Banyan
But what do they really want?
A WEEK in Afghanistan impresses two things upon the visitor. The first is that the United States, pouring vast quantities of soldiers and dollars into the country, is at last getting serious about creating the kind of stable nation that caters to the wishes of its people. The second is that few people have much idea what those wishes are.
Though America has been in Afghanistan since 2001, its serious insurgency-busting, nation-building strategy is relatively new. George Bush routed the Taliban after September 11th because al-Qaeda had, like a parasitic brood, commandeered the Taliban state in order to organise and train for global jihad. But once the Taliban and al-Qaeda were on the run, the administration paid mere lip service to building a stable Afghanistan.
It fobbed off peacekeeping on to NATO and created an International Security Assistance Force (ISAF) with a remit that at first did not go beyond Kabul, the capital. Nobody troubled about forging a national army. Fixated by terrorism, the Bush administration ignored the risks of rising opium output. Soon insurgencies were multiplying, fuelled by drugs, warlords, local resentments, a weak national army and police and a recovering Taliban. Years were wasted, not to mention lives and money.
Now America and its friends have what is surely a last chance to put things right. If they fail, Western voters will run out of patience, even as more Afghans will become convinced that if the Westerners haven’t put their country on its feet by now, it must be because they have nefarious motives for seeing it prone.
For Stanley McChrystal, the general in charge of ISAF forces, the real fight is only just beginning. He and his commanders have studied the history of counter-insurgencies (won in an average of 13 years, lost in 11). They downplay the chief oddity of this one, which is that foreign forces are fighting it. But at least building a national army is now high on their agenda.
The new strategy is about to face its defining moment in Kandahar. The province matters because it is the cultural centre of the Pushtuns, who are Afghanistan’s biggest ethnic group. Kandahar city is the spiritual home of the Taliban, who set up their capital there in 1996. Today Taliban insurgents again hold sway over much of the Kandahar countryside. Even in the city, which is controlled by the government, a spate of Taliban killings this year has targeted local leaders. ISAF cannot afford to let Kandahar go wrong.
Battle should begin after the leaves have dropped in the vineyards, offering less cover for insurgents. But, the allied commanders insist, the counter-insurgency in Kandahar will be less a military offensive than a process designed to reassure, impress and safeguard civilians. Much of the talk is about how to restore electricity supplies or get a giant television screen up in the city so that locals can watch the World Cup. As for the Taliban-held districts, the idea is to capture them and quickly drop in some hand-picked local leaders. New schools and roads will follow. Government-in-a-box.
Yet Kandahar highlights the limits, even contradictions, of the new approach. In the city people suffer not from political actors who are too weak but rather those who are too powerful. The government and the armed business networks behind it are no less oppressive than the Taliban.
Kandahar’s shadow shogun is Ahmed Wali Karzai, half-brother to President Hamid Karzai. He has grown rich on ISAF patronage. Armed forces linked to him have contracts to protect the CIA and to escort ISAF fuel convoys. In 2009 they killed the city’s chief of police in a shoot-out. ISAF believes the president’s half-brother may profit from the drugs trade, if only indirectly. Distinctions between friend and foe, it seems, are dissolving. For all that it regrets breeding him, the coalition depends on Ahmed Wali Karzai too much to cut him loose.
One Kandahar citizen says he had hoped the protection rackets—so common during the civil war of the early 1990s—were things of the past. That must surely be true for most Afghans. But, even so, it is hard to know what they want instead.
Democracy was supposed to give an answer but President Karzai stole the last election. Possibly folk are readier to attempt a bolder political accommodation with Taliban leaders than he seems prepared to endorse at the “peace jirga” he convened this week in Kabul. It was supposed to find a national consensus on the issue of reconciliation with enemies. But few observers expected much from the gathering, even before the Taliban fired rockets at it.
The problem of knowing what Afghans think is an obstacle more generally. When World Bank workers attempt to take surveys, they have to memorise the questions and answers, since villagers speaking to strange folk with clipboards are at risk from insurgents. The best annual survey of public opinion, by the Asia Foundation, is necessarily self-selecting since surveyors cannot go into dangerous areas. But even it found last year that the proportion of respondents who feared voting in national elections had risen from 45% to 51%. That bodes ill for September’s parliamentary elections.
As for General McChrystal, for all his desire to understand better what Afghans want, he and his advisers have to move around in a security bubble. Last week the general tried to break out of the bubble by striding purposefully from the ISAF garrison in rural Kandahar he was visiting, in search of Afghans to question. The only two adults about, village elders, gave every impression of having been laid on for him. Their praise for the counter-insurgency was gushing. The general didn’t seem to drink it in.
Crime and politics in Guatemala
Crime and politics in Guatemala
The UN’s prosecutor resigns, taking an enemy with him
guatemala city
Castresana ponders political suicideASH still smears the pavements of Guatemala City, three weeks after nearby Mount Pacaya blew its top. On June 7th the city was shaken by a second explosion, this time of the political sort: the resignation of Carlos Castresana, a Spanish prosecutor who heads the International Commission Against Impunity in Guatemala (CICIG), a body set up in 2007 by the UN and Guatemala’s government to investigate organised crime and its links to the state. In a brief statement, Mr Castresana blamed the government for failing to support his effort to root out the mafias that have long penetrated its ranks.
His departure came as a shock. It followed a string of successes. In January CICIG secured the arrest of Alfonso Portillo, a former president charged with embezzling $15.7m, as he tried to flee the country. In the same month it cracked the stranger-than-fiction case of Rodrigo Rosenberg, a lawyer who, the commission found, had arranged his own murder in a bid to frame the president, Álvaro Colom. In all, CICIG has forced out some 2,000 police officers, ten prosecutors and, in its first year, an attorney-general.
The trigger for Mr Castresana’s resignation was the naming on May 25th of a new attorney-general, Conrado Reyes, whom CICIG had publicly accused of having ties to drug-traffickers and illegal-adoption rings. Once in office, Mr Reyes sacked more than 20 officials and demanded to oversee all wiretaps. Fearing a slow death of CICIG, Mr Castresana sacrificed himself instead. It worked: his resignation generated enough fuss to force the Constitutional Court to annul Mr Reyes’s appointment.
Whoever replaces Mr Castresana can expect plenty of opposition. In a final press conference on June 14th, he presented evidence that various criminal factions had joined together since January to fight CICIG with a campaign of smears and intimidation. In one wiretapped phone call, two suspected criminals discussed cooking up a rumour that Mr Castresana was having an affair with a colleague. He also said that two suspects in the Rosenberg case bribed the officials that choose the attorney general with designer suits and ties, in order to secure Mr Reyes’s nomination.
