Worst income dip in 20 years doesn’t stop spending

Consumers boosted spending in January for the third straight month, suggesting that a big drop in income and tax hike at the start of the year did little to alter their behavior.

Consumer spending advanced a seasonally adjusted 0.2% last month, the Commerce Department said Friday. That matched the estimate of economists polled by MarketWatch.

Americans continued their spending ways despite an increase in their taxes and the biggest plunge in income in 20 years. 

A two-year law that reduced payroll taxes by 2% expired in January and the government also raised rates on the very rich. For people earning $1,000 a week, the payroll tax increase takes an extra $20 out of their paychecks. 

Incomes, meanwhile, sank 3.6% in January after spiking 2.6% in December. Companies accelerated the payment of rewards for workers and investors in December to avoid higher tax rates in January, accounting for the big swing.

Consumer spending represents as much as 70% of the economy. When Americans buy more goods and services, businesses generate higher sales and profits and can afford to hire extra workers. Less spending results in slower economic growth. 

In Friday trades, U.S. stocks tacked sharply lower, mainly because of concerns about deep cuts in federal spending and a slowdown in the Chinese manufacturing sector.
  
Danger signs?

Although spending largely held up in the first month of the tax increase, many analysts think it will exert some downward pressure on the economy over the next few months. Consumers don’t always change their behavior immediately after a tax increase. 

In one potentially troubling sign, spending on durable goods such as appliances, furniture, or consumer electronics fell 0.8% in January to mark the first drop in three months. Consumers tend to cut back on big-ticket items if they feel more economic stress.

What’s more, higher gasoline prices and sharp cuts in federal spending could also apply the brakes to the economy in the coming months. 

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On Friday, the government is supposed to begin the process of slashing federal outlays by as much as $85 billion over the next six months under the rules of a so-called sequester. Top Democrats and Republicans were scheduled to meet at the White House to discuss the matter, but no breakthrough was expected. 

Economists say the spending reductions could hamper the ability of the U.S. to grow any faster than the 2.2% rate by which it expanded in 2012. The economy needs to grow much faster to quickly reduce the nation’s 7.9% unemployment rate. 

The incomes of earned by Americans, meanwhile, posted the biggest drop since January 1993. Economists polled by MarketWatch had expected incomes to shrink 2.6% because of sharply lower dividend and bonus payments last month. 

Personal income derived from assets such as stocks, for example, plunged by $365.5 billion last month after jumping $273.8 billion in December, according to Commerce data.

Adjusted for inflation, income after taxes slumped an even larger 4%. Yet excluding special factor such as the accelerated dividends, real disposable income rose 0.3% in January and matched December’s increase.

Still, the combination of modest rise in consumer spending and a steep drop in income reduced the savings rate of Americans to 2.4% from 6.4% — the lowest level in more than five years.

Households typically work to rebuild savings when they fall to such low levels, but rising home values and the surging stock market is making Americans feel a little bit wealthier. What’s more, a slowly improving labor market is giving more people the hope of finding a job or getting a better one. That might make them less inclined to sock more money aside. 

Wages, on the other hand, are still not growing very fast. Incomes after taxes, adjusted for inflation, rose just 1.5% in 2012 after a 1.3% increase in 2011. And even those meager gains could be largely eaten up by the price at the pump if gasoline continue to advance. The average cost of a gallon of gas has jumped 14% since the beginning of the year. 

Yet overall inflation is still relatively tame. The PCE price index was flat in January, putting the 12-month increase at 1.2%. The core rate, which excludes food and energy, edged up 0.1% in January and is up 1.3% in the past year.
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Business spending plans gauge hits 13-month high

A gauge of planned U.S. business spending recorded its largest increase in more than a year in January, suggesting growing confidence in the durability of the economic recovery.

The case for the economy's resilience was further bolstered by another report on Wednesday showing that contracts to buy previously owned homes approached a near three-year high last month. Housing is expected to underpin growth this year.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, jumped 6.3 percent, the biggest gain since December 2011. These so-called core capital goods orders had slipped 0.3 percent in December.

"The encouraging tone of this report suggests that the business sector is beginning to feel sufficiently confident about the improving economic outlook to commit to investment activity," said Millan Mulraine, a senior economist at TD Securities in New York.

In a separate report, the National Association of Realtors said its pending home sales index increased 4.5 percent to its highest since April 2010, just before a home-buyer tax credit expired.

The rise in signed purchase contracts, which become sales after a month or two, added to data such as building permits and house prices that have suggested a decisive turnaround in the housing market.
Home building added to growth last year for the first time since 2005 and economists expect another contribution this year.

