After years of being underappreciated by Wall Street, financial analysis’s are predicting ludicrous growth rates for Elon Musk’s electric car company.
Tesla Motors is back in the news again.
In the past year, the company has been on a continuous roll. In August, it opened an assembly plant in the Netherlands, and it now as has a functional cross-country supercharger network in the U.S. In the fourth quarter, it sold about 6,900 cars, more than expected. It ended 2013 with 22,477 cars sold, worth $2.5 billion, and a projection that it would “deliver over 35,000 Model S vehicles in 2014, representing a 55+% increase over 2013.”
A staff member cleans the Tesla Motors Inc. logo on the company's Model S electric vehicle displayed at the 43rd Tokyo Motor Show 2013 in Tokyo, Japan, on Thursday, Nov. 21, 2013. (Tomohiro Ohsumi/Bloomberg via Getty )
As the chart below shows, the company’s stock has soared more than seven-fold, from about $35 in late February 2013 to about $250 this week, giving it a market capitalization of $31.1 billion, compared with $58 billion for General Motors and about $60 billion for Ford.
This week, investors were, um, charged up, by two simultaneous bold strokes. On Monday, February 26 Tesla announced it would capitalize on its momentum by selling $1.6 billion in convertible notes (a sort of debt/stock hybrid). Even better, it would use the funds to construct a futuristic $5 billion battery plant. The Gigafactory would be built somewhere in the southwestern U.S., and could employ up to 6,500 people. Taking a page from Henry Ford’s book, Tesla founder Elon Musk decided he can cut costs and gain greater control through vertical integration. Tesla has said that its ability to produce cars has been constrained by a lack of batteries from suppliers. By building its own power sources – and by building them in huge volumes – Tesla can bring the price of these vital components down sharply. What’s more, as an optimistic Morgan Stanley analyst noted, the batteries produced in the factory could have applications in related fields like energy storage and utilities.
The next day, Tesla’s stock shot up another 31 points, or 14 percent.
I’m far from a Tesla hater. I’ve championed the company as an archetype of American-style innovation, self-belief, and swagger. Founder Elon Musk has been brilliant not just in devising a new product, but in negotiating complex systems to maximum advantage – taking U.S. Energy Department loans (and then loudly paying them back years ahead of schedule), reaping significant revenues by selling zero-emission production certificates to other carmakers, and funding production by taking big deposits from customers well in advance of delivery. Tesla’s success has forced other carmakers to up their electrification game in ways that will benefit consumers and the environment.
But Tesla is getting bubbly. And we could be entering dangerous territory.
Cable companies can’t sign up any more people. In fact, they’re losing them to the Internet. So the only way to survive is to monopolize more of the market and up-sell subscribers just as Comcast-Time Warner Cable will do.
On Wednesday, Comcast struck a $45-billion deal to acquire Time Warner Cable. If approved, the deal would represent a giant step toward greater consolidation: Comcast has 22 million subscribers and Time Warner has 11 million. To allay anti-trust concerns, Comcast said it would divest systems with about 3 million subscribers, leaving the merged company with a combined 30 million customers—well over half of the nation’s cable television subscribers.
The deal is plainly good for shareholders of Time Warner. Time Warner’s stock was trading at about $80 two years ago, so the $159-per-share offer represents a nice double in 24 months. Comcast’s shareholders pushed the company’s shares down a few percentage points, weary of the larger amount of debt the company will take on.
But is this a good deal for consumers? Well, maybe.
The companies, of course, say this is a win-win for customers of both Time Warner and Comcast. Why? Well, it’s not mentioned in the press release, but consumers generally feel that Comcast has better customer service than Time Warner Cable.
What’s more, the companies say Time Warner Cable customers will now get access to all the awesome whiz-bang stuff that Comcast already offers its customers. With a few software updates, existing Time Warner Cable set-top boxes will get new features like “cloud-based X1 Entertainment Operating System, plus 50,000 video on demand choices on television, 300,000 plus streaming choices on XfinityTV.com, Xfinity TV mobile apps that offer 35 live streaming channels plus the ability to download to watch offline later, and the newly launched X1 cloud DVR.” For their part, Comcast customers will be able to get some of the perks of Time Warner Cable membership, including features like: “StartOver, which allows customers to restart a live program in progress to the beginning, and LookBack, which allows customers to watch programs up to three days after they air live, all without a DVR.” Comcast subscribers will also be able to gain access to the 30,000 Wi-Fi hotspots Time Warner Cable has set up, mostly in Los Angeles and New York.
So far, so good.
But this deal won’t really change the fundamental customer experience of Comcast or Time Warner Cable customers. This isn’t like Burger King buying McDonald’s, or Lowe’s buying Home Depot, in an effort to take out a competitor and carve out market share in a particular area. In essence, it’s one giant company that had a geographical monopoly on cable service in some areas of the country merging with another giant company that had a geographical monopoly on cable services in other areas of the country.
Cable companies are like utilities. The firms were granted geographic monopolies, or licenses, in exchange for making the huge, multi-year investments to build out infrastructure and for guaranteeing to offer service in every nook and cranny of a region, no matter how economically inefficient it might be. That’s how the model worked for other utilities—water, electricity, and telephone service.
President Obama’s speech won’t change the country’s sour mood about jobs and the deficit, but America is coming back faster and stronger than anyone expected.
President Obama took the podium for last night’s State of the Union Address at a time when mood of the country is sour—toward the president and toward the economy.
An objective look at the data and the record of the last several years suggests that this shouldn’t be the case.
