Tag Archives: Spending

Explainer: Rising U.S. inflation and what it means for markets

A man unloads vegetables at Grand Central Market in Los Angeles, California, March 9, 2015. REUTERS/Lucy Nicholson

By Chuck Mikolajczak and Lucia Mutikani

(Reuters) – U.S. financial markets have been roiled recently by something neither the economy nor investors have had to contend with for the better part of a decade: concerns they may soon have to reckon with rising inflation.

The S&P 500.is down more than 7 percent from its lifetime high hit on Jan. 26 through Feb. 13, after falling as much as 10.2 percent, and yields on the benchmark U.S. 10-year note have climbed to a four-year high, largely due to inflation worries.

What exactly is inflation, aside from a rise in prices for goods and services, and why is it having such a strong influence on markets?

Inflation is measured in a number of ways by various government agencies, and as long as the economy continues to expand it will be a consideration for markets.

Investors will get the latest inflation data on Thursday with the monthly Producer Price Index.

WHAT IS INFLATION AND HOW IS IT MEASURED?

While inflation decreases consumer purchasing power, a certain level of inflation is considered a reflection of a strengthening economy and the impact on consumers can be offset by rising wages.

The U.S. government publishes several inflation measures on a monthly and quarterly basis. The main measures are the Consumer Price Index (CPI) and the personal consumption expenditures (PCE) price indexes. The CPI and PCE are constructed differently and perform differently over time.

The monthly CPI, compiled by the Labor Department’s Bureau of Labor Statistics (BLS), measures the change in prices paid by consumers for goods and services. The BLS data is based on spending patterns of consumers and wage earners, although it excludes rural residents and members of the Armed Forces.

CPI measures the prices that consumers pay for frequently purchased items. The components are weighted to reflect their relative importance, with the weightings derived from household surveys. Some of the components of the CPI basket such as food and energy can be volatile. Stripping out food and energy from the CPI gives us the core CPI, seen as a measure of the underlying inflation trend.

The January reading on consumer prices released on Wednesday showed prices rose more than expected, up 0.5 percent versus the 0.3 percent expectation. The core reading rose 0.3 percent against the 0.2 percent forecast. Both numbers increased from the 0.2 percent reading for December.

Another reading is the Producer Price Index (PPI), which measures prices from the seller’s point of view.

The Federal Reserve, whose mandate includes price stability along with maximum employment, prefers the personal consumption expenditures (PCE) price indexes constructed by the Commerce Department’s Bureau of Economic Analysis. PCE is considered to be more comprehensive because it includes some components that are excluded from the CPI. According to the BEA, the PCE reflects the price of expenditures made by and on behalf of households. Weights are derived from business surveys.

Housing has a greater weighting in the CPI than in the PCE index. The weighting for medical care is greater in the PCE price index than in the CPI. As with CPI, food and energy components of the PCE are volatile. Stripping them out yields the core PCE, which measures the underlying inflation trend. The core PCE is the Fed’s preferred measure for its 2 percent inflation target.

WHAT SPARKED THE RECENT INFLATION WORRY?

The government’s monthly employment report for January, released on Feb. 2, showed wages posted their largest annual gain in more than 8-1/2 years, suggesting the economy was moving closer to full employment and inflation was on the horizon.

If the economy continues to gain momentum, inflation is likely to rise further toward the Fed’s 2 percent target.

There is concern, however, that the recent U.S. tax overhaul by the Trump administration, which slashed the corporate income tax rate and cut personal income tax rates, could cause an economy that may be nearing full capacity to overheat and prompt the Fed to become more aggressive than anticipated in its course of interest rate hikes.

Markets are pricing in an 87.5 percent chance of a quarter-point increase at the U.S. central bank’s next policy meeting in March. The Fed has forecast three hikes this year, after raising rates three times in 2017.

Some market participants are unsure about how swiftly the Fed will react to inflation and market turbulence under its new chair, Jerome Powell. The March meeting will be the first since Powell took over from Janet Yellen. Recent comments from some Fed officials suggested the possibility of more hikes should the economy continue to strengthen.

HOW HAS INFLATION AFFECTED MARKETS?

Many analysts believe the stock market was overdue for a pullback because valuations, as measured against corporate earnings, have been rich by historic standards, and that the employment data showed economic fundamentals underpinning stocks are strong. Inflation has yet to rise to concerning levels, and as long as the pace remains modest, stocks have room to climb.

Healthy economic growth, along with U.S. deficit spending and moves by central banks around the world to lift interest rates from ultra-low levels, has driven U.S. bond yields to a four-year high. Rising yields could dent the attractiveness of high dividend-paying stocks to investors and trigger increased borrowing costs for U.S. companies and households, which could crimp economic growth.

The initial reaction to the CPI data on Wednesday was sharp, with S&P 500 e-mini futures <ESc1> falling to a session low of 2,627 while yields on the benchmark U.S. 10-year note <US10YT=RR> rose as high as 2.891 percent. The dollar initially spiked higher against a basket of major currencies <.DXY> before weakening.

However, stocks recovered and turned positive shortly after the opening bell and yields on the 10-year note eased.