Still, the reports are unlikely to change the Federal Reserve's very easy monetary policy stance. Fed Chairman Ben Bernanke, testifying before Congress for a second straight day, pointed to the pick-up in housing as a sign the U.S. central bank's aggressive easing of monetary policy is gaining traction.
However, he signaled a willingness to press forward with efforts to spur an even stronger recovery and lower the jobless rate, which remains at a lofty 7.9 percent.

Stocks on Wall Street ended more than 1 percent higher on the data and Bernanke's comments, with the Standard & Poor's 500 posting its best daily percentage gain since January 2. The U.S. dollar weakened against a basket of currencies, while prices for U.S. government debt fell.

FACTORY ACTIVITY COOLING

Although shipments of core capital goods, used to calculate equipment and software spending in the government's measures of gross domestic product, fell last month, economists were little worried.
"The balance between orders and shipments of capital goods is looking healthier as backlogs of core capital goods orders rose for the first time in eight months," said John Ryding, chief economist at RDQ Economics in New York.

"Our take is that manufacturing activity - especially in the capital goods area - is bouncing back after cautious behavior ahead of the fiscal cliff."

U.S. factory activity, which helped lift the economy from recession, has cooled in recent months, held back by sluggish domestic demand, tighter fiscal policy in Washington and slowing global growth.
While business investment plans looked strong, the report showed that overall orders for durable goods - items ranging from toasters to aircraft that are meant to last three years or more - tumbled 5.2 percent as demand for civilian and defense aircraft collapsed. It was the first drop since August.
Orders for civilian aircraft, which are very volatile and which tend to fall at the start of the year, dived 34 percent.

Boeing received orders for only 2 aircraft, down from 183 in December. Economists said the decline was probably not related to the grounding of Boeing's 787 Dreamliners after problems with overheating batteries.

"I haven't heard any reports about airlines canceling their orders. This could be a one-month lull rather than something greater," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.

Defense aircraft orders plunged 63.8 percent after soaring 58.5 percent in December, likely as orders were pushed forward ahead of $85 billion in government-wide spending cuts set to kick in on Friday.
Overall defense capital goods orders plummeted 69.5 percent in January, the sharpest fall since July 2000.

But durable goods orders excluding transportation increased 1.9 percent last month, also the largest gain since December 2011, after increasing 1 percent in December. That was a sign factory activity continues to plod along.

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U.S. Stocks Fall as Fed Maintains Plan as Economy Shrinks

Nine out of the 10 groups in the Standard & Poor’s 500 Index retreated as energy and industrial companies fell the most, dropping at least 0.6 percent. An index of homebuilders slipped 1.3 percent as Lennar Corp. declined 2.4 percent. Amazon.com Inc. jumped 4.8 percent after reporting gains in sales and North American operating margin. Facebook Inc. fell 1.4 percent in late trading after posting a drop in profit.
The S&P 500 fell 0.4 percent to 1,501.96 at 4 p.m. in New York. The Dow Jones Industrial Average lost 44 points, or 0.3 percent, to 13,910.42. Both measures yesterday reached their highest levels since 2007. The Russell 2000 Index slid 1.2 percent, falling from yesterday’s record high. About 6.8 billion shares traded hands on U.S. exchanges today, or 9.5 percent above the three-month average.
“The underlying trend for the market is upward, but the problem is there is some weakness in the economic numbers that I don’t think investors have fully factored in,” David Kelly, chief global strategist at JPMorgan Funds in New York, said by phone. His firm oversees about $400 billion. “It’s transitory as the Fed said. But when you put in a negative number on GDP for the fourth quarter, it’s hard for the market to rally.”
Fed Chairman Ben S. Bernanke has unleashed the power of the central bank to buy unlimited amounts of Treasury and mortgage- backed securities in a bid to end a four-year long period of unemployment above 7.5 percent and bolster the economy. The central bank said today it will keep purchasing securities at the rate of $85 billion a month as the economy paused because of temporary forces including bad weather

Bank of Japan to adopt 2% inflation target

The Bank of Japan on Tuesday formally adopted a 2% inflation target in a major shift in its policy stance, and said it will continue its asset purchases on an "open-ended" basis to further expand its monetary stimulus. At the conclusion of its two-day policy meeting, the central bank said its "price stability target" of 2% year-on-year increase in consumer prices will replace its previous "goal" of a 1% increase in inflation. Under its open-ended asset purchases, the Bank of Japan said it will pursue "aggressive monetary easing" aimed at achieving its 2% price stability target, "through a virtually zero interest rate policy and purchases of financial assets," for as long as the bank judges it appropriate. The decision sent the yen and Japanese stocks on a wild ride: The yen initially fell sharply after the announcement, sending stocks rallying, but the currency soon bounced back sharply as the market digested the details, with shares likewise moving back to losses

Real estate prices expected to drop this year

• 
  Reuters - The increasing real estate prices will decline in 2013.