Historically speaking, presidents get credit for the positive economic news that happens on their watch and get blame for the bad things that happen—even when they are not entirely at fault. The first George Bush had the misfortune to have a shallow recession and slow recovery come in the second half of his term. Bill Clinton had the phenomenal luck to preside over a period of economic nirvana—the end of the Cold War, the entry of China into the global trading system, the internet and telecom boom—and leave just in time.
Obama’s timing was reasonably good. The recession had started in early 2008 and the financial crisis came just a few weeks before the election. But the worst of the economic downdraft came in his first six months of office.
Things started to turn around rather quickly. I’ve been arguing for years that America is coming back better, stronger, and faster than many people anticipated, and than many of its peers. And it’s mostly happening. The stock market has gone nuts, more than doubling since its March 2009 nadir. Gross Domestic Product surpassed its late 2007 peak in 2011 and hasn’t looked back. (Britain’s economy has yet to return to its pre-recession size.) The U.S. economy is now closing out its 55th straight month of growth. Monthly exports—an indication of competitiveness and the utility of what we do—are at a record level and are up nearly 60 percent from the April 2009 bottom.
Virtually all the bailout money to financial institutions and car companies was paid back. GM and Chrysler are thriving, and the U.S. financial system is on solid footing, as evidenced by the pervasive decline in financial failure. The economy has added jobs for 39 straight months—beating the streak of 37 months in which the economy added jobs in the George W. Bush years—with the private sector adding a cumulative 8.2 million jobs since February 2010. The deficit, which peaked at an unimaginable $1.4 trillion in fiscal 2010, is shriveling by the day. It came in at $680 billion in fiscal year 2013, and is down about 40 percent through the first three months of fiscal year 2014. This is truly the Golden Age of Deficit Reduction.
Oh, and two more important, previously unimaginable developments have materialized in the past couple of years—thanks in no small part to Obama administration policies. Health care cost inflation is falling for the first time in ages. And housing, while still a bit wobbly, is definitively back.
All the elements of a feel-good story are here: aggressive policies that worked, the natural regenerative forces of the U.S. economy coming to the fore, competing successfully in international markets, and a continuing revolution in the energy sector. Many things that were completely FUBAR in 2008 and 2009 are fixed.
If you’re a professional who needs to communicate without a paper trail, Confide is for you—at least until it gets hacked or bought by a big, privacy-invading tech firm.
Confide, the disappearing-messaging app for grownups that was tabbed as one of the The Daily Beast’s hot apps for the week, has come too late for many professionals. But if you want to rag on co-workers, engage in political machinations, and swap tips about hot stocks without having to worry so much about the consequences, it’s right on time.
The media is full of stories of careers and lives laid waste by indiscreet texts, emails, and other digital communications. The New Jersey George Washington Bridge scandal reached critical mass only when infelicitous emails and texts between Governor Chris Christie’s chief of staff, Bridget Kelly, to political operative David Wildstein, and others were subpoenaed by the state legislature and leaked to the press. “Time for some traffic problems in Fort Lee,” Kelly infamously wrote to Wildstein. Her career—and possibly, Chris Christie’s presidential ambitions—has been derailed.
Meanwhile, in lower Manhattan, former SAC Capital manager Matthew Martoma is on trial for insider trading in drug-company stocks. Preet Bharara, the U.S. Attorney for the Southern District of New York has run up an impressive run of insider-trading convictions—77, with no losses—largely because prosecutors have been able to mine troves of emails, texts, instant messaging threads and other forms of digital communication. My favorite was the instant messaging thread between two easily busted jokers, which included gems like: “Jesus don’t tell anyone else,” and “I don’t want to go to jail.”
With electronic communication, in all its forms, having replaced face-to-face communications, and with digital technology having replaced analogue technology, our lives are documented and stored. Every off-the-cuff utterance, each whit of conspiracy, every misspoken phrase is laid down in bits and bytes, captured, stored, and easily accessed by employers, the government, authorities, and, ultimately, the public. On trading floors, every conversation is taped, and employees are often prohibited from using personal phones or emails—the better to ensure compliance.
That’s good news for law enforcement, but bad news for people trying to do things sub rosa, or even just confidentially.
This concern has led, in some quarters, to a revival of an ancient communications technology: face-to-face conversation. For most middle-aged big-shots, the acronym LDL is a measure of cholesterol. For people in sensitive workplaces, it means “let’s discuss live,” as in “Let’s not talk about this thing in a way that could create a paper trail that could be awkward for us down the road.” In 2007, when Goldman Sachs was devising strategies to get rid of junky mortgages, one trader cut the electronic conversation short by suggesting “LDL.”
But DL’ing is a really unwieldy way of doing business in this 24/7, hyperconnected, global economy. Imagine every communication with a co-worker had to take place face-to-face. It’s enormously inefficient.
For this reason, Snapchat caught on like wildfire. The idea, and promise, of the popular app is that the information you send—a photo, and anything you want to write on it—disappears after 10 seconds or so. Teens who had been embarassed by Facebook postings and texts, easily captured and shared an infinitum, quickly glommed onto it. Snapchat offers all the exhibitionism and daring without the threat of public disclosure.
With only 74K new jobs and the unemployment rate at its lowest since 2008, the December monthly jobs report dumped a steaming pile of caution on the red carpet of economic optimism.
The last couple months have seen a surge of economic optimism. The Federal Reserve decided the economy is strong enough to start tapering its bond purchases. The economy grew at a 4.1 percent annual rate in the third quarter of 2013 and the fourth quarter of 2013 is looking pretty good. The jobs market has been picking up steam, adding an average of more than 200,000 positions over the last four months. The deficit is shrinking rapidly.
But Friday morning, the monthly jobs report dumped a steaming pile of caution on the carpet. And while the headline jobless rate fell to 6.7 percent from 7 percent in November, its lowest level since October 2008, there was virtually no good news for the jobs market in this report.