Mr Castresana also accused the government of failing to boost the powers and resources of the justice system—a witness-protection programme now exists in name only, after the government stopped funding safe houses, for instance. And no one can explain why the president keeps appointing senior officials who later turn out to have criminal links.
The government counters that it has no money (central-government spending is the lowest as a share of GDP in Latin America) and that it is politically hamstrung, now that Mr Colom’s party holds barely a fifth of the seats in the legislature. Many appointments, including Mr Reyes’s, are partly in the hands of (allegedly crooked) independent commissions.
As Mexico and Colombia crack down on them, drug gangs are finding refuge in Guatemala. In the jungle state of Petén, the Zetas, a Mexican drug-trafficking group, have hung up signs recruiting soldiers. A report from America’s state department says that “entire regions of Guatemala are now essentially under [their] control.” The country’s lawlessness exposes it to the appeal of a strongman. Otto Pérez Molina, a former general who promises an “iron fist” against crime, leads the opinion polls for the next presidential election in September 2011. Much-needed change is unlikely to come from the left: the candidate most likely to run for Mr Colom’s party is Sandra Torres, his wife.
Slovak and Czech politics
Slovak and Czech politics
A political earthquake in central Europe brings new faces and high hopes
BRATISLAVA AND PRAGUE
Easy, tigressAFTER years of sleaze and stagnation central European politics is livening up. In April the centre-right gained a thumping majority in Hungary. At the end of May Czech voters, spurred by an anti-corruption campaign, shunned the two main parties for newcomers. And now Slovaks have evicted the country’s most effective politician, the populist and nationalist prime minister Robert Fico, in favour of a bunch of free-market parties preaching lean government and ethnic harmony.
Iveta Radicova (pictured), head of the centre-right Christian Democrats (SDKU-DS), is set to form a government backed by 79 of the 150 parliamentary deputies. The sociology professor, nicknamed the “Tatra Tigress”, will be Slovakia’s first woman prime minister (and one of a mere handful of prominent female politicians in the region). Her party won only 28 seats; it has a chance of power thanks to the collapse of Mr Fico’s coalition partners and a surge in support for two newcomers.
Slovakia’s political landscape has changed. The party of Vladimir Meciar, an authoritarian ex-prime minister who isolated Slovakia from Europe in the 1990s, failed to pass the 5% threshold needed to enter parliament. It is now likely to fold. The racist Slovak National Party squeaked in. Its loudmouth leader, Jan Slota, said he was “crying”. Both parties were Mr Fico’s allies. He pandered to their voters during the election campaign, to some effect: his nominally centre-left party’s share of the vote rose by 6%, gaining it 62 seats. It polled strongly among poorer and provincial voters. But flirting with the fringe made Mr Fico a pariah in the eyes of more mainstream potential partners.
These include the new Most-Hid (from the Slovak and Hungarian words for “bridge”), run by Bela Bugar, who used to run another well-rooted Hungarian ethnic party. The old outfit did not meet the 5% threshold, whereas the new lot, which aims to cross the ethnic divide, gained a surprising 8%. Most-Hid’s success seems to have stunned the new government in Budapest, which bet heavily on its defeated rival. The other newcomer, Freedom and Solidarity (known as SaS), did far better than expected, polling 12%. It is run by Richard Sulik, a zealous economic liberal who brought the flat tax to Slovakia in its free-market glory days. SaS fought the election using social-networking and messaging websites, chiefly Facebook and Twitter.
The new four-party Slovak coalition (it also includes a small Christian-Democrat party) will have two big tasks. One is to fix the public finances. Slovakia’s deficit has risen to 6.8% of GDP, following an economic contraction of 4.7% last year. The other is to mend relations with Hungary, plagued by rows over language and loyalty. Ms Radicova wants to scrap a new law that strips Slovaks of their passports if they take dual Hungarian citizenship. (She also opposes Slovakia’s contribution to the euro-zone bail-out fund.)
The Slovak result echoes that of the Czech election two weeks earlier, where anti-corruption campaigns swung votes behind new parties, which did well in Prague and among younger voters. Two of them—TOP 09, led by Karel Schwarzenberg, a Habsburg-tinged aristocrat and former foreign minister, and the more populist Public Matters—are in coalition talks with the centre-right Civic Democrats.
Public finances are a worry in the Czech Republic too (fears of the “road to Greece” played prominently in the election campaign). The coalition parties want to start working on a new budget as soon as the government has been agreed on, probably on July 7th. The country has promised the European Union to get the deficit below 3% of GDP by 2013, from 5.3% this year. The government should hold 118 of the 200 seats in the lower house, making it a bit more secure than its Slovak counterpart when it faces tough fiscal decisions.
It will have a harder job meeting voters’ expectations of cleaner politics. A campaign called “Replace the Politicians”, run by a group of apolitical but public-spirited marketing experts, helped focus voters’ wrath on some of the worst offenders, who found themselves voted off party lists. But the problems go deep. A cosy cartel between the old parties has brought worrying overlaps between business and politics, the stench of dirty money from the east and a stream of scandals involving the courts, police and spooks. Mr Schwarzenberg describes corruption as a “cancer” that threatens to turn the country into “Sicily, minus the sea and oranges”. But as Italians know, moaning about corruption is one thing. Eradicating it is quite another.
Britain's emergency budget
Britain's emergency budget
All the scenarios are painful, but some make more sense than others
FROM the outset Britain’s new coalition government has said that its main task is to tackle the yawning fiscal deficit, which hit a peacetime record of 11.1% of GDP in 2009-10. It will set out its plans in an “emergency” budget to be presented on June 22nd. The decisions made by George Osborne, the Conservative chancellor of the exchequer, working with Danny Alexander, the Liberal Democrat at the Treasury in charge of controlling spending, will be momentous, determining, perhaps, the government’s own longevity as well as Britain’s economic prospects.
In practice the budget will have to take into account the compact between the Tories and Lib Dems, as well as each party’s election pledges. But in principle this is an opportunity to start afresh, sweeping aside their own commitments and plans inherited from Labour, and learning from the experience of other countries that have had to impose big clampdowns. The question is how to close the fiscal gap while protecting a still delicate economy, securing public support through a distribution of pain that is seen to be fair.
The first step is to establish just how deep a hole has to be filled. On June 14th the new Office for Budget Responsibility (OBR), now in charge of fiscal forecasting, put the deficit in the financial year to March 2011 at £155 billion ($229 billion), or 10.5% of GDP, before any changes by the current government.
