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Young Adults Fret Over Jobs, Haven’t Lost Hope

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.

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Young Adults Fret Over Jobs, Haven’t Lost Hope

Apple (AAPL) – Too Risky Now

AAPL closed at $223.02.  Its highest close ever.  While it is STILL an attractive stock at this level one has to be cautious in this territory.  I would much rather be investing in other stocks as AAPL seems more and more to ramped up on fanatical momentum as its market cap has topped $200 billion.  On my daily commute to work I often am struck by the number of people that have I-Phones, I-Pods, and those using their apps.  It reminds me of my youth and the Sony Walkman and Discman.  It will be interesting to see how AAPL fares in the future and how it responds to changes in consumer tastes and fickle brand loyalty.  If you do decide to stay in Apple with a long  position than I suggest buying some puts to protect your gains.

Caterpillar CEO Sees Stronger Rebound Boosting Sales

Sales at Caterpillar Inc. are expected to rise 10 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 2011.

The company’s current “base case” scenario is for sales to reach $55 to $60 billion during that time, 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.

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Caterpillar CEO Sees Stronger Rebound Boosting Sales

Fed Lieutenant’s Speech Suggests Rate Increase by Year End

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%.

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Fed Lieutenant’s Speech Suggests Rate Increase by Year End

Economy Still Breeding Doom And Gloom

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.

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Economy Still Breeding Doom And Gloom

Secondary Sources: Too Big to Fail, 4% Inflation, Commercial Real Estate

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

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Secondary Sources: Too Big to Fail, 4% Inflation, Commercial Real Estate

Small Businesses Turn More Pessimistic

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.

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Small Businesses Turn More Pessimistic

Senior Fed Official Lays Out More Exit Detail

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.

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Senior Fed Official Lays Out More Exit Detail

Productivity Surge May Hurt Job Growth, Fed Paper Says

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.

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Productivity Surge May Hurt Job Growth, Fed Paper Says