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U.S. Economy Grew at 2.1% Rate

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The American economy turned in a weaker annual performance last year than in 2018, held back by developments that set the stage for slower growth to come.

Gross domestic product — which measures the value of goods and services produced inside the United States — grew at a 2.1 percent annual rate between October and December, the same as the previous three months, according to preliminary data released by the Commerce Department on Thursday.

A shrinking trade deficit resulting from a steep falloff in imports helped bolster the fourth quarter’s reading, as did a revived housing sector. Consumer spending expanded, but at a slower pace than during the summer.

Year-over-year growth was 2.3 percent in 2019, compared with 2.5 percent a year earlier.

“In the bigger picture on 2019, growth was solid,” said Matthew Luzzetti, chief United States economist for Deutsche Bank Securities. But he said a key element, domestic demand, disappointed, growing by 2.2 percent as consumers and businesses pulled back on spending. That was the weakest figure since 2013.

In the second half of 2017 and in some of 2018, the annual growth rate surged past 3 percent, helped by hearty tax cuts and government spending. And it continued to sail ahead at the start of last year, reaching 3.1 percent between January and March.

But the stimulus effect faded, and that growth level now looks more like an aberration. The economy has not expanded by 3 percent or more in a full calendar year since 2005.

Most economists now see normal growth circling the 2 percent mark.

The slowdown, in part, reflects a maturing labor market, where the official jobless rate creeps along at half-century lows as the expansion heads toward its 11th anniversary and a hefty chunk of the population ages into retirement.

“Underneath what you’re seeing is slower domestic activity,” said Kathy Bostjancic, chief United States financial economist at Oxford Economics. “It’s just the natural state of things.”

Federal Reserve officials have maintained a wait-and-see approach on the economy, and on Wednesday left benchmark interest rates unchanged. The inflation rate has remained stubbornly below the Fed’s target of 2 percent.

One measure of inflation reported on Thursday, the personal consumption expenditure index, was unexpectedly weak. Excluding the volatile categories of food and energy, the index increased just 1.3 percent on an annual basis.

“That was the biggest surprise in the report,” Mr. Luzzetti of Deutsche Bank said. Jerome H. Powell, the Fed chair, has “become increasingly worried about persistently low inflation and feeding into lower inflation expectations,” he said, “so these data do put some additional pressure on the Fed around the middle of the year when they’re doing this policy review.”

The economy’s resilience has been one of the Trump’s administration’s most notable accomplishments, and is sure to loom large as the 2020 presidential campaign gains momentum.

President Trump has maintained an enthusiastic bullishness on the economy even though the annual growth rate has fallen short of his promises of 3 or 4 percent.

At the World Economic Forum in Davos, Switzerland, this month, he declared that “the United States is in the midst of an economic boom the likes of which the world has never seen before.”

Mr. Trump has spread blame for the economic slowdown, reserving his harshest criticism for the Federal Reserve Bank, which raised benchmark interest rates between 2015 and 2018 before cutting rates three times last year.

“No. 1, the Fed was not good,” he said. “Had we not done the big raise on interest, I think we would have been close to 4 percent.”

The president also mentioned the six-week strike at General Motors last fall and the continuing turmoil at Boeing, the nation’s largest aerospace manufacturer and largest manufacturing exporter, after accidents involving two of its 737 Max airplanes that killed 346 people.

Credit…Ruth Fremson/The New York Times

December has usually been a strong month for Boeing, with average sales of 234 airplanes over the past five years, Ian Shepherdson, chief United States economist at Pantheon Macroeconomics, noted in a newsletter. Last month, it sold just three. Strong sales of defense aircraft after Congress raised military spending offset the decline.

Still, Boeing’s halt in 737 Max production will continue to ripple throughout the economy in the coming year. This week, one of the airplane manufacturer’s suppliers, Arconic, said it expected to lose $400 million in Boeing sales and cut jobs. Another contractor, Spirit AeroSystems Holdings, recently announced that it was eliminating 2,800 jobs this month. Hundreds of other companies are also grappling to manage the fallout.

Analysts say they expect Boeing’s disrupted production to shave half a percentage point off G.D.P. in the first three months of this year.

Imports fell sharply in September after the United States imposed tariffs on China because some American companies held off buying goods, hoping that the Trump administration might soon strike a trade deal that reduced or removed the tariffs.