In general, analysts expected that the economy would add somewhere between 200,000 and 250,000 payroll jobs in the month. Instead, BLS reported that the gain was a mere 74,000— the lowest single month total and the worst single-month performance since January 2011. Given the vast base on which we’re working—137 million— the difference between a gain of 74,000 and the loss of 74,000 is an infinitesimal statistical difference.
It wasn’t that many sectors cut their payrolls in December. It’s just that they didn’t add too many, despite steady growth and despite a large number of job openings. And those that did add jobs were primarily in low-wage sectors. Retail added 55,000 positions, and professional and business services added 19,000 jobs. Construction, which has been booming, cut 16,000 jobs in December, and health care, which, in recent years, has reliably added a large number of jobs each year, cut 6,000 positions. Most bizarrely, the motion picture and sound recording industry slashed 14,000 jobs—about four percent of its total employment in the month. Oh, and the government—public sector—continued to cut jobs, even as the budget picture at the state and local level brightens. Between them, state, local and federal governments reduced employment by 13,000 in December. Together, they employ 1.14 million fewer people than they did in May 2010.
So how is it that the unemployment rate fell? The payroll jobs number is compiled from a survey of companies and institutions. They tell BLS how many people they employ and the agency extrapolates a total for the whole economy. The unemployment rate is compiled from the household survey, in which BLS calls up a bunch of people and asks them about their employment status. The unemployment rate is compiled by calculating the percentage of people who say they are looking for a job but don’t have one as a percentage of the total number of people who say they are in the workforce.
So, what happened in December? The work force fell by 347,000 people, and is now 548,000 smaller than it was in December 2012. Now, it could be that a certain percentage of aging baby boomers are simply dropping out and retiring. But, in theory, a growing economy should pull people into the labor force, not push them out. Meanwhile, in December, the number of people who were working rose 143,000 from November—after all, jobs are being created. This combination of modest growth in the ranks of the employed and a sharp decline in the labor force made the unemployment rate fall sharply, from 7 percent to 6.7 percent.
What does it mean? The news wasn’t entirely awful. The figure will be revised in each of the next two months, and the tendency over the past year has been for BLS to revise the number upwards. For example, this month, BLS revised the October jobs gain upwards, from 203,000 to 241,000. And the long-term trend remains intact. “Though December’s job growth was less than expected, we continue to focus on the longer-term trend in the economy— 2.2 million private sector jobs added and a 1.2 percentage point decline in the unemployment rate over the course of 2013,” said Jason Furman, Chairman of the Council of Economic Advisers.
Furman’s right. But here’s the problem. If this weakness persists, then it casts doubt on the conventional wisdom surrounding a host of issues. The stock market has been buoyant, and interest rates have been rising in part because of expectations of higher economic growth. There was a widespread sense that, having weathered the shutdown and tax increases of 2013, American businesses are shrugging off some of their fear and opening their pocketbooks to hire some of the long-term unemployed. A jobs report like this makes people think otherwise.
No thanks to Congress, the minimum wage in several states and cities will rise in 2014. That will help the working poor and lift wages for even more Americans.
Here’s my bold prediction for 2014: lots of Americans will finally get wage increases.
The obsession of large companies with low wages—even amid a record stock market, record profits, an record amounts of cash on their balance sheets—has been one of the more unsavory and frustrating aspects of the current economic expansion. Lots of businesses can easily afford to pay more. But they don’t—because they don’t have to, because the labor market is weak, because they’re obsessed with boosting profits, because labor unions are almost non-existent, and because societal and cultural norms have changed significantly. For many companies, including our biggest employers (Walmart, McDonald’s), paying decent wages simply isn’t part of their mission, or goal, or self-image.
Ultimately, as I’ve argued, the refusal of profitable companies to pay higher wages—and to refuse to even aspire to do so, or to argue that crappy wages are in fact a positive good—is self-defeating. In the U.S., consumers account for about 70 percent of economic activity. For the overwhelming majority of Americans, wages are the fuel for consumption. So if employers insist on keeping a lid on pay, they’ll find that demand for their products and services is likely to be stagnant. And, indeed, this is what Walmart, McDonald’s and plenty of other firms have discovered in 2013.
The obsession with low wages is also self-defeating, because it exposes companies to the prospect of higher regulation and scrutiny. If companies won’t raise wages, and then build a business model that presumes employees will get food stamps and Medicaid to get by, they’re essentially asking for the government to act. While President Obama has been pushing for a higher minimum wage, the Republican majority in the House has essentially ensured that there will be no action on a higher national minimum wage.
But across the country, states, cities, and towns have been acting. And starting in 2014, the minimum wage will rise in a big chunk of America—in 13 states and four cities, to be exact. Let’s review. In New Jersey (population 8.9 million), a constitutional amendment approved in November bumps the stage minimum wage up to $8.25 an hour and stipulates that it should rise every wear with inflation. In New York State (population 19.95 million), the minimum wage is rising to $8.00. In Connecticut (population 3.6 million), the minimum wage is set to rise from $8.25 to $8.70 per hour. In Rhode Island (population 1 million), the minimum wage is going up to $8.00. In July, California (population 38 million) will increase the minimum wage to $9.00
In nine other states, where the minimum wage is indexed to inflation or the cost of living, the floor under salaries will also be rising by small amounts. These include places where lots of Americans live, like Florida, Ohio, Colorado, Washington, and Arizona.
Now, only a small minority of the American workforce works for the minimum wage. But these legislative acts are nonetheless important. They will force companies to pay some existing employees more—often significantly more. They’ll push companies to raise the wages of those earning just above the current minimum wage. Most importantly, they set a higher standard for businesses. In effect, these states are telling companies, large and small, that if they want to operate in certain very large jurisdictions, they will have to design their operations in such a way that allows for slightly more decent compensation.
