is neither a businessman nor an economist nor a party eminence serving out a comfortable valedictory. Geithner is something else entirely—a superstar of the bureaucracy, whose rapid rise during the 1990s came in the Treasury Department he now runs. At heart, he’s an institutionalist.”
• Financial Conditions: On Econbrowser, James Hamilton looks at a new index we talked about recently. “Of particular interest at the moment is the fact that the HHMSW index, unlike most other indicators, shows a renewed deterioration subsequent to the initial recovery in the first part of 2009, a somewhat surprising result given the current steeply-sloping yield curve, low TED spread, and booming stock market. The surprising contrary inference from the HHMSW index appears to be due to two factors. First, the HHMSW index is based on the deviation of the financial indicators from what one would have predicted given recent economic conditions. Many indicators have not improved as much as one would have expected given the return to GDP growth, and the departure from a typical recovery pattern is viewed by the index as a highly pessimistic development. Second, the HHMSW index makes use not just of the yields themselves but also of the quantities of various assets, and many of these show little improvement so far. For example, issuance of new asset-backed securities remains quite low. Will real GDP follow the HHMSW index back down? That’s not what I’m expecting. But if it does, it wouldn’t be the first time I’ve been wrong.”
• Best Countries for Women: Writing for Economix, Nancy Folbre looks at the best nations for women. “As I’ve explained in more detail in a journal article, it’s easier to measure rights and achievements than obligations and commitments. Consider for instance, differences in financial responsibility for the care of dependents — which are quite substantial in many countries like the United States, where single mothers are raising a large proportion of all children. As women gain more economic independence, they may lose some financial support from the fathers of their children. Nor do any existing indexes measure differences between women in men in the amount of time devoted to unpaid household work or family care, or resulting differences in leisure time. As national statistical agencies begin publishing data on these dimensions of living standards, researchers can move toward the development of expanded indexes. If we want to make progress, we need to measure it as accurately as possible.”

Compiled by Phil Izzo