As tensions with China cooled in December, imports revived, according to figures released Wednesday. And with a Phase 1 trade deal now signed, they might climb further in the months to come.

Rising imports push down G.D.P. because the measure counts only the value of goods and services produced within a country’s borders. When a nation buys more things from abroad than it sells — the definition of a trade deficit — it pushes down G.D.P.

While the deficit excluding oil steadily climbed through most of President Trump’s tenure, it had fallen sharply in recent months before December’s figures came in.

The Trump administration has made lowering the American trade deficit a goal. Economists, though, have opposed using the deficit as a scorecard: It can fall for a variety of reasons, and not all of them are good.

The deficit can fall because exports are growing, or because imports are shrinking, or both. For example, a boom in manufacturing can reduce the deficit by pushing imported products out of the American market and feeding a surge in exports — the outcome the Trump administration wanted to engineer.

But the deficit can also fall because the pace of the American economy is slowing, making consumers less likely to buy imported goods and businesses less likely to invest in the United States. And that has been the situation in the United States, economists say.

“There is no evidence of those broader positive developments,” said Brad W. Setser, a senior fellow in international economics at the Council on Foreign Relations. “There is no growth in exports, and manufacturing is weak. So to the extent that tariffs have succeeded in bringing the trade deficit down, they have done so largely by reducing U.S. demand, not by raising U.S. production.”

Businesses are hesitant to invest when they are unsure of what’s ahead.

According to Ben Herzon, executive director of United States economics at Macroeconomic Advisers, a forecasting firm, research shows that the “level of investment spending recently has been about $100 billion lower that it would have had there been no uncertainty about trade policy.”

That suggests there is room for more investment if trade policy settles.

Tensions with China have eased with the signing of the Phase 1 pact. And this week, Mr. Trump signed the new North American trade agreement with Canada and Mexico into law. But tariffs remain on two-thirds of Chinese imports. At the same time, trade frictions with Europe over tariffs, airplane subsidies, digital taxes and the World Trade Organization have ratcheted up.

Also unsettling is the outbreak in China and spread of a mysterious and deadly virus that has the potential to rattle investors, and slow growth in Asia.

On the domestic front, Mr. Trump’s impeachment trial in the Senate and the coming presidential election add another large dose of political uncertainty.

No matter who becomes the Democrats’ nominee, “we’re likely to have two candidates with very different views on tax, regulatory and trade policy,” said Mr. Luzzetti of Deutsche Bank. “Businesses don’t know which direction that’s going to go in, so they may hold back on spending projects.”

Mr. Luzzetti said the volatility in the data because of trade and Boeing would make it hard to gauge the underlying growth dynamics until midyear.

Although wage growth and business investment have slacked off, consumers’ confidence in the economy has been unshaken. Optimism about the ease of finding a job helped fuel the rise in its most recent monthly measure of confidence, the Conference Board, a business research group, reported this week.

Consumer spending accounts for two-thirds of economic activity, and enthusiasm drives growth.

The growth, though, is not spread evenly. “The manufacturing and service sectors are telling two slightly different stories,” said Emily Weis, macro strategist at State Street Corporation, a large financial institution based in Boston.

While spending on services has remained strong, manufacturing in the United States has yet to revive, despite signs that it has stabilized abroad.

December was the fifth month in a row that the sector had declined. One large company, 3M, which makes Post-it notes and a wide range of other consumer and office products, announced this week that it was laying off 1,500 people globally.

“Manufacturing has generally underwhelmed in the U.S.,” Ms. Weis said.

The Commerce Department will revise the fourth-quarter results twice, as more data comes in.

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Oil prices climb to highest in years as COVID recovery, power generators stoke demand

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 Oil prices hit their highest in years on Monday as demand continues its recovery from the COVID-19 pandemic, boosted by more custom from power generators turning away from expensive gas and coal to fuel oil and diesel.

Brent crude oil futures rose 87 cents, or 1%, to $85.73 a barrel by 0111 GMT, the highest price since October 2018.

US West Texas Intermediate (WTI) crude futures climbed $1.12, or 1.4%, to $83.40 a barrel, highest since October 2014.

Both contracts rose by at least 3% last week.