The financial failures of the Great Recession—bank busts, foreclosures, and bankruptcies—shrank dramatically this year. And the success will feed on itself.
In 2013, the U.S. economy managed not just to survive a series of shocks—the fiscal cliff, the sequester, tax increases, the government shutdown, the advent of the Affordable Care Act—but to power through them. As we speak, the U.S. is closing out its 54th month of growth, and the headline growth numbers are as good as they’ve been in years. The stock market is at a record high.
This confluence of events remains something of a mystery. The U.S. is a consumer-driven economy, but consumer confidence remains at recessionary levels and wages have hardly budged. Companies are hoarding cash. The Federal Reserve has continued to support the economy with unprecedented levels of bond-buying but with diminishing returns. And government continues to weigh on the economy.
There is one overlooked factor that can help explain the comparative buoyancy of the U.S. economy: the decline of financial failure.
Financial failure comes in many forms: the shuttering of banks, defaults on mortgages, credit-card charge-offs, corporate and personal bankruptcies, and mass lay-offs. Each is damaging as an event on its own. But, like rocks tossed into lakes, their impacts cause larger ripples. Because the American financial system piles debt upon debt, one small financial failure can lead to a larger number of financial failures. Because humans are, well, human, they tend to react to failures around them by becoming more financially conservative—even if their own livelihood isn’t in danger. Put another way, failure is pro—cylical—a company going bankrupt fires a worker, who defaults on a mortgage, which causes a sharp decline in value on a mortgage-backed security, which can help push a bank toward insolvency. And that’s part of the reason the recession of 2008-2009 was so deep and harsh. Failure begot failure.
But the forces work in the other direction. For the reasons cited above, success (or a mere decline in failure) can lead to further success (or further declines in financial failure.) And to a large degree, this was the story of 2013.
Fewer companies failed this year than in previous years. Corporate bankruptcies in the third quarter of 2013 (PDF), at 8,119, were down 12.2 percent from the third quarter of 2012. In fiscal year 2013, which ended in September, corporate filings were down 17 percent from the year before—and down 42 percent from fiscal 2009. Yes, companies continue to restructure, revamp, and rightsize, often in very public ways. Through the first 11 months, large companies publicly announced 478,428 job cuts, according to Challenger, Gray & Christmas. But that’s down 2.5 percent from the first 11 months of 2012. Overall, there was generally a lot less firing in 2013 than in 2012. As a result, the weekly pace of first-time unemployment claims declined over the course of the year. In the second half of 2013, on a seasonally adjusted basis, about 330,000 Americans experienced the trauma and psychological blow of filing for unemployment benefits each week. In the second half of 2012, about 380,000 Americans did so.
Declining separations combined with modest growth in hiring meant that the U.S.—especially the private sector—added about 2 million jobs in the first 11 months of 2013. And the fact that more people were successful at finding jobs, or holding on to jobs they already had, meant that significantly fewer consumers experienced financial failure. In fiscal 2013, personal bankruptcy filings—at 1.072 million—were down 12 percent from fiscal 2012, and off 30 percent from 2010 Americans did a much better job keeping up with their mortgages, too. In the third quarter of 2013, only 6.41 percent of all residential mortgage loans were delinquent—down from 6.99 percent in the second quarter of 2013 and down from 7.40 percent in the third quarter of 2012. Americans haven’t had this much success staying current on their mortgages since the spring of 2008. Consumers are doing even better when it comes to staying on top of their credit card debt. According to TransUnion, this summer, credit card delinquency rates fell to a 20-year low.
How did this holiday go so wrong? From Black Friday overload to ecommerce’s last-minute delivery disaster, this sure-thing shopping season was a major turnoff for customers.
This was a strange holiday shopping season. There’s disappointment among the bricks-and-mortar retailers who saw traffic fall, and even more for those last-minute online shoppers who had to explain some empty spots under the Christmas tree.
In theory, this should have been one of the best seasons in recent memory. The economy is growing rapidly. Despite tax increases and the government shutdown and sequester, consumers were buoyed by rising housing prices and an improving jobs market. A year ago, Americans were dealing with the prospect of the fiscal cliff and great uncertainty. This December, by contrast, the data flow for the final weeks of the year has been relentlessly upbeat.
But the early returns have been less than encouraging. A survey commissioned by the National Retail Federation found that the amount spent on Black Friday weekend fell 2.3 percent from 2012. According to MasterCard, which tallies actual activity at cash registers, sales for the weeks between Nov. 1 and Dec. 24 were up 2.3 percent from the year before. That’s decent, but it’s still below the increases that retail sales have been enjoying.
One likely reason for the gloomy numbers: Much of the romance, fun, and joy has been wrung out of the Christmas shopping experience. Desperate to get a head-start on the season, stores have been pushing Black Friday sales into Thanksgiving Day. The aggressive come-ons lure crowds that can turn violent and frenzied. The mood is often more dark than light, which turns some people off. Difficult weather also turns people away.
At the same time, more goods than ever are available through ecommerce, and more people who came of age on the Internet are starting to have more consuming power. With online sales growing at a 15 percent annual clip—some four times the rate of total retail sales—ecommerce is gaining market share against bricks-and-mortar sales. The convenience is pretty irresistible. For many, it’s become a point of pride to complete holiday shopping without ever having to step foot in a mall or deal with the hassle of finding a parking space in a slushy lot.