The increasing real estate prices will decline in 2013, Ayed Al-Qahtani, head of the Real Estate Committee in the Eastern Chamber, told a local newspaper. During a symposium on real estate in Dhahran last week, Al-Qahtani said that real estate prices in some areas of the Kingdom rose during the past four years by 150 percent. The Saudi market overcame all the consequences of the global crisis of 2008. “This gave way to a great confidence in the country’s real estate market,” he said.

The Eastern Province has the highest number of real estate auctions, and the most diverse new products in the sector, despite the obstacles it is facing. “A developer must obtain a so-called Aramco document, before any new land scheme can be approved. That is the biggest obstacle for the sector,” said Al-Qahtani.
The problem of liquidating assets, which distressed real estate contributions, was resolved in 2012 through the direct supervision of the Ministry of Commerce.
“The mortgages finance regulation was approved last year, with its many passages and codes. This is considered to be a strong driver for the real estate market in the Kingdom, with the inclusion of mortgage, leasing finance, executive judiciary and assessment,” said Al-Qahtani.
He said that assessment law is the most difficult of all, and should only be applied with a clear and precise mechanism. He mentioned the US mortgage crisis that led to the collapse of the property sector. He stressed that the establishment of a commission for assessment is a good step forward to implement the law.
For 2013, Al-Qahtani predicted, “Residential units still fall short to cover the demand in the Kingdom. The market here needs more than 300 thousand units, against the 120 thousand units provided by developers annually,” he concluded.

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FISCAL CLIFF (What’s in Boehner’s “Plan B” – and what’s not)

What’s in Boehner’s “Plan B” – and what’s not

December 19, 2012, 11:30 AM

House Speaker John Boehner’s “Plan B” is Topic A in Washington as Republicans and the White House try to avert the fiscal cliff. And while it has almost no chance of clearing the Democratic-controlled Senate, passage in the House would allow the GOP to say Republicans acted to stop some tax increases. A vote — which the White House says President Obama would veto — is expected on Thursday.

Here’s a look at what’s in the bill, and what’s not.

The marquee element of the bill, which Boehner first unveiled on Tuesday, is its extension of Bush-era tax cuts for Americans making less than $1 million. That threshold was a concession by Boehner, who’d originally wanted tax increases on no one. But it’s much higher than President Obama’s $400,000 threshold (which was itself a concession for Obama).

Plan B also sets at 20% the tax rates for capital gains and dividends on income higher than $1 million — but keeps the current 15% rate for those making less than $1 million. Without a fiscal cliff agreement, rates on capital gains go up to a maximum of 23.8%. For dividends, rates go even higher, from 15% now to 43.4%. Click here for a Tax Foundation primer on the fiscal cliff.

Boehner’s bill would keep current rules on the estate tax, setting the exemption just north of $5 million with a top rate of 35%. That’s compared to 55% without a fiscal-cliff deal. Obama would set the estate tax at 45% with a $3.5 million exemption.

Plan B would also prevent the expansion of the alternative minimum tax, and extend some expensing for small businesses.

What it would NOT do is address the across-the-board spending cuts set to kick in next year for the Pentagon and domestic spending. Nor would it deal with the debt limit.

So while passage of Plan B would put Republicans on the record as opposing most tax increases (as if that were in doubt) it would only address half of the fiscal cliff. But Republicans could blame someone else for that.

Where next for the Australian dollar?

SYDNEY (Market Watch) — The Australian dollar has survived a drop in commodity prices and lower interest rates this year, but will the world’s fifth-most-traded currency head lower in the new year? 

The “aussie”— which accounts for around 7% of global foreign-exchange trade — presently trades well over the $1.05 mark, near where it started the year. 

Relatively high domestic interest rates, a triple-A credit rating and an outperforming economy have laid the foundations for the currency’s strength over the last few years, after it started 2009 at around 70 U.S. cents.

It stumbled mid-year to as low as 96 U.S. cents, when a drop in commodity prices raised questions about the future strength of Australian exports, and downward pressure on interest rates eroded some of its yield advantage against rivals. 

Since then, however, iron-ore prices are off their worst levels, thanks to signs that China’s economy is stabilizing, and while interest rates are still well above levels found in many other developed world economies. But analysts say these issues alone don’t fully explain the recent revival in the Australian currency’s fortunes. 

“The simplest answer is that some other factor matters more, and the likely candidate is the risk-on/risk-off dynamic,” HSBC currency strategists said in a recent research note.

“Even a cursory glance at the evidence suggests a strong and consistent relationship between the Australian dollar-U.S. dollar pair and the performance of the U.S. equity market, in turn a reliable proxy for the wider risk-on/risk-off phenomenon,” the strategists said. 

From 2009, the Australian dollar’s rate against the U.S. currency has shown a more than 75% correlation with moves in the S&P 500 according to HSBC’s research. 

