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Economic Currents

Keep up to date with the latest UHERO news.

Q&A: Fed Act to Lower Mortgage Rates

Posted September 22, 2011 | Categories: Q&A
1. The Federal Reserve met for a two day meeting on Tuesday and Wednesday. After their meeting, the stock market fell sharply Wednesday afternoon and Thursday. What did they do!

The Federal Open Market Committee (FOMC) met on Tuesday and Wednesday to discuss the state of the US economy and to decide on monetary policy actions. The last time they met back in August in their post meeting statement they said that "downside risks to the economic outlook have increased", and "that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013." They updated their outlook this week basically telling us that the economy is facing more than just a temporary slowdown acknowledging that "there are significant downside risks to the economic outlook" and that global financial market turmoil is a significant risk.

2. But isn't the problem that the Fed really can't do much more with short term interest rates at near zero?

The Fed's traditional monetary policy tool—short term interest rates—are near zero and are expected to stay there. That is one possible reason for the decline in stock markets is the fear that the Fed is out of tools, and the recognition of the significant downside risks. What the fed did was announce two changes in policy that are aimed at lowering long term interest rates.

3. You mean what people are calling operation twist?

Operation twist was just one of the changes. Basically between now and June 2012, the Fed will sell short term (3-years or less) treasury securities and purchase, $400 billion of long-term (6-30 years)Treasury securities. The result will be downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The other change specifically targets mortgage rates. On Monday, October 3, the Fed will begin reinvesting "principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities." This differs from the current practice of reinvesting principal payments from holdings of agency debt and agency MBS in Treasury securities. The result will be some downward pressure on mortgage rates.

4. We just received some additional news on Hawaii economic growth this week as well, what was that?

On Thursday, the Bureau of Economic Analysis released its quarterly State Income data. Nominal income growth for the second quarter of 2011 places Hawaii 45th out of all 50 states, with annualized growth of less than 4% compared with the first quarter of 2011. These numbers are broadly consistitent with the UHERO forecast released at the end of last month which documented the slowing growth since the end of 2010.

-- Carl Bonham

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Q&A: Employment and Unemployment in Hawaii

Posted September 16, 2011 | Categories: Q&A
1. Hawaii’s unemployment rate increased from 6.1 percent in July to 6.2 percent in August.  Why did this happen?

The basic reason is that the number of Hawaii’s people in the labor force and without jobs increased by 900.

One reason is the continuing weakness in the tourism this summer with declines in June and July and almost no gains in August.

2. The number of people employed in the state decreased from July to August. Which sectors were most responsible?

The State lost 5,100 jobs in August.  Almost all of the decline was due to the government sector which lost 5,700 jobs.  By contrast, there were 600 more jobs in the private sector, with both construction and finance registering gains and leisure/hospitality registering small losses.

The weakness in the government sector is likely due to the phase-out of federal government stimulus programs, a hiring freeze for some positions imposed by the State of Hawaii, and the four counties’ cutbacks to keep operating budgets balanced.

3. The US stock markets rallied this week … what’s going on?

The decision by Germany and France on Wednesday to stand by Greece and the injection of liquidity into major European banks by five major central banks have encouraged investors that Europe has regained the will to solve its debt problems.  And the decision by Brazil, a big booming developing country, to join in the aid package to Greece is also important, as its government is recognizing that a crisis in Europe could bring its growth to a halt.

4. Any other factors?

President Obama’s decision to fight aggressively for his new jobs program is also a big positive, as this puts some pressure on Republicans to compromise in the coming Congressional budget negotiations.

-- Professor Sumner LaCroix
Dept. of Economics and University of Hawaii Economic Research Organization

Watch UHERO discuss this topic on KITV's Project Economy. UHERO faculty and research fellows appear on this segment weekly. Visit our media section to view previous appearances

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Q & A: Social Security Disability Program - Problems and Reforms

Posted August 19, 2011 | Categories: Q&A, Blog
1.  The Social Security Administration is known for its old-age pension program but it also runs a program providing benefits to disabled americans?

The Social Security Disability Program provides insurance for American workers and their families against being left in poverty and unable to pay medical expenses if they become disabled.  The Program currently provides benefits to 8.4 million disabled workers and 2 million dependent spouses and children.

An economist from the Massachusetts Institute of Technology (MIT), Professor David Autor, presented a paper in Hawaii this week that highlighted some big challenges facing the program and some suggested reforms.

2.  What are the SSA's main challenges?

- 2.9 million US workers will apply for benefits this year.  SSDI cash payments and Medicare costs for disabled workers now amount to about $173 billion per year or $1,500 per household.  At this rate, the SSDI trust fund will be exhausted between 2015 and 2018.

-  The rules now require workers who apply for disability benefits to remain unemployed while their application is processed—about 3 years.  And if disability status and benefits are approved, they can be revoked if the worker returns to work for more than a few hours per work.  Taken together, the program totally removes millions of people from the labor force, many of whom may be able to work part-time or recover to work full time.   

3. what types of reforms are capable of dealing with these problems?