Indeed, in the last few weeks, Americans seemed to be making a point not to go to stores. According to ShopperTrak, U.S. store visits in the week ending Dec. 22 were down a stunning 21 percent from a year ago. If that number holds true, it’s possible that 2013 might mark something of a tipping point. Time was, stores that struggled in the first three quarters could rely on floods of customers in the last six weeks to help salvage the year. At some point every December, procrastinators would usually realize they needed to go get a bunch of stuff for the people on their lists—and nothing offers immediate gratification like a mall. This year, it seems that even the last-minute and impulse buyers were turning to Amazon.com and the Internet to get their late-season shopping done.
Yet just as some bricks-and-mortar retailers may have alienated customers by pushing Black Friday ever earlier, online retailers may angered just as many by edging the shopping season ever closer to Christmas.
Believe it or not, the economy is showing signs of serious growth. Will the catastrophist diehards learn to stop worrying and accept the recovery?
It’s been a bad week or so for the economic catastrophists.
Never mind that the S&P 500 is near a record high, that the economy has been expanding for 53 months, and that payrolls have risen by nearly 7.5 million since February 2010.
Many still continue to believe that disaster is right around the corner. Why? The narrative goes something like this. There’s Obamacare, which is supposed to inhibit hiring, consumption, and the general enjoyment of life. Then there’s the Federal Reserve, supposedly required by the economy’s perennial weakness to buy $85 billion of bonds a month forever, never exiting from its quantitative easing policy—which would set up a disastrous inflation. And should the Fed exit, interest rates will soar, and the stock and housing markets will crash. Consumers, hamstrung by low confidence and a weak recovery, are reluctant to spend and borrow. That inhibits consumption, which accounts for 70 percent of economic activity. Growth, which has been stuck at about 2 percent, will never accelerate. Meanwhile, Washington is incapable of doing anything except inflicting damage on the economy.
But the surprise data flow and events of the past week have gone against this narrative.
To wit. On December 12, the Census Bureau reported that retail sales rose a healthy .7 percent in November from October, and were up 4.7 percent from November 2012. So far this year, retail sales are up 4.3 percent from 2012. More people are working at slightly higher wages, and so they’ve got more fuel for consumption. Meanwhile, something else seems to have changed. Since the financial crisis, American consumers have been hacking down at their mountain of debt—through foreclosure and default, yes, but also through paying down credit cards, home equity lines, and credit cards, and by stopping themselves from taking on new debt. Generally, the amount of revolving debt (i.e. credit cards) is back to the level it was at in 2006. But this is changing. Earlier this month, the Fed reported that in October, revolving credit rose at a 7.5 percent annual rate. Americans are gingerly releveraging. (Matthew Boesler at Business Insider dubbed a chart showing this increase “the most important chart of 2013.”) That’s good news for consumption, so long as people can maintain their debts. And guess what? Debt service as a percentage of disposable income is at an extremely low level.
As for Washington, last week Congress struck a deal essentially to fund the government for two years—at higher levels of spending. The Ryan-Murray compromise, which undoes much of the sequester immediately in exchange for higher revenues over the next ten years, has a two-fold benefit. First, it means that America won’t suffer a debilitating, confidence-destroying shutdown in the near future. Second, by undoing cuts and actually boosting spending—even by only a few percentage points—government spending and investment will again become a consistent contributor to overall growth. Yes, the debt ceiling looms again early next year. But I think we all know how that is going to play out (Republicans stomping their feet, yelling, threatening, and ultimately caving.)
On Wednesday, Ben Bernanke, in his final press conference, dropped a surprise. In January, the Fed will start to scale back—taper—its bond purchases, from $85 billion per month to $75 billion. That’s a small amount, but it’s a significant first step, that, if repeated, would bring that program to a close next year. In response to the news that the Fed would be removing a crucial source of support, the markets...went nuts. Stocks soared as investors took heart from the underlying strength of the economy. Long-term bond prices floated upward, but still remain below three percent. The price of gold, a barometer of economic fear, plummeted.
Why did the Fed act? Essentially, Bernanke concluded that the underlying forces propelling the economy forward are stronger than people think. And Friday morning, we got confirmation of this hunch. The Commerce Department, in reporting its second revision of third quarter growth, revised the growth rate up from 3.6 percent to 4.1 percent. (For comparison’s sake, the first estimate of third quarter growth, released just six weeks ago, pegged the rate at a non-impressive 2.8 percent. Overall, the report presented a picture of an economy in which both consumer and business activity is rising smartly. Even government chipped in a little, adding eight basis points to the growth rate. This is the first time the quarterly growth rate has risen above four percent since the fourth quarter of 2011. The pace of fourth quarter growth is nowhere near as torrid – about 2.3 percent according to Macroeconomic Advisers.
Greg Blatt, IAC’s CEO since 2010, will lead the new Match Group housing online dating ventures and more.
IAC is reorganizing and rationalizing. Greg Blatt, who has been chief executive officer of the company since 2010, will become chairman of the newly created Match Group, which will house the firm’s online dating businesses, Tutor.com, fitness site DailyBurn, and the company’s interest in Skyllzone. (IAC is the parent company of The Daily Beast.) Match.com CEO Sam Yagan will serve as CEO of the newly constituted Match group. Search & Applications is headed by CEO Joey Levin.
Simon Dawson/Bloomberg, via Getty
The move is part of a rationalization of the many operating units of IAC into three groups: the newly formed Match Group; the search and applications business, which accounts for about 60 percent of IAC’s revenues; and media businesses, which include Vimeo, The Atavist, and The Daily Beast.
“For the last three years Greg has served as CEO of IAC and during this time our stock price has doubled and profits have increased more than 180%,” IAC Chairman Barry Diller said in a statement. “As Chairman of the Match Group, he’ll be integral in exploiting new opportunities and continuing the growth trajectory that he himself has helped pilot.”