“Easing restrictions around the world are likely to help the recovery in fuel consumption,” analysts from ANZ bank said in a note on Monday.

“The jet fuel market was buoyed by news that the U.S. will open its borders to vaccinated foreign travellers next month. Similar moves in Australia and across Asia followed.”

They added that gas-to-oil switching for power generation alone could boost demand by as much as 450,000 barrels per day in the fourth quarter.

Still, supply could also increase from the United States, where energy firms last week added oil and natural gas rigs for a sixth week in a row as soaring crude prices prompted drillers to return to the wellpad.

The U.S. oil and gas rig count, an early indicator of future output, rose 10 to 543 in the week to Oct. 15, its highest since April 2020, energy services firm Baker Hughes Co said last week.

China’s economy, meanwhile, likely grew at the slowest pace in a year in the third quarter, hurt by power shortages, supply bottlenecks and sporadic COVID-19 outbreaks.

The world’s second-largest oil consumer issued a new batch of oil import quotas for independent refiners for 2021 that show total annual allowances were lower than last year, a first reduction of import permits since these firms were allowed into the market in 2015.

 

(Reporting by Jessica Jaganathan; Editing by Kenneth Maxwell)

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Stop handing out free money (and other ideas for getting the economy back on track) | TheHill – The Hill

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Supply chain shortages and inflation are hurting consumers and Democratic election prospects in 2022 and 2024. The Biden administration, no doubt aware of this possibility, is taking action to address the ill-effects of scarcity and higher prices. Recently, the administration mandated that the Port of Los Angeles remain open 24 hours a day so merchandise idling in shipping containers can be delivered faster to fill empty supermarket shelves and consumer shopping carts.

But this response may be coming too late, because shortages and inflation have created uncertainty in the minds of consumers that cannot be easily reduced.

While the administration has handled the COVID-19 pandemic well, it has been much less successful in dealing with the negative effects of the ensuing adjustments, including shortages, inflation, supply chain disruptions, high demand and uncertainty.  

The widespread shortages were caused by sudden and rapid increases in consumer demand and by manufacturers and suppliers that were too slow or unable to respond swiftly.

Once supply chain disruptions are straightened out as manufacturers increase their production and distributers move their products faster, shortages are bound to ease, though some could linger.  

The U.S. economy is also experiencing a modest annual inflation rate of 5.4 percent, caused by the trillions of dollars that the Treasury gave Americans in 2020 to spend to avert a pandemic-induced depression. Flush with this cash and what they had saved while sheltering in their homes during the pandemic, consumers quickly increased demand for most products and services. They became less price sensitive and pushed inflation higher. Still, though worrisome, an annual inflation rate of 5.4 percent is hardly runaway or stagflationary.  

But the excess cash is tapering off. Without it, consumers will be forced to reduce their demand and thereby push most prices downward. As a result, future inflation won’t be as drastic or widespread, especially since the Federal Reserve Board is planning to reduce the money supply, which will dampen inflation.

But the uncertainty produced by the pandemic is likely to prevent people from getting back to normal and might foster some continued shortages and inflation.  

Americans have been feeling confused and unsure about their future. Before the pandemic, they took stable prices and product availability for granted, knew the content and location of their jobs, woke up in the mornings to feed their kids and send them to school and were fairly content with their lives. Not anymore. Their world had changed, and the new one seems unfamiliar and scary to many. As a result, 4.3 millions have left the labor force since the onset of the pandemic.

What can the White House and Congress do to alleviate shortages, inflation and uncertainty? Here are four ideas.  

1. Take measures to ease shortages. Mandating that the Port of Los Angeles work nonstop will increase some supplies, but it’s not enough. It should be followed by similar action in other ports. Likewise, factories should be instructed to increase production. Such measures are easy to take in the case of consumer staples but more difficult in the case of computer chips, as chips are part of a global industry, and increasing their production requires building large factories and investing billions of dollars.

2. Stop handing out free money to consumers. With less money to spend, demand and inflation will ease. Though Americans are no longer receiving government manna, many still have cash to spend, which will continue to exert some upward inflationary pressures. 

3. Think again about the size, timing and spending schedule of infrastructure and Build Back Better initiatives. Pumping trillions of dollars into the economy could create a new round of inflation inflammation.