One change proposed by David Autor, the MIT economist who has intensively studied this program, is to provide incentives to employers and employees to allow disabled employees to remain employed, perhaps with fewer hours and some accommodations for the disabled person.

Another change would be to provide partial wage replacement for workers with disabilities who remain employed or find new jobs after they have started receiving social security diability benefits.  

The Netherlands—Holland—had similar problems with its disability benefit program in 1990.  The good news is that a series of reforms have helped to

-- Sumner LaCroix

Watch UHERO discuss this topic on KITV's Project Economy. UHERO faculty and research fellows appear on this segment weekly. Visit our media section to view previous appearances

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Q & A: S&P's downgrade of its rating for U.S. Treasury bonds

Posted August 8, 2011 | Categories: Q&A, Blog
1.  s&p's downgrade: how does it change things?

S&P’s downgrade of the US long term credit rating is a landmark historical event for the US. The ratings downgrade--from AAA to AA+-- tells potential buyers of US government bonds that the risk of the US government defaulting on its $14 trillion debt has risen substantially. And to add insult to injury, S&P also slapped on a “negative outlook” warning to the downgrade. It’s worth noting that the other two big ratings agencies did not lower the US rating—just S&P.

2.  did we learn something about the us economy from the s&p report on the us credit rating downgrade?

For those following the economy closely, the S&P rating report provided no new information about federal spending, federal revenues, future annual deficits or the accumulated debt.

But for the average person, S&P’s decision to downgrade the US credit rating is the second ominous signal in just two months—the first being the political crisis over increasing the US debt ceiling—that the federal government’s democratic institutions are not coping well with the dual problems of large future federal government budget deficits and slow economic growth. In the face of these two new signals, it would not be surprising to see increased trading and price volatility on US stock and bond markets, as investors become nervous—again—about the security of their investments.

So here’s the really amazing thing: In the face of increased risk on US bonds, investors are rushing into …. U.S. bonds!!! The last time I looked this morning, the yield on the ten-year U.S. bond had fallen from 2.55% to 2.38%. For those of you thinking about refinancing into a ten-year mortgage, this is the time to look into it, as mortgage rates are closely tied to US bond rates.

3. how will the lower us long-term credit rating affect nuts and bolts decisions by families, businesses, and governments?

It will force insurance companies and “fixed income” funds to reconsider holdings of US bonds in their portfolios, as state and federal law requires these companies to hold only AAA rated investments as capital for some activities.

Some analysts are also expecting that the ratings agencies will downgrade the credit rating for Fannie Mae and Freddie Mac, the two large federal-government owned corporations that facilitate markets for residential mortgages. A lower rating on debt issued by Fannie and Freddie could increase the effective interest rate on a residential mortgage.

-- Sumner LaCroix

Watch UHERO discuss this topic on KITV's Project Economy. UHERO faculty and research fellows appear on this segment weekly. Visit our media section to view previous appearances

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Q & A: U.S. Employment, Unemployment... and the Stock Market

Posted August 5, 2011 | Categories: Q&A, Blog
1.  What were the results of the july employment report?

Non-farm employment increased by 117,000 jobs while private employment increased by 154,000 jobs. Employment counts for May and June were revised upwards. The U.S. unemployment rate fell from 9.2% to 9.1%, and average hourly earnings rose to $23.10.

2.  Which sectors are restraining job growth?

The State/Local Government sector is still cutting spending and jobs to balance their budgets—this includes 23,000 Minnesota government workers who were laid off in July due to the shutdown and have come back on the job in August. The Construction, Finance, Information, and Hospitality and Leisure sectors are all shedding jobs. 

3.  Are any sectors generating new jobs?

There was moderate growth in Manufacturing (supply disruptions from Japan are easing), Retail, Mining, and Healthcare.

4. ok, the decline in the stock market... what's going on?

The Growing Debt Crisis in Europe. Deficit spending and weak banking systems have led to economic crises in Ireland, Portugal, and Greece—three small countries. The same problems have now spread to Spain and Italy—two big countries at the heart of Europe’s economy. US and global investors are worried that a slow European economy will also depress demand for US exports, thereby pushing down future earnings of these firms, and thereby US stock prices.

Uncertainty Stemming from the DC Congressional Circus. Consumers, seeing the political circus in Washington, DC, did something really rational in response to their worries about debts, deficits, and partisan wrangling: They cut back on their spending! US consumer spending was down in July and US/global companies and investors are worried that it will remain low and drag down future corp. earnings—thereby depressing US stock prices.

Lack of Movement on Long-Term Structural Reform. Long-term growth is generated partly by good monetary and fiscal policies and partly by reforms of the regulatory and legal frameworks governing capital, labor, and product markets. Congress’s focus on partisan wrangling over the federal budget meant that it failed to take up reform legislation vital to education, housing, research and development, transportation, reauthorizing the Federal Aviation Adminisration …. and a lot more.

Worries about How Much Longer High Oil Prices will Persist.

-- Sumner LaCroix

Watch UHERO discuss this topic on KITV's Project Economy. UHERO faculty and research fellows appear on this segment weekly. Visit our media section to view previous appearances

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