“Businesses like Tutor.com, DailyBurn and Skyllzone all require a common set of skills that Match has deployed so effectively,” Blatt, a 10-year veteran of the company, told employees. “Basically, I’m coming into a situation that already has great leaders in place and strong business momentum.”
Recognizing that many of its businesses don’t need central oversight, IAC does not plan to name a new CEO. “Greg and I agree that a less centralized operating structure, pushing talent and decision-making closer to the businesses, is now the best way to achieve our growth objectives,” Diller said.
The Fed announced it would cut back on its economic stimulus Wednesday. The chairman’s last decision signals confidence in the economy and Washington.
Yes, things are really getting better in the U.S. economy.
That’s the conclusion of Federal Reserve Chairman Ben Bernanke and his colleagues at the Federal Open Market Committee. On Wednesday, the Fed announced it would scale back—or taper—the $85-billion-per month bond buying program by $10 billion per month. The reason? The economy is improving, and the Fed thinks the better times are here to stay.
There has been “meaningful cumulative progress in the labor market,” Bernanke said, noting that since the Fed started its bond-buying efforts the economy has added 2.9 million payroll jobs and the unemployment rate has fallen from about 8 percent to 7 percent. Meanwhile, the data flow has been generally positive—with household spending, business investment, and housing prices all moving up. And to top it off, Congress and the White House—whose tax increases, spending cuts, and brinksmanship have put a damper on economic growth—are showing signs of hugging it out. “Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing,” he said.
While this move represents a change in policy, it doesn’t mark much of a departure. The Fed will continue to purchase $75 billion worth of bonds and mortgage-backed securities per month, as part of an effort to keep long-term rates low. In addition, Bernanke said the Fed will maintain its policy of keeping short-term interest rates close to zero—at least for another year.
As part of this statement, the Fed enhanced its so-called “forward guidance,”—i.e. telling the markets what to expect in the future. In the past, the Fed had said that it would start to unwind stimulative efforts once unemployment fell below 6.5 percent. But today, Bernanke said that the Fed would maintain its zero-interest rate policy “well past the time that the unemployment rate declines below 6.5 percent” — so long as inflation remains contained. All of which means banks and companies will be able to gorge on cheap short-term money for another year or two. In its current forecast, the Fed predicts the unemployment rate will fall to between 6.3 percent and 6.6 percent in the fourth quarter of 2014.
Analysts are likely to spin this as a first move in tightening and a decrease of support for the economy. But the change is only marginal. The Fed is still intervening significantly in financial markets, and stands willing to do more if necessary. In fact, Bernanke expressed more concern than usual about the prospects of inflation being too low. “The committee is determined to avoid inflation that is too low as well as inflation that is too high.”
In other words, the Fed isn’t really putting on the brakes. It is just taking its foot off the gas pedal a tiny bit. And as Bernanke passes control of the steering wheel to Janet Yellen, it’s still going at a very rapid clip. “We intend to maintain a highly accommodative policy.” Bernanke said.
Users of the car-summoning app were steamed when nasty weather drove up prices. But that’s how things work in the real world.
Don’t hate Uber because it jacks up prices.
The car-summoning service came in for some criticism over the weekend. Users know that at times of high demand—rush hour, or when it’s raining—prices can easily double during a “surge.” It’s a reflection of supply and demand. But over the weekend—a cold, holiday-season weekend when it was snowing, sleeting, and generally unpleasant to be outside—the surge prices rose to up to 7 and 8 times the usual. Many users cried foul.
Cem Ozdel/Anadolu Agency, via Getty
They shouldn’t. This is how things work.
In many markets, it is completely accepted that prices rise at times of peak demand—especially when supply is relatively limited. This phenomenon is most pronounced in transport. Ride the train at 8:00 a.m. and you pay a peak price. A few hours later, riders pay a lower off-peak price. It can cost $800 to fly from New York to Florida and back in the last week of December, but only $250 in the middle of August. In the Caribbean, resort prices tend to drop in April or May. On Valentine’s Day, restaurants tend to jack up menu prices, or force people into expensive fixed-price dinners. It is even more pronounced with electricity, where utilities and power generators have expensive plants standing by that are turned on only when demand spikes. On very hot days, the peak price can easily double or triple the usual price.
Before Uber, it worked the same way with car services. In Manhattan, when you couldn’t find a taxi, you could try to hail a moonlighting car-service driver or gypsy cab and negotiate a fare. At 5:00 p.m. on a cold, rainy day, the price demanded would inevitably be higher than it would be at 2:00 p.m. on a nice day.
Now, I find the surge pricing to be one of Uber’s annoying attributes. The few times I’ve tried to use the service—generally around rush hour, when it was raining, in a part of town without a nearby subway stop—surge pricing has been in effect. And I always recoiled. Unwilling to pay $25 or $35 for what is usually a $12 cab ride, I’d take my chances with a taxi, or hop on the bus, or run to the subway station, or use Citibike. Sure, I’d be less comfortable and perhaps get wet. But at that moment in time, I didn’t value the service Uber was offering sufficiently to pay for it.
But think about the other side of the Uber equation: the drivers.
Bad news HBO, Walmart, and the NFL: Opting out is now standard practice for a generation of millennials. Must-have TV channels are out, and cheap work-arounds are in.
America’s economy and culture are defined in large measure by business and social phenomena that have exerted a huge amount of peer pressure for people to opt in. Consider football, the leading American spectator sport. Or Black Friday, the leading American consumer bloodsport. Or Facebook, the leading American social network. Sure, there are always outliers and rebels who stand on the sidelines: the Commies who argue against consumption, the nerds who prefer programming to football. But basically, these entities have generally occupied a rare and coveted commercial space. Those who didn’t participate were somehow out of it, not cool, marginalized. And so everybody, when they came of age, opted in.