A strengthening currency would normally go hand-in-hand with an improving economy, yet the U.S. dollar is near four-year lows even after a recent uptick. Some of the weakness has been attributed to anticipation of scaling back in stimulus measures by central banks other than the Fed.

If the U.S. economy fails to show any meaningful uptick in inflation as currently feared, that could tie the Fed’s hands when it comes to interest rate hikes and drag the dollar lower.

(Reporting by Chuck Mikolajczak; Additional reporting by Richard Leong; Editing by Alden Bentley and Leslie Adler)

Trump signs tax, government spending bills into law

U.S. President Donald Trump sits at his desk before signing tax overhaul legislation in the Oval Office of the White House in Washington, U.S., December 22, 2017.

By Susan Heavey and Lisa Lambert

WASHINGTON (Reuters) – U.S. President Donald Trump signed Republicans’ massive $1.5 trillion tax overhaul into law on Friday, cementing the biggest legislative victory of his first year in office, and also approved a short-term spending bill that averts a possible government shutdown.

Trump said he wanted to sign the tax bill before leaving Washington on Friday for his Mar-a-Lago estate in Florida, rather than stage a more formal ceremony in January, so he could keep his promise to finish work before Christmas.

“I didn’t want you folks to say I wasn’t keeping my promise. I’m keeping my promise,” he told reporters in the White House.

The two pieces of legislation represent Trump’s most significant accomplishment with Congress since taking office in January, as well as a sign of what awaits when he returns from Florida after the Christmas holiday.

The tax package, the largest such overhaul since the 1980s, slashes the corporate rate from 35 percent to 21 percent and temporarily reduces the tax burden for most individuals as well.

Trump praised several companies that have announced employee bonuses in the wake of the bill’s passage, naming AT&T, Boeing, Wells Fargo, Comcast and Sinclair Broadcast Group.

“Corporations are literally going wild over this,” he said.

Democrats had opposed the bill as a giveaway to the wealthy that would add $1.5 trillion to the $20 trillion national debt during the next decade.

The spending bill extends federal funding through Jan. 19, largely at current levels. It does nothing to resolve broader disputes over immigration, healthcare and military spending.

Republicans also are divided over whether to follow up their sweeping overhaul of the U.S. tax code with a dramatic restructuring of federal benefit programs.

House Speaker Paul Ryan has said he would like to revamp welfare and health programs but Senate Republican Leader Mitch McConnell told National Public Radio on Monday that he was not interested in cutting those programs without Democratic support.

Trump’s year also closes with significant turnover of many top staffers who had been in the White House since early in his term. On Friday, the White House confirmed Deputy Chief of Staff Rick Dearborn and Jeremy Katz, who worked under White House economic adviser Gary Cohn, were leaving.

(Additional reporting by Makini Brice; Writing by Andy Sullivan; Editing by Bill Trott)

U.S. factory activity jumps, construction spending unchanged

A man walks his dog past a mural depicting factory workers in the historic Pullman neighborhood in Chicago

By Lindsay Dunsmuir

WASHINGTON (Reuters) – U.S. factory activity jumped in June suggesting economic growth in the second quarter gained some steam, while construction spending held steady in May.

The Institute for Supply Management (ISM) said on Monday its index of national factory activity rose to a reading of 57.8 last month from 54.9 in May.

A reading above 50 in the ISM index indicates an expansion in manufacturing, which accounts for roughly 12 percent of the overall U.S. economy.

The ISM survey’s new orders sub-index rose to 63.5 in June from 59.5 the prior month. A measure of factory employment increased to a reading of 57.2 from 53.5 in May.

According to ISM, comments from those surveyed generally reflected expanding conditions, “with new orders, production, employment, backlog and exports all growing in June compared to May and with supplier deliveries and inventories struggling to keep up with the production pace.” Fifteen of the 18 manufacturing industries reported growth in June.

The dollar rose to a session high against a basket of currencies after the data, while the yield on the 2-year U.S. Treasury note rose to a more than eight-year high. U.S. stocks extended gains.

 

CONSTRUCTION SPENDING MIXED

Meanwhile, U.S. construction spending unexpectedly remained flat in May but federal government outlays on construction projects were the highest in more than four years.

The Commerce Department said on Monday that construction spending in May remained unchanged at $1.23 trillion. Spending in April was revised to show it declining 0.7 percent after a previously reported 1.4 percent fall.

Economists polled by Reuters had forecast construction spending rising 0.3 percent in May. Construction spending increased 4.5 percent from a year ago.

Federal government construction spending jumped 6.4 percent in May to its highest monthly level since January 2013.

The May construction spending release included revisions to data back to January 2015, the Commerce Department said.

In May, private construction spending fell 0.6 percent, the biggest decline since October 2015, after declining 0.2 percent in April. Investment in private residential construction also declined 0.6 percent, the biggest fall since July 2014, after rising 0.5 percent the prior month.

Spending on private nonresidential structures fell 0.7 percent in May, the fifth straight monthly decline.

Investment in public construction projects rose 2.1 percent in May after dropping 2.7 percent in April.

Outlays on state and local government construction projects increased 1.7 percent in May after falling 2.7 percent in April.