4. Reduce uncertainty. Unfortunately, policymakers lack the knowledge, skills and tools to address this effectively. What is desperately needed is trusted and steady leadership to assure Americans that their lives as consumers, employees, parents and human beings will be more certain again. Unless they can be made to feel more content with their lives, the economy may continue to sputter and keep a fuller economic recovery at bay. 

Can these challenges be successfully addressed in the coming year or two? Maybe. The U.S. discovered and produced a life-saving vaccine against COVID-19 in record time and enacted policies that averted depression. Likewise, I expect shortages and inflation to subside and a sense of normalcy to rise. This, plus efforts to make consumers feel more confident, would put the country on a more prosperous path. 

Avraham Shama is the former dean of the College of Business at the University of Texas – Pan American. He is a professor emeritus at the Anderson School of Management at the University of New Mexico. His book, “The Impact of Stagflation on Consumer Psychology,” was published by Praeger publishing. 

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Shekel surplus weighs down Palestinian economy – FRANCE 24

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Issued on: 17/10/2021 – 05:06Modified: 17/10/2021 – 05:04

Ramallah (Palestinian Territories) (AFP)

Palestinian businesses flush with too much Israeli cash: it may not be the most talked about aspect of the occupation, but experts warn it is a growing concern for the Palestinian economy.

Palestinians in the West Bank use the Israeli shekel but, beyond that commonality, the two financial systems are dramatically different.

In Israel, as in many advanced economies, digital payments are rapidly growing, taking the place of transactions once done with bills and coins.

But in the West Bank, a territory under Israeli military occupation since 1967, cash is still king.

Tasir Freij, who owns a hardware store in Ramallah, told AFP he now has to pay a two percent commission to deposit paper money because his bank is reluctant to receive it.

“This is a crisis… and we are feeling its effects,” Freij told AFP.

Much of the paper money is brought in by the tens of thousands of Palestinians who work inside Israel or Jewish settlements in the West Bank, and who get their wages in cash.

Experts and business people say the buildup of hard currency risks stifling the Palestinian financial system.

Palestinian men exchange currencies in the West Bank city of Ramallah; the local  shekel surplus has seen its value fall against major global currencies
Palestinian men exchange currencies in the West Bank city of Ramallah; the local  shekel surplus has seen its value fall against major global currencies
Palestinian men exchange currencies in the West Bank city of Ramallah; the local shekel surplus has seen its value fall against major global currencies ABBAS MOMANI AFP

Freij fretted that buying goods from abroad typically requires converting shekels into foreign currencies, especially dollars or euros, but the abundance of shekels in the market has forced him to accept painfully unfavourable rates.

– ‘Dumping ground’ –

The Palestinian Monetary Authority, which functions as the central bank in the West Bank, has warned that paper shekels are building up because it has no way to return the hard currency to Israel.

PMA governor Firas Melhem told AFP that the cash buildup was “a very worrying problem,” causing headaches for banks and businesses.

“If the problem is not resolved quickly, the Palestinian market will turn into a dumping ground for the shekel,” he added.

The shekel was established as the official currency in the Palestinian territories as a result of economic protocols known as the Paris agreements that followed the Oslo Accords between Israel and the Palestinian Territories.

Much has changed since those 1994 agreements.

As they lean more on digital transactions, Israel’s banks no longer want to reabsorb paper cash that accumulates in the West Bank but does not circulate rapidly through the Israeli economy.

The Bank of Israel cited security as another reason.

“We stress that uncontrolled cash transfers could be misused, especially for money laundering and terror funding, and would not be in compliance with international standards on the prohibition of money laundering and terror funding,” the bank told AFP in a statement.

– Solutions? –

Palestinian banks have tried to encourage customers to moderate their cash deposits, but that risks limiting the capital available to banks, which would lower their ability to offer loans.

The cash surplus predicament has fuelled renewed calls from some Palestinian experts in favour of ditching the shekel, either in favour of a unique Palestinian currency or that of another nation, including the Jordanian dinar, which also circulates in the West Bank.

The Palestinian Monetary Authority is also pushing the Bank of Israel to take back more hard currency.

But Melhem stressed that Palestinians also needed to “keep up with developments in financial technologies,” and move towards more cashless payments.

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