But quickly, almost out of nowhere, we’re seeing an increasing propensity of people to opt out of these powerful trends. And the more people do it, the more acceptable it comes.
Football is the most American of sports, the Alpha Male of games. But revelations about concussions and more evolved parents (even many football players say they don’t want their kids suiting out) is taking a toll. While television ratings remain high (and Super Bowl ad rates are likely to set a new record), more boys are opting out. After growing inexorably for decades, Pop Warner, the largest little league football organization, reported that participation fell 9.5 percent between 2010 and 2012.
After watching football games on Thanksgiving, Americans hit the malls on Black Friday. With the rise of the internet and the growing desperation of bricks-and-mortar retailers, Big Store has been hyping the Thanksgiving weekend shopping season relentlessly. But, as with football, Americans seem to be boycotting what has evolved from a national pastime into a violent bloodsport. According to the National Retail Federation, the number of people who said they’d shop at stores in between Thanksgiving and the following Sunday fell from 147 million in 2012 to 140 million 2013. That’s seven million consumers who opted out. Many preferred to shop online, or were simply turned off by the spectacle. And it’s just beginning. On the Wall Street Journal op-ed page, which usually celebrates American-style capitalism, this was the headline on columnist Peggy Noonan’s column: “Next Year Stay Home, America.”
On social networks like Facebook and Twitter there is immense, unavoidable pressure to opt in. Choosing not to join is choosing not to be part of the conversations among all your friends, frenemies, and interesting strangers. And sure enough, the data show that these networks continue to add users to their impressive membership rolls. But here and there, if you listen closely, you can detect signs of opting out. We all know teenagers who keep their Facebook accounts active, but spend all their time on Snapchat, which doesn’t leave the same digital footprint. And some professionals (ok, me) consciously boycott Twitter for the weekend.
Not too long ago, you simply had to have cable television in order to be part of the national popular culture conversation. That’s where all the most talked-about sports (ESPN), drama (HBO), and news (CNN) took place. If you didn’t have a set-top box and an expensive subscription to 400 channels, you were out of it. And so year after year, cable subscriber numbers grew along with the population. But there’s been a disruption in the force. More and more interesting programming is being delivered by alternate means—through Netflix, or YouTube. Apps, tablets, and workarounds mean you don’t have to have an expensive cable package in order to watch the show your friends are watching—which is a boon for thrifty millennials. And so in 2013, for the first time ever, the number of Americans paying for television reception via satellite or cable, will likely decline.
Look, the NFL, Nordstrom, Facebook and Time Warner Cable aren’t going to collapse in 2014. But the growing incidence and acceptance of opting out—the more people do it, the cooler it becomes—means they will face pressure to change the rules of the games they play. And their travails should make everybody else think twice. Peer pressure, habit, tradition and marketing simply don’t possess the gravitational force they did in the past.
As Washington chewed over the Paul Ryan-Patty Murray budget deal, the Treasury Department announced a walloping drop in red ink. Turns out government didn’t need a “grand bargain” to get its fiscal house in order.
The Murray-Ryan budget deal was anti-climactic. After all this—three years of failed grand bargain talks, the sequester, a shutdown—we have a deal that will cut deficits by a grand total of $22 billion over ten years. No wonder the Tea Party crowd is incensed. Yet the outrage over the federal debt—$17 trillion and rising—won’t stand in the way of this deal. That’s because, thanks in part to the sequester, but thanks largely to the miracle of sustained growth, the annual deficit is shriveling.
Indeed, on Wednesday afternoon, just as official Washington was chewing over the implications of the Murray-Ryan deal, the Treasury department released the November Treasury Monthly Statement. And it reinforced what I’ve been arguing for months now: We live in the Golden Age of Deficit Reduction.
Consider the numbers. Since peaking at $1.417 trillion in fiscal year 2009, which ran from October 2008 through September 2009, the annual deficit has fallen sharply. It fell to $1.294 trillion in FY 2010, bumped up slightly to $1.296 trillion in FY 2011, fell to $1.089 trillion in FY 2012, and then plummeted to $680 billion in FY 2013. That’s a decline of 52 percent in four years. That’s stunning, considering there was no grand bargain to cut spending, reform entitlements, or raise taxes. Of course, Washington can take some credit. The Budget Control Act of 2011 and Republicans’ general push for austerity since 2011 have helped restrain spending. The expiration of certain components of the Bush-era tax cuts, the enactment of new taxes under the Affordable Care Act, and the expiration of the Social Security payroll tax holiday at the end of 2012 helped produce more revenues.
But a good chunk of the deficit reduction can be chalked up to the national pro-cyclicality of tax collections and entitlement spending. Put simply, when economic times are bad, tax revenues fall off a cliff at the same time that the government has to spend more on programs like food stamps and unemployment benefits. And so the deficit can swell very rapidly during a recession. That’s what happened in 2008 and 2009. But when things turn around, when the economy grows at a decent clip for a long period of time, the process works in reverse. Employment, payroll, and corporate income taxes rise sharply at the same time that government spending on items like unemployment benefits decline. And so the deficit can contract just as quickly as it expanded.
That’s what has been happening in the past few years. In FY 2013, for example, revenues rose by a healthy 13.2 percent ($324 billion) from FY 2012, while total spending fell 2.3 percent ($84 billion) from FY 2012. The sequester and declining military spending (thanks to the unwinding of two wars) helped contribute a great deal to the spending reduction. But lower levels of spending on unemployment benefits, thanks to the improving labor markets and the expiration of curtain extended benefits, accounted for about $24 billion of that $84 billion reduction—or nearly 28.5 percent.