 

(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)

 

U.S. inflation expectations edge up: NY Fed

A shopper walks by the sodas aisle at a grocery store in Los Angeles

NEW YORK (Reuters) – Measures of U.S. inflation rebounded slightly last month, according to a Federal Reserve Bank of New York survey released on Monday that also showed a sharp drop in Americans’ spending expectations.

The survey of consumer expectations, one of several gauges of prices for the U.S. central bank, showed median inflation expectations for one year ahead edged up to 2.8 percent in April, from 2.7 percent in March. The three-year measure was 2.9 percent, compared to 2.7 percent a month earlier.

The bump, which the New York Fed said was driven by those with lower income and education, keeps the price measures roughly in a range since late last year.

The central bank has raised interest rates twice since December in large part on expectations that inflation will keep edging higher.

The survey also showed median household spending growth expectations dropped to 2.6 percent last month, from 3.3 percent in March. It was the lowest level since the New York Fed began measuring in mid-2013.

The internet-based survey is done by a third party and taps a rotating panel of 1,200 household heads.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

Germany balks at Tillerson demand for more European NATO spending

U.S. Secretary of State Rex Tillerson shakes hands with NATO Secretary General Jens Stoltenberg. REUTERS/Yves Herman

By Lesley Wroughton and Gabriela Baczynska

BRUSSELS (Reuters) – Germany said on Friday that NATO’s agreed target spend of two percent of members’ yearly economic output was neither “reachable nor desirable”, countering Washington’s demands that European partners comply and quickly.

The United States provides nearly 70 percent of NATO’s budget and is demanding that all allies make clear progress toward the agreed target this year. Only four European NATO members – Estonia, Greece, Poland and Britain – have done so.

“Two percent would mean military expenses of some 70 billion euros. I don’t know any German politician who would claim that is reachable nor desirable,” Germany’s Foreign Minister Sigmar Gabriel said at the first NATO meeting attended by U.S. Secretary of State Rex Tillerson.

Tillerson, however, reiterated Washington’s demands and said the U.S. will push that agenda when NATO leaders meet on May 25 for the first top-level summit of the alliance. U.S. President Donald Trump will attend that meeting.

“Our goal should be to agree at the May Leaders meeting that by the end of the year all Allies will have either met the pledge guidelines or will have developed plans that clearly articulate how…the pledge will be fulfilled,” Tillerson said.

“Allies must demonstrate by their actions that they share U.S. governments commitment.”

In Berlin, German government spokesman, Steffen Seibert, said the government was committed to increasing defense spending and would continue to do so “because we know it is necessary and makes sense to further strengthen our armed forces”.

Members have until 2024 to comply with the spending target.

Tillerson did however offer assurances of Washington’s commitment to NATO, softening Trump’s stance.

Trump has criticized NATO as “obsolete” and suggested Washington’s security guarantees for European allies could be conditional on them spending more on their own defense. He has also said he wants NATO to do more to fight terrorism.

“The United States is committed to ensuring NATO has the capabilities to support our collective defense,” Tillerson said at the meeting in Brussels. “We will uphold the agreements we have made to defend our allies.”

NATO Secretary General Jens Stoltenberg said ties between European NATO members and the United States were “rock solid”.

He said the ministers would discuss “fair burden sharing to keep the trans-atlantic bond strong” and “stepping up NATO efforts to project stability and fight terrorism”.

Stoltenberg confirmed ministers would discuss national defense spending plans on Friday as the bloc seeks to respond to the new, harsher tone from across the Atlantic, which has galvanized European NATO allies.

Though Washington has also offered reassurances, Tillerson’s initial decision to skip his first meeting with NATO foreign ministers reopened questions about the Trump administration’s commitment to the alliance.

The meeting was later rescheduled and Tillerson was attending on Friday, though has not scheduled meetings with individual countries as is customary by the secretary of state during such a meeting.

(Additional reporting by Robert-Jan Bartunek; Writing by Gabriela Baczynska; Editing by Louise Ireland)

California governor proposes spending $437 million on aging dams, flood control

California Governor Jerry Brown speaks in Los Angeles, California, United States, April 4, 2016. REUTERS/Lucy Nicholson/File Photo

SACRAMENTO, Calif. (Reuters) – California Governor Jerry Brown on Friday proposed spending $437 million for flood control and emergency response and preparedness, days after damage at the country’s tallest dam, located northeast of the state capital, led to the evacuation of nearly 200,000 people downstream.

Damage to both the regular spillway and its emergency counterpart at the Oroville Dam earlier this month brought issues with aging infrastructure into sharp relief in a state that relies on a complex system of dams and reservoirs to irrigate farms and provide drinking water for nearly 40 million people.

Brown, a Democrat, told reporters at a news conference that he would ask the state legislature to approve spending $387 million from a $7.5 billion water bond passed by voters in 2014. Another $50 million would come from the state’s general fund budget, he said.

Brown also said he requesting financial and regulatory assistance from the federal government in a letter that he said would be sent to President Donald Trump on Friday.

(Reporting by Sharon Bernstein; Editing by Leslie Adler)