Fed matters

Risk-on/risk-off trading in the last few years has in itself largely resulted from massive central-bank liquidity injections into financial markets, where the sheer weight of money has created its own trading force. Money has found a home in many assets, pushing prices up. 

One of the banks leading the way in quantitative easing has been the Federal Reserve, which has had something of a knock-on effect on the U.S. dollar’s performance against rivals such as the aussie.

After their initial push following the 2008 global financial crisis, the central banks again ramped up policy-support measures and liquidity in the latter part of this year, with the Fed recently pledging billions more a month to support the U.S. economy, giving fresh legs to the Australian dollar. 

The Australian dollar “is still being influenced by global factors,” said Alvin Pontoh, currency strategist at TD Securities, who has an end-2013 target of $1.03 for the aussie. 

Pontoh believes the Fed is likely to extend quantitative easing at least to the end of next year, and the European Central Bank will also likely cut interest rates further.

Gold drops on stalemate in U.S. budget talks

Precious-Gold dropped on Tuesday trading on renewed worries regarding the so-called U.S. fiscal cliff as officials did not reach a solution yet, thereby threatening both U.S. and global recovery.

The shiny metal slipped for a third straight session to trade around $1704.66 an ounce, where it found support at $1701.66, which represents the Simple Moving Average (SMA) 100 level on the daily charts, after it fell from a high of $1717.35.

The trading range for today is expected among the key support at $1690.00 and the key resistance now at $1730.00.

Still, the main director of market sentiment is the U.S. fiscal cliff; it threatens the world`s biggest economy of falling back into recession if $607 billion of tax hikes and spending cuts start in January.

Yesterday, House of Republicans suggested a $2.2 trillion deficit-cutting plan, yet White House Communications Director Dan Pfeiffer replied that it “does not meet the test of balance.”

With the sluggish progress seen in U.S. budget talks the tensions are heightening and weigh on shares and commodities.

Gold is now moving with the U.S dollar as they both face downside pressure of the little progress in the budget negotiations.

The dollar index plummeted today to record a low of 79.80 after opening today`s trading at 79.89.

On the other hand, the euro is resuming its upside direction to six-week high versus the greenback after Greece said yesterday it would spend 10 billion euros to buy-back bonds via a modified Dutch auction.

Euro area finance ministers expressed their confidence that Greece will handle a successful bond buyback on Dec. 7, lifitng up expectations the debt crisis is abating.

Later in the day, European Union finance ministers will meet in Brussels to continue their pursuit to ease the three-year-old debt crisis.

Crude oil for January`s delivery inched down to $88.68 per barrel compared with the day`s opening level of $88.90.

Among other precious metals, silver retreated to $33.28 from the day`s opening of $33.32, platinum ticked down to $1592.75 from $1594.25, and palladium inched up to $678.60 from $678.40.

Gold drops on stalemate in U.S. budget talks

Precious-Gold dropped on Tuesday trading on renewed worries regarding the so-called U.S. fiscal cliff as officials did not reach a solution yet, thereby threatening both U.S. and global recovery.

The shiny metal slipped for a third straight session to trade around $1704.66 an ounce, where it found support at $1701.66, which represents the Simple Moving Average (SMA) 100 level on the daily charts, after it fell from a high of $1717.35.

The trading range for today is expected among the key support at $1690.00 and the key resistance now at $1730.00.

Still, the main director of market sentiment is the U.S. fiscal cliff; it threatens the world`s biggest economy of falling back into recession if $607 billion of tax hikes and spending cuts start in January.

Yesterday, House of Republicans suggested a $2.2 trillion deficit-cutting plan, yet White House Communications Director Dan Pfeiffer replied that it “does not meet the test of balance.”

With the sluggish progress seen in U.S. budget talks the tensions are heightening and weigh on shares and commodities.

Gold is now moving with the U.S dollar as they both face downside pressure of the little progress in the budget negotiations.

The dollar index plummeted today to record a low of 79.80 after opening today`s trading at 79.89.

On the other hand, the euro is resuming its upside direction to six-week high versus the greenback after Greece said yesterday it would spend 10 billion euros to buy-back bonds via a modified Dutch auction.

Euro area finance ministers expressed their confidence that Greece will handle a successful bond buyback on Dec. 7, lifitng up expectations the debt crisis is abating.

Later in the day, European Union finance ministers will meet in Brussels to continue their pursuit to ease the three-year-old debt crisis.

Crude oil for January`s delivery inched down to $88.68 per barrel compared with the day`s opening level of $88.90.

Among other precious metals, silver retreated to $33.28 from the day`s opening of $33.32, platinum ticked down to $1592.75 from $1594.25, and palladium inched up to $678.60 from $678.40.