What matters most is the shortfall likely to persist after the economy has fully recovered, unless spending is cut and taxes are raised. On the new forecasts, the permanent weakening in the public finances from the financial crisis and recession is 5% of GDP, according to the Institute for Fiscal Studies (IFS), a think-tank. But that is based on a central projection from the OBR and Mr Osborne may want to build in a safety margin of up to 1% of GDP. Moreover, interest payments will rise by close to 1% of GDP between this year and 2014-15 because of the deluge of borrowing. Taking this into account, the cyclically-adjusted primary budget balance (which excludes interest payments) would need to improve by around 7% of GDP.
Mr Osborne must also decide how swift the consolidation should be. He has already announced net spending cuts worth 0.4% of GDP for 2010-11. A further 6.6% off the deficit by trimming expenditure and raising taxes in the four years to 2014-15 would mean an annual improvement in the structural primary balance of over 1.6% of GDP. If he takes it more slowly over five years, he could reduce the deficit by just 1.3% of GDP a year.
As the chart shows, international experience suggests that either would be feasible. In the ten biggest consolidations since the late 1970s (and Britain’s would rank among them), the average pace of deficit-cutting was 1.9% of GDP a year, according to a study by the OECD. A quick workout now would calm bond vigilantes who fret about Britain’s borrowing, and could to some extent be offset by keeping interest rates lower for longer.
But Mr Osborne will need to take into account the fragility of Britain’s economy these days: the OBR is less optimistic than the previous government about its immediate prospects and also thinks that the long-term trend rate of growth is lower. And the troubles of the euro area, Britain’s biggest trading partner, also argue for a pace that is not too punishing. John Hawksworth, an economist at PricewaterhouseCoopers, an accountancy firm, thinks a fiscal consolidation of around 6.5% of GDP is needed and favours the more gradual approach. This would match the pace of Britain’s previous retrenchment, over six years, in the 1990s.
So what are the options for healing the public finances? If Mr Osborne wiped the slate clean, he could at one extreme rely entirely on spending cuts or at the other on tax rises. The OECD study found that cures based mainly on expenditure cuts tended to be more successful in stabilising the public finances. But Stéphanie Guichard, its main author, says that when fiscal consolidations are large they typically require tax rises as well as spending cuts. There are two particular reasons why higher taxes should take some of the strain in Britain.
The first is that in the middle of the previous decade the exchequer became unhealthily dependent on buoyant receipts from frothy finance and property markets. These will not return on the same scale. The second is that fiscal consolidation will succeed only if the public accepts the package as fair. Since spending cuts tend to hurt poorer people more, it is vital to show that richer folk, who usually pay more tax, are also feeling the pinch, according to Jens Henriksson, who worked on Sweden’s fiscal retrenchment in the 1990s.
Unwelcome though it is, a contribution from higher taxes is required. Just how big it should be is a matter of dispute. The Tories have said they want to rely on taxes for a fifth of the consolidation. That may be too ambitious. If something like 2% of GDP were found by higher taxes, leaving spending to be cut by 5% of GDP, it would still be a tougher mix than all but two of the ten biggest OECD deficit-cutters managed.
Mr Osborne has several choices in raising these revenues. First of all, there is the legacy of planned tax increases left by his Labour predecessor, Alistair Darling, which build to 1.2% of GDP by 2014-15. Of this, just under half comes from higher income tax, including a new 50% top rate on annual incomes above £150,000. Higher national-insurance contributions (NICs) will raise another 0.4% of GDP. The rest is to come from increases in alcohol, fuel and tobacco duties. Although the Tories pledged before the election to reverse most of the NIC increase, that still left them in effect planning for 0.8% of GDP from extra taxes as a result of Labour’s measures.
Mr Osborne could choose to annul all his predecessor’s tax changes, including those already implemented this year, and replace them. There are arguments for sweeping them aside. The new top rate of income tax may well alienate more rich people than raise revenues from them, and the associated pension provisions are nightmarishly complicated.
On strictly economic grounds, it would be better to raise money through higher VAT or, for example, a new carbon tax. Consumption taxes are generally thought to have smaller adverse effects on growth than most other types of tax and are certainly less distorting than corporate or personal income tax, as a 2009 OECD study confirmed. If, for example, the main rate of VAT were lifted from 17.5% to 21%, this would raise 1% of GDP—more, if some exceptions from it, such as that for books and newspapers, were removed. A carbon tax could raise a similar amount and, properly designed, could have the further merit of helping Britain to lower its emissions of greenhouse gases (see article).
The snag with both, however, is that they are regressive, meaning that poorer households would fork out proportionately more of their income paying them than richer ones. If the coalition government is to come up with a plan that will not lead to serious protests, it may have to stick to some of Labour’s income-tax imposts on the better-off while raising allowances to help low to middling earners. For the same reason, there may be a case for raising the rate of capital-gains tax on non-business assets, as the government proposes, provided that gains are indexed for inflation. Taken together, such measures will enhance the perceived fairness of the fiscal-consolidation package, and could then be supplemented by a carbon tax or higher VAT to raise an additional 1% of GDP. A further 0.2% could come from other measures, such as a mooted levy on banks.
That leaves spending, and the remaining 5% of GDP needed to balance the books. On May 24th the chancellor announced a first tranche of cuts worth 0.4% of GDP in the current financial year, so he has 4.6% still to find. According to the OBR, total expenditure in this financial year (before the cuts outlined last month) will be £701 billion, or 47.5% of GDP.
The single biggest component is welfare, which makes up 28% of the total. Around 55% is spent on the public services, such as health and education, and administration. A third category is a miscellaneous bunch of commitments, some of which, including debt-interest payments (2.9% of GDP this year), are unavoidable.
Indiscriminate cuts in welfare would run against the imperative of a socially fair package, since most of the spending goes in state pensions to workers in general, and to the poor and needy. But quite a chunk does not. At present, for example, all families with dependent children receive child benefit, and some quite well-off ones also get extra help through the child-tax credit, which is mainly for poorer families. If the two were combined and means-tested, there could be a saving of around £6.5 billion a year, according to the IFS.
Special benefits for pensioners, who will be gaining from separate plans to shore up the basic state pension, could also be reduced. One candidate is winter-fuel payments, which go to all households with someone over 60. This is a poorly directed benefit, as only 12% of recipients pay more than 10% of their income to heat their homes adequately (the “fuel poverty” which the transfer is meant to alleviate); scrapping it would save £2.7 billion. Ditching free bus travel for the over-60s and free television licences for the over-75s would save £1.6 billion.
And there is scope for other savings. For example, cutting the share of child-care costs that can be refunded through a tax credit from 80% to 50% could save £700m. Tightening the disability-living allowance and housing benefit in the private rented sector could raise £3 billion and £700m respectively, according to the Social Market Foundation (SMF), a think-tank. Altogether, these measures would clip 1% of GDP off the welfare bill.
Such a package would mean that the Tories, in particular, had to jettison pledges, notably over pensioner freebies. But unless substantial savings are made in welfare, public services will pay a disproportionate penalty. Even with a welfare clampdown of this magnitude, another 3.6% of GDP will be needed. Cuts will fall mainly on the departments responsible for the public services.
The next important decision Mr Osborne must make is what balance to strike between current and capital spending, on roads and rail and the like. Mr Darling had already pencilled in investment cuts worth 1.5% of GDP. This seems excessive, repeating the mistake often made in the past of slashing capital spending when times are hard; this has left the country with a poor transport system, for example. For Britain to emerge from its fiscal crisis not only must the deficit shrink but the economy must grow, and this means adequate infrastructure. The government might want to cut net investment by no more than 1% of GDP. That, in turn, would mean reducing current departmental spending by around 2.6% of GDP.
An obvious target is the government’s own pay bill, which makes up a quarter of total spending. Public-sector workers are paid much more than private-sector staff. In 2009 average hourly wages were 15% higher for men and 25% higher for women. But the public workforce is better educated and qualified. Once these differences are stripped out, men in the public sector earn 2% and women 7% more, for an average premium of 5%, according to research by Antoine Bozio and Paul Johnson of the IFS.
This suggests scope for a real cut in public pay of around 5%, which could be delivered through a two-year pay freeze. The gross saving would be £8.9 billion, though some of the effect would be lost in lower taxes. Even so it would deliver a net saving of £5.5 billion, or 0.4% of GDP.
The pensions gap between the public and private sector is greater still. More generous and much more widespread pension provision boosts public pay by a further 12% compared with the private sector, according to the IFS researchers. An increase in public-sector employee contributions of, say, two percentage points would raise £3 billion, or 0.2% of GDP, according to the SMF. Broader reform of the system could take place in slower time.
A squeeze in public-sector employment will also produce substantial savings. The government head count grew by 13% in the decade to 2009. Some of the extra staff were required but a 7.5% cull might be necessary now, bringing down the payroll by 400,000 or so. The potential saving would depend on how many of the job losses were among the lower paid and on whether it caused higher unemployment, pushing up benefit bills, but it might be around 0.8% of GDP. The job losses could be lower if more swingeing cuts in pay and perks were made.
The CBI, an employers’ group, thinks there is also scope for additional savings. Susan Anderson, who heads its public-services unit, argues that public managers will now be forced to make changes, such as sharing or outsourcing services like payroll and service-desk support. Procurement could also be tightened. Bigger economies will come in the medium-term by comprehensively reconfiguring the way that public services are provided. Such savings could build up to 1.2% of GDP.
The need to cut public services should spur more fundamental reforms. The funding bonanza they have had over the past decade has been accompanied by falling productivity. It is time to concentrate on reforming the provision of health care and education, essentially resuming the supply-side liberalisation pioneered by Tony Blair, while also moving towards more co-payment and user fees.
Unfortunately, what would be manageable if cuts were made across all public services has been made much harder by the government’s promise to ring-fence some of them, notably the enormous health budget. The problem with safeguarding favoured services is that less favoured ones face steeper real cuts. And there are pressures to widen the inner circle.
This became clear with the Treasury’s first tranche of cuts in May, mainly in departmental budgets. Because health, overseas aid, big chunks of education and defence were shielded, the cuts elsewhere were much deeper than logic dictated. Several ministries, including transport and environment, lost 5% or more of their planned budgets for 2010-11 at a stroke.
Yet among the bad news lurks a little good. The crisis has forced people to focus on the state and what it should provide—free, for a fee or not at all—and in the nick of time. An ageing population will require more spent on pensions, health and social care in the 2020s. Mr Hawksworth, of PWC, thinks a further fiscal tightening equal to two or three percentage points of GDP will be needed to counter those costs. No bad thing to get the public finances in hand before then.
American politics and business
American politics and business
America’s justifiable fury with BP is degenerating into a broader attack on business
FOR over a month, Barack Obama watched the oil spill spread over the Gulf of Mexico with the same powerless horror as other Americans. Finally, lampooned by his countrymen for his impotence, he was spurred into action. He attacked the only available target—BP—and, to underline the seriousness with which he takes this problem, he gave his first Oval Office address on the subject.
The address got poor reviews; the attack on BP better ones. This week the firm bowed to pressure, and announced that it was, in effect, handing over $20 billion to the government to pay for compensation and clean-up, as well as cancelling the payment of any dividends this year and setting up a fund—of a mere $100m—to compensate unemployed oil workers.
This may do Mr Obama some good. Whether it will benefit America is more doubtful. Businessmen are already gloomy, depressed by the economy and nervous of their president’s attitude towards them. This episode will not encourage them.
There is good reason for Americans to be furious with BP. The authorities reckon that the oil may be flowing at a rate of 60,000 barrels a day—far more than the company estimated, and the equivalent of an Exxon Valdez every four days. Efforts to stem the toxic plume have met with only modest success (see briefing).
A permanent solution may be available in August, but only if the drilling of relief wells to intercept and plug the stricken one goes according to plan.
BP already had a miserable safety record in America. In 2005 an explosion at one of its refineries in Texas killed 15 people. In 2006 corrosion in its pipelines led to a sizeable spill on Alaska’s North Slope. Since then, regulators have often fined it for breaking safety standards. There are indications that BP’s approach to the drilling of the Macondo well was similarly slapdash. Engineering measures that might have prevented the calamity were not carried out, tests of safety equipment delayed. The firm’s emergency-response plan spoke of protecting the area’s walruses—an easy task, since there aren’t any—and consulting an ecologist who had died in 2005.
America has a well-developed system for getting companies to pay for the damage they do; and BP long ago accepted that it would pay in full. But that was never going to satisfy the country’s corporate bloodlust. An outfit called Seize BP has organised demonstrations in favour of the expropriation of BP’s assets in 50 cities. Over 600,000 people have supported a boycott of the firm on Facebook. Several of BP’s gas (petrol) stations have been vandalised.
The politicians, eager as ever to stay in tune with the nation, joined in. Ken Salazar, the secretary of the interior, vowed to keep the government’s boot on BP’s neck. At one of the many recent hearings at which BP executives have been hauled over the coals, a Republican congressman suggested that the chairman of BP’s American arm should commit ritual suicide. Mr Obama said he was looking for arses to kick.
After the macho rhetoric came the demands for cash. Mr Obama decided to “inform” BP that it must put adequate funds to meet all compensation claims into an escrow account beyond its control, although he has no authority to do so. Nancy Pelosi, the speaker of the House of Representatives, instructed it not to pay a dividend until all claims tied to the spill are settled. Her fellow Democrats in Congress are trying to raise BP’s liability retroactively—the sort of move America’s courts rightly frown on. Mr Salazar, on even thinner legal ice, suggested that the government would hold BP accountable not just for the harm directly done by the spill, but also for the jobs lost in the oil business thanks to the freeze on oil drilling in deep water that he himself has imposed.
Investors seem to be worried that the wrath of American officialdom will ruin BP. They have driven down its value by $89 billion since the well erupted, far in excess of all but the most dire forecasts of the ultimate costs of the spill. Corporate America, normally quick to resist government intrusion, has kept strangely silent, as though businessmen are afraid of the consequences of sticking their heads above the parapet.
The attack on BP seems to have paid off for the administration, in that the firm has caved in to most of its demands. Mr Obama’s swipes at the company have lent him an unfamiliar air of forcefulness. And, as everybody in Washington knows, so long as BP meets its commitments, government attempts to meddle in the firm’s management, much less seize its assets, will be rejected by the courts. So why not keep going?
For several reasons. The vitriol has a xenophobic edge: witness the venomous references to “British Petroleum”, a name BP dropped in 1998 (just as well that it dispensed with the name Anglo-Iranian Oil Company even longer ago). Vilifying BP also gets in the way of identifying other culprits, one of which is the government. BP operates in one of the most regulated industries on earth with some of the most perverse rules, subsidies and incentives. Shoddy oversight clearly contributed to the spill, and an energy policy which reduced the demand for oil would do more to avert future environmental horrors than fierce retribution.
Mr Obama is not the socialist the right claims he is (see article). He went out of his way, meeting BP executives on June 16th, to insist that he has no interest in undermining the company’s financial stability. But his reaction is cementing business leaders’ impression that he is indifferent to their concerns. If he sees any impropriety in politicians ordering executives about, upstaging the courts and threatening confiscation, he has not said so. The collapse in BP’s share price suggests that he has convinced the markets that he is an American version of Vladimir Putin, willing to harry firms into doing his bidding.
Nobody should underestimate the scale of BP’s mistake, nor the damage that it has caused. But if the president does not stand up for due process, he will frighten investors across the board. The damage to America’s environment is bad enough. The president risks damaging its economy too.
Bailout Nation
Bailout Nation Will Thrive as Long as AIG Lives: Jonathan Weil
Commentary by Jonathan Weil
June 17 (Bloomberg) -- To believe Christopher Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee, the end of government bailouts is near. In truth, the financial-overhaul legislation now before Congress would do little to arrest the bailouts already in progress.
When the U.S. government rescued American International Group Inc. in 2008, it reasoned that a disorderly failure of the financial-services giant would lead to an economic catastrophe. What the Treasury and Federal Reserve said they needed was a way to wind down systemically important institutions without sending them into bankruptcy courts, to keep the companies from triggering defaults on their obligations that would cascade throughout the broader financial system.
Congressional leaders say their final bill will deliver the resolution authority regulators have been seeking. “It will end bailouts, ensuring that failing firms can be shut down without relying on taxpayer bailouts or threatening the stability of our economy,” Dodd said June 10 at the House-Senate conference committee where the differences between the two chambers’ bills are being negotiated.
It wouldn’t end AIG’s rescue, though. The reason AIG hasn’t failed is that the Fed and the Treasury continue to stand behind it. There’s no sign this will change anytime soon. Nor would the legislation force the government to do otherwise.
Liquidation Plans
Under the text being considered by the conference committee, the Federal Deposit Insurance Corp. would gain new “orderly liquidation authority” over large bank-holding companies and non-bank financial firms. The Treasury secretary, with Fed and FDIC approval, could initiate the resolution process upon concluding that the country faced a potential crisis because a large financial institution was in danger of defaulting or had done so already.
If the absence of such authority was what prevented the government from letting AIG fail in 2008, you might think regulators would be itching to test-drive these new procedures. Yet there seems to be no eagerness at the Treasury or the Fed to try this new tool on AIG once it becomes available. If the government wants the markets to believe it would ever liquidate a failing company of AIG’s size in the future, a good place to start would be with AIG itself after this proposal is enacted.
As of May 27, AIG owed the Treasury and the Federal Reserve Bank of New York $132.4 billion, according to a June 10 report by the Congressional Oversight Panel, led by Harvard Law School professor Elizabeth Warren. The government, which controls almost 80 percent of AIG’s equity, hasn’t announced a timeline for its exit strategy. The Treasury and Fed say they remain hopeful AIG can make good on its promise to repay the money.
‘Poisonous’ AIG Rescue
That’s a highly uncertain prospect, especially after the recent collapse of AIG’s $35.5 billion deal to sell its main Asian insurance operation to U.K.-based Prudential Plc. Warren’s oversight panel said the Treasury “will likely remain a significant shareholder in AIG through 2012,” and that taxpayers “remain at risk for severe losses.” Meanwhile, as the panel said, “the government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace.”
AIG still has an investment-grade credit rating, solely because of its U.S. backstop. And by paying AIG’s creditors in full, the government has encouraged massive misallocations of capital toward pretty much any company perceived to have a too- big-to-fail guarantee.
Cutting Losses
It is conceivable that AIG might pay back taxpayers in full if given a long enough timetable to sell off its parts. Yet the longer the government refrains from putting the company through the wood-chipper, the more it lets moral hazard metastasize. It shouldn’t hesitate to cut its losses if AIG’s prospects dim.
The end-of-bailouts rhetoric looks even more ridiculous when you consider that both the House and Senate bills explicitly exclude Fannie Mae and Freddie Mac from the Treasury’s new powers. They’ve drawn $145 billion already from their unlimited credit line from the government. And it’s not just Fannie and Freddie that are being continuously rescued when the government absorbs their losses. It’s the whole U.S. banking system.
Between them, the two government-chartered companies guarantee more than $5 trillion of mortgages. Without those guarantees, many of the underlying loans would bounce right back onto the books of the companies that issued them, which would cause those lenders’ balance sheets to balloon, leaving a lot of them undercapitalized. The only way Fannie and Freddie can keep making good on its commitments, at a time when delinquencies are soaring, is to keep tapping the Treasury for more money.
The government has no choice, though. It can’t stop paying, because that would tank the banking system and the housing market. Unlike AIG, Fannie and Freddie bonds were sovereign debt long before the government took its 80 percent stake in the companies in 2008. The U.S. for decades had implicitly pledged that it would stand behind their obligations, even though it still keeps them off the federal balance sheet.
The real facts are sobering enough. The last thing we need is for someone of Dodd’s stature to be misleading anyone into thinking this proposal would accomplish something it’s expressly designed not to do. An end to bailouts? We can only dream.
Al Pacino Wouldn’t Need to Talk Tough
Al Pacino Wouldn’t Need to Talk Tough to BP: Margaret Carlson
Commentary by Margaret Carlson
June 17 (Bloomberg) -- A president should give no speech before its time. The one that Barack Obama delivered Tuesday night was too small for such a big problem, the Oval Office setting too august for mere updates.
Obama spoke as if we are at war, but without any discernable plan of battle. He missed a chance to call for sacrifice, whether from a new conservation corps or from his party’s senators, who at some point face a tough vote on energy legislation. Obama said he’s going to get to that “in the months ahead” -- which means after the midterm election in November.
In a choice of whether to save the planet or Blanche Lincoln, he went with the latter. Talk about wasting a crisis.
Obama, who surely would have liked to announce some breakthrough on Gulf oil spill compensation, was at the mercy of BP Plc’s timetable. News of the company’s $20 billion commitment came the day after the speech.
On the face of it, Obama couldn’t ask for a more perfect adversary. The day of his speech, oil companies called to testify before Congress said they wouldn’t have built a rig in such a shoddy manner.
Evidence of BP’s corner-cutting, to the point of intentional negligence and reckless endangerment, is everywhere. According to lawmakers, BP used six instead of the usual 21 centralizers before cementing the well, didn’t test the cement bond, chose a cheaper method to prevent gas from rising unchecked to the surface, and stinted on a backup blowout preventer -- all to “save time/money,” to borrow a phrase from one internal BP e-mail.
Press Conference Partners
And yet for weeks, the administration has treated BP as an equal, a partner at press conferences, rather than a breaker of laws, scores of them. Eliot Ness didn’t share a podium with Al Capone.
A strong leader bides his time, keeps the culprits at arm’s length and acts like the boss. And he doesn’t invite them into the White House. Meetings with BP should be held in a windowless conference room at the Justice Department. That would prevent scenes like the one yesterday, when BP executives leaving the West Wing met the press as if they were heads of state.
Obama’s Oval Office address was the latest in a series of actions that seem overly reactive to the drumbeat that he’s not showing enough fury. The public, which likes to see its leaders in control, is clamoring for no such thing.
Just because the press likes nothing more than an angry outburst -- I’m guilty, too -- doesn’t mean the president should oblige. Gary Cooper, Clint Eastwood, Al Pacino as Michael Corleone -- they shared a cool stare and a steady voice. They meant business and didn’t have much to say.
Kicked Himself
After days of being told he was insufficiently upset, Obama flashed some temper when NBC’s Matt Lauer prodded him about butt-kicking and the president was ready to play a tough guy on TV. Score one for the press, and take one away from the president, who was diminished by it.
For weeks, Obama’s been making up for listening to aides determined to distance him from the oil spill’s political spillover. He’s been overcompensating ever since. Stop him before he wastes valuable presidential time on another trip to the Gulf to hug a local resident. Once is enough.
Obama didn’t use the speech to fix what’s under his control. He could have told the country that, contrary to the reigning Republican ethos, government -- sometimes big government -- is needed to regulate the BPs of the world. Otherwise, corporations run amuck and cause harm that can never be fixed.
He also could have declared he will replace Interior Secretary Ken Salazar for not doing a heck of a job.
Excuse You
Since 2008, when Congress got a report from Interior’s inspector general, we’ve known that the Minerals Management Service was beset by financial self-dealing, cocaine use, gifts and sex. While Salazar didn’t create the corruption -- three decades of regulatory coziness took care of that -- he had 18 months to fix it, and didn’t, other than adopting some new ethics guidelines. In his speech, Obama basically excused Salazar for not knowing “the problem there ran much deeper.”
The speech shows that this White House is fighting the last one’s mistakes. It wasn’t George W. Bush’s infamous flight over Hurricane Katrina damage that ruined his presidency. It was his failure to do what he could to relieve the human suffering visible on the ground.
People don’t want an emotional president. They want the president to bring the power of the government to bear on the bad guys, alleviate the suffering of people and the planet and punish those who could have done something but didn’t.
Do that, and there’s no need to give a speech.
Obama May Get Boost From Pressing BP
Obama May Get Boost From Pressing BP to Set Up Fund (Update1)
By Nicholas Johnston and Hans Nichols
June 17 (Bloomberg) -- President Barack Obama scored a political victory by pressuring BP Plc to commit $20 billion for damages from an environmental disaster that’s weighing on his presidency as the company struggles to contain thousands of barrels of oil flowing into the Gulf of Mexico each day.
BP’s agreement yesterday to establish the compensation fund, and the London-based oil company’s decision to temporarily suspend dividends as Gulf residents and businesses begin filing claims, gave Obama an opportunity to look like he was directing events instead of reacting to them, said Allan Lichtman, a political history professor at American University in Washington.
“Obama has been behind the curve on the oil spill since its onset,” Lichtman said. “Finally, he may be catching up.”
Even some critics who praised Obama for getting BP’s commitment to multibillion-dollar damage payments say the president’s longer-term outlook depends on how soon BP controls the oil spill and how much crude tars Gulf beaches and marshes.
“You have to give the president credit where credit is due,” Florida Republican Senator George Lemieux said on CNN, lauding the BP escrow account. “He did a good job on that. Now what we have to do is really focus on keeping the oil from coming ashore in the first place.”
BP Chairman Carl-Henric Svanberg, summoned to the White House for meetings yesterday that included a private 25-minute Oval Office session with Obama, apologized for the biggest oil spill in U.S. history and promised the company would take responsibility.
Words ‘Not Enough’
“We made it clear to the president that words are not enough,” Svanberg said. “We understand that we will and we should be judged by our actions.”
BP jumped as much 9.7 percent, the biggest intraday gain since November 2008, and traded at 361.25 pence as of 10:22 a.m. in London.
The company’s American depositary receipts were up 45 cents to $31.85 in New York trading, after earlier touching $33. The shares are down 47 percent since April 20 in what Fadel Gheit, a New York-based analyst at Oppenheimer & Co., called “panic selling.” Gheit upgraded BP to “outperform” from “market perform” on May 27.
BP’s $750 million of 1.55 percent notes due 2011 rose 2.25 cents to 94.5 cents on the dollar, after tumbling as low as 87.9 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The cost of protecting BP’s debt against default for one year fell 461.5 basis points to 535.5, after climbing as high as 1,075 yesterday, CMA DataVision prices show.
‘Calming Effect’
BP’s Chief Financial Officer Byron Grote said yesterday in a conference call with investors and analysts that the company’s actions on the dividend and escrow account likely “will create a calming effect” on debt holders.
Obama faces a challenge calming a public distressed by daily reports about the continuing environmental crisis, said Charlie Cook, publisher of the independent Cook Political Report in Washington. A USA Today/Gallup Poll released June 15 showed 71 percent of adults polled said Obama hasn’t been tough enough on BP.