These trends have continued into the first two months of the 2014 FY year. Revenues are rising at a smart pace, and spending continues to fall, led by declines in defense and unemployment benefit spending. In November, for example, the government collected $182.45 billion in revenues, up 12 percent from $162.7 billion in November 2012. At the same time, spending in November came in at $317.7 billion, down 4.8 percent from $333.8 billion in November 2012. As a result, the deficit in November 2013 was $135.2 billion, down from $172.1 billion in November 2012. That’s a decline of 21 percent.
Now, these monthly figures can be pretty noisy. If benefits are paid out on the last day of October one year and then paid out on the first day of November in the next year, it can influence the figures. So it makes more sense to look at the trend. But the data from the first two months of FY 2014 tell the same story. For the first two months, revenues are $381.4 billion, up 10 percent from the first two months of FY 2013. Meanwhile, spending, at $603 billion, is down nearly five percent from $633 billion in the first two months of FY 2013. As a result, the deficit for the first two months—$226.8 billion—is down 22.6 percent from last year. Lower spending on defense (down $11.7 billion) and on unemployment benefits (down about $3 billion) account for roughly half the decline in spending.
A bipartisan proposal to trim the sequester and forbid shutdowns for the next two years means Washington may finally be ready to quit kneecapping growth.
On Tuesday, Rep. Paul Ryan and Sen. Patty Murray announced a budget deal. Should it pass, the deal would undo a portion of the sequester and raise discretionary spending in fiscal 2014 by $45 billion, from the sequester level of $967 billion to $1.012 trillion. It would offset the spending increases slated for the next two years with new revenues raised from jacking up airline ticket fees and boosting federal employees’ pension contributions.
Chairman of the House Budget Committee Rep. Paul Ryan (R-WI.) offers remarks while joined by others form the GOP leadership, during a media availability following a Republican Conference meeting at the U.S. Capitol, December 11, 2013, in Washington, DC. (Rod Lamkey/Getty)
Political analysts have been wondering whether this betokens a new era, in which House leadership finally tells the Tea Party caucus to take a hike. And economic analysts are asking whether, after years of erecting stumbling blocks to growth, Washington is finally getting out of the way.
There’s no question that in the last few years, government austerity has weighed on growth. Federal spending has fallen for two straight fiscal years, even as receipts have risen sharply. That has helped make this the Golden Age of Deficit Reduction. But progress on the deficit has come at a price. Each quarter, when it reports the Gross Domestic Product figures (PDF), the government goes through and tells us how much each sector added to (or detracted from) growth in a given quarter. In nine of the last 12 quarters, and in the past four running, the federal government has been a drag, reducing the growth rate by anywhere from .1 percent to 1.19 percent. Increasing spending, even by about $45 billion per year, would mean that in coming quarter, the federal government would add to growth. Not enough to make the difference between recession and expansion, or between excellent growth and meh growth, to be sure. But it would turn a major headwind into a minor tailwind.
Boosting spending and undoing a chunk of the sequester is likely to have a bigger impact on the still-ailing job market. As we’ve long noted, this is a “conservative recovery”. The private sector has been adding jobs every months for the last few years while the public sector has been cutting them. That doesn’t typically happen during expansions. Since 2010, the public sector has cut 1.134 million positions, with the federal government accounting for more than 700,000 of those cuts. (Note: some of those cuts in federal government employment are due to the layoffs of workers hired to conduct the census.)
In recent months, as state and local government finances have improved, states and cities have stopped cutting and started adding employees. Since January, state and local government employment has risen by 87,000. But thanks in part to the sequester, federal employment has continued to trend down through 2013. Compared with January, there were 88,000 fewer federal employees in November. We don’t need the federal government to start massive make-work job programs. We just need it to stop laying people off and furloughing them, and to start hiring (or re-hiring) a modest amount of workers each month. Doing so would make the job market a little bit tighter, boost payrolls, provide a modest amount of upward pressure on wages, and help coax a few more people off the sidelines and back into the labor market.
Then there are the less tangible impacts even this small deal will have on consumers’ and businesses’ confidence. Since the summer of 2011, Washington has been lurching from one manufactured economic crisis to another: threatening a debt default, shutting down the government, furloughing employees and cancelling contracts. These sort of arbitrary and draconian events tend to put a chill on economic activity and make those affected think twice about investing and spending. The Gallup Economic Confidence Index went into a deep rut during the shutdown in October and is only now regaining its pre-shutdown levels. People are much more reassured by functionality than by dysfunction. So at the margins, the Ryan-Murray deal is likely to boost confidence and sentiment. Should it pass, the U.S. would have a real budget for the next two years while forestalling any possibility of a shutdown. And the newfound comity in Congress might ease the path for raising the debt ceiling early next year with a minimum of drama.
But we shouldn’t get too excited. An increase of $45 billion in spending isn’t exactly New Deal 2.0. We still don’t have a much-needed infrastructure spending bill. And Congress, even as it giveth, will taketh away: extended unemployment benefits for those hit hard by the recession are set to expire in January. Since the deal excluded an extension of those benefits, about 1.3 million people are set to lose a vital form of income support in a matter of weeks. Food stamps have already been cut, and congressional Republicans are hell-bent on cutting them further. The combination of those two actions will reduce the spending power of those at the lower rungs of the income ladder, and will negate a portion of the gains reaped from easing the sequester.
With an Ohio Walmart hosting a holiday food drive for its own workers, The Daily Beast's Michael Tomasky criticizes the notoriously stingy company for not paying them more.
Hailed as a perfect answer to the evils