“This is a long slog for the president,” Cook said. White House officials “just have to grit their teeth, try their best and tough it out,” he said. “There is no single thing they can say or do to fix this horrible problem, both the spill and the ensuing political problems.”
BP’s Obligations
After a four-hour White House meeting between administration officials and BP executives, Obama said the escrow fund “will provide substantial assurance” that claims will be paid. “The people of the Gulf have my commitment that BP will meet its obligations to them,” Obama said.
Obama’s top energy and climate adviser, Carol Browner, said the fund was a “White House-driven agreement” that doesn’t cap BP’s liability and won’t prevent individuals and businesses from suing the company.
It will be administered by lawyer Kenneth Feinberg, 64, who has overseen executive pay at companies that received federal bailouts and administered the compensation fund for victims of the Sept. 11 terrorist attacks.
Obama has traveled to the Gulf four times since the spill started. After returning from Mississippi, Alabama and Florida on June 15, he said BP would be held responsible for “recklessness” in the Gulf.
BP has spent about $1.6 billion on containing and cleaning up the spill so far. The company’s spending for cleanup and liabilities may reach $40 billion, Standard Chartered Plc estimated last week.
The government has increased its estimate of the oil leak to 35,000 to 60,000 barrels a day.
Exxon Valdez
Based on the low end of the estimate, BP well may have leaked 1.99 million barrels so far, exceeding 262,000 barrels spilled by the Exxon Valdez in 1989, according to statistics from the American Petroleum Institute.
The accident prompted Obama to declare a six-month moratorium on deepwater offshore oil drilling and, under the agreement reached yesterday, BP will contribute $100 million to a fund for oil workers who lost jobs because of the action.
Obama said he’s confident the company will be able to pay claims.
“BP is a strong and viable company, and it is in all of our interests that it remain so,” he said.
Jobless Claims in U.S. Unexpectedly Rose
Jobless Claims in U.S. Unexpectedly Rose Last Week (Update1)
By Courtney Schlisserman
June 17 (Bloomberg) -- The number of Americans seeking jobless benefits last week unexpectedly rose to a one-month high, indicating firings are staying elevated even as the U.S. economy grows.
Initial jobless claims increased by 12,000 to 472,000 in the week ended June 12, Labor Department figures showed today in Washington. Economists surveyed by Bloomberg News projected 450,000 claims, according to the median forecast. The number of people receiving unemployment insurance rose, while those getting extended benefits dropped.
Some companies are trimming payrolls to boost or maintain profits at the same time overall employment has grown each month this year. The figures show that bigger job gains needed to spur consumer spending, which accounts for 70 percent of the economy, may be slow in developing, keeping the unemployment rate close to 10 percent.
“The labor market is not improving,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. “If you really are going to have a sustainable recovery, you need the labor market to improve.”
Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates. Today’s report coincides with the week the government surveys companies for its monthly employment report.
Consumer Prices
Separate figures from the Labor Department showed consumer prices fell in May for a second month. The consumer price index dropped 0.2 percent, the biggest decrease since December 2008 and reflecting cheaper gasoline.
Stock-index futures pared gains after the report. The contract on the Standard & Poor’s 500 Index rose 0.1 percent to 1,110.7 at 8:42 a.m. in New York. The yield on the 10-year Treasury note dropped to 3.25 percent from 3.26 late yesterday.
Economists forecast jobless applications would fall from an initially reported 456,000 for the prior week, according to the median of 42 projections in a Bloomberg survey. Estimates ranged from 440,000 to 475,000.
States reporting higher initial claims last week said there were cutbacks in the manufacturing, construction and educational services industries, a Labor Department spokesman said. Claims tend to rise following a holiday and seasonal factors anticipated a smaller gain than what occurred, the spokesman said.
Four-Week Average
The four-week moving average, a less volatile measure than the weekly figures, fell to 463,500 last week from 464,000, today’s report showed.
The number of people continuing to receive jobless benefits increased by 88,000 in the week ended June 5 to 4.57 million. They were forecast to rise to 4.5 million after slumping 234,000 the previous week.
The continuing claims figure does not include the number of Americans receiving extended or emergency benefits under federal programs. Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 169,000 to 5.22 million in the week ended May 29.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, rose to 3.6 percent in the week ended June 5 from 3.5 percent.
States Reporting
Thirty-eight states and territories reported a decrease in claims, while 15 reported an increase. These data are also reported with a one-week lag.
Claims around 450,000 are consistent with private companies adding about 100,000 jobs a month, JPMorgan Chase & Co. chief economist Bruce Kasman said in a note to clients before today’s report. That is fewer than the 116,000 a month average growth in the five years to December 2007, when the recession began.
Initial claims would have to average 425,000 to 430,000 for private payrolls to rise by the 175,000 a month that JPMorgan economists are forecasting for the second half of the year, Kasman said.
Dot Hill Systems Corp., a Longmont, Colorado-based software maker, said June 15 it will eliminate about 10 percent of its global workforce and also cut the annual base salaries of its vice president and executive management teams by the same amount. Other employees face a potential 5 percent reduction in annual base pay.
BP Rebounds on Agreement
BP Rebounds on Agreement to Phase in Oil Spill Fund Payments
By Eduard Gismatullin
June 17 (Bloomberg) -- BP Plc rebounded the most in 19 months and the cost of insuring the company against default fell after an agreement to phase in payments to a $20 billion fund to compensate victims of the worst oil spill in U.S. history.
BP scrapped dividends and pledged asset sales yesterday to meet President Barack Obama’s demand to set up the fund in response to the Gulf of Mexico oil spill. Its shares have slumped 45 percent since the Deepwater Horizon rig exploded on April 20, wiping about 55 billion pounds ($80 billion) off the London-based company’s value.
“It brings some clarity, but obviously we still don’t know whether $20 billion will be enough or whether the company will need more,” said Colin Morton, who helps manage about $1.7 billion at Rensburg Fund Management in Leeds, England. “If this is the final cost, it’s more than adequately reflected in the price.”
Chief Executive Officer Tony Hayward, who will testify before Congress today, said in prepared remarks that he was “deeply sorry” for the explosion and spill. BP’s Chairman Carl-Henric Svanberg agreed on payments over four years to finance an independent body that will settle claims resulting from the damaged oil well after a meeting with Obama at the White House yesterday.
BP jumped as much as 9.7 percent, the biggest intraday gain since November 2008, and traded at 362.20 pence as of 3:13 p.m. in London. The shares fell 1.5 percent yesterday to 337 pence, the lowest since April 1997.
Halting the dividend, reducing investments in drilling and selling oil and gas fields will do enough to ensure the company’s financial stability, Chief Financial Officer Byron Grote said yesterday.
Provides Comfort
The deal to phase payments into the fund “allows us to stage our injections in a way that I hope now provides comfort to debt and equity markets,” Grote said.
BP had faced increased pressure from U.S. lawmakers to settle damage claims and suspend the dividend in the run-up to yesterday’s meeting at the White House.
“A line has been drawn,” said Manoj Ladwa, a London-based senior trader at ETX Capital. “It’s likely that we are going to see less of the aggressive rhetoric that we saw out of the U.S. administration going forward.”
The agreement to cut three quarters of dividend payments and set up the fund removed BP from a four-hour stint among companies the bond market labels distressed.
Bonds, Swaps
BP’s bonds rose, with the spread on its 1 billion euros of 4.5 percent notes due November 2012 narrowing to 555 basis points from 696 basis points yesterday, according to HSBC Holdings Plc prices on Bloomberg. The yield premium on the 500 million pounds of 4 percent bonds due December 2014 was at 410 basis points, from 411 basis points.
The company’s bonds were the most active in U.S. trading yesterday. BP’s $750 million of 1.55 percent notes maturing in 2011 increased 2.25 cents to 94.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The cost of protecting BP’s debt against default for one year fell 461.5 basis points to 535.5, after climbing as high as 1,075 yesterday, CMA DataVision prices show.
BP’s American depositary receipts reversed losses after the White House deal was announced to close up 45 cents, or 1.4 percent, at $31.85 in New York yesterday.
“A more normal political atmosphere and measures to address debt concerns will emphasize that the shares have sold off too far,” Jon Rigby, an analyst at UBS AG, wrote in a note to clients. UBS cut its price target on the shares by 10 percent to 525 pence.
Low Point
BP will raise $10 billion this year selling assets, Grote said in his call with investors, concentrating on oil and gas fields that aren’t central to the company’s business.
Share gains may be limited after Obama said the fund won’t cap BP’s liability for cleanup costs or supersede the rights of individuals or states to sue the company.
“There seems to be some relief in the United States, but I’m not so sure about some investors, particularly the income funds, will be quite so sanguine about this,” said Peter Hutton, a London-based analyst at NCB Stockbrokers Ltd.
BP has spent about $1.6 billion on containing and cleaning up the spill so far. The company’s spending for cleanup and liabilities may reach $40 billion, Standard Chartered Plc estimated last week.
Increased Estimate
The U.S. government this week increased its estimate of the oil leak to 35,000 to 60,000 barrels a day.
“Even if the final cost totals $40 billion and BP is liable for 100 percent, the shares look oversold,” Richard Griffith, a London-based analyst at Evolution Securities Ltd., wrote in a report.
Still, he urged caution about buying the shares until after the so-called relief wells BP is drilling to plug the bottom of the damaged well are completed in August.
BP is three to four weeks away from a close approach to its leaking well with emergency drilling that will eventually halt the oil spill, U.S. Coast Guard Admiral Thad Allen told reporters on a conference call today.
Manufacturing Expansion in Philadelphia Area Slows
Manufacturing Expansion in Philadelphia Area Slows (Update1)
By Bob Willis
June 17 (Bloomberg) -- Manufacturing in the Philadelphia region expanded in June at a slower rate than forecast as a measure of factory employment contracted for the first time in seven months.
The Federal Reserve Bank of Philadelphia’s general economic index dropped to 8, a 10-month low, from 21.4 in May. Readings above zero signal growth in the regional gauge, which covers eastern Pennsylvania, southern New Jersey and Delaware. Economists forecast the measure would fall to 20, according to the median projection in a Bloomberg News survey.
Manufacturing, which led the economy out of the worst recession since the 1930s, is easing into a more sustainable pace of growth as the need to replenish inventories becomes less pressing. The figures stand in contrast to a report this week showing New York factories expanded at a faster rate.
“Manufacturing still seems to be in a modest expansion,” said David Sloan, a senior economist at 4Cast Inc. in New York. His forecast of 10 was the lowest in the Bloomberg survey. “The fact that employment dipped suggests manufacturing growth is not that strong.”
Stocks fell after the report, with the Standard & Poor’s 500 Index dropping 0.7 percent to 1,107.29 at 10:27 a.m. in New York. The yield on the 10-year Treasury note declined to 3.2 percent from 3.26 percent late yesterday.
Jobless Claims
The figures follow a report from the Labor Department today that showed consumer prices fell in May for a second month. The Labor Department also said jobless claims rose by 12,000 to 472,000 last week, a sign companies are still trimming payrolls. Economists surveyed by Bloomberg projected 450,000 new claims, according to the median forecast.
Estimates in the survey of 58 economists for the Philadelphia Fed index ranged from 10 to 24.
The Fed bank’s shipments gauge dropped to 14.2 from 15.8 in May. The new orders measure rose to 9 from 6.1.
The employment index declined to minus 1.5 from 3.2 in April. Factories nationally have added 126,000 workers to their payrolls this year, according to Labor Department data.
The Philadelphia Fed’s index of prices paid decreased to 10 from 35.5 in May. Prices received declined to minus 6.5 from 3.5.
The inventory index rose to 4.6 from minus 7.9, signaling factories are adding to stockpiles.
The overall Philadelphia Fed index isn’t composed of the individual measures, so some economists consider it a gauge of sentiment among manufacturers.
New York Manufacturing
Figures from the New York Fed two days ago showed factories in that region expanded in June at a faster rate than the previous month. The so-called Empire State Index rose to 19.6 from 19.1.
Economists monitor the New York and Philadelphia Fed factory reports for clues about the Institute for Supply Management figures on U.S. manufacturing during the month. That report will be released July 1.
The ISM’s manufacturing gauge fell in May from the previous month’s level, which was the highest in almost six years.
Trade is helping spearhead the factory rebound. U.S. exports have risen 10 of the 12 months through April, boosted by surging growth in emerging Asian and Latin American countries, according to figures from the Commerce Department.
Wilmington, Delaware-based DuPont forecasts its sales in emerging markets will grow in two years to about $12 billion, or 35 percent of its total sales, from about 30 percent last year, Chief Financial Officer Nicholas Fanandakis said June 8 at an industry conference in New York.
DuPont Sales
“As you continue to see the growth in population and consumerism, the increase in the middle class, the need for products and services increases, and DuPont is extremely well positioned to take advantage of that growth opportunity” in such countries ranging from China to Brazil, he said.
The U.S. grew at a 3 percent annual rate in the first quarter, helped by the biggest increase in consumer spending in three years and a 13 percent rise in business investment in new equipment, the Commerce Department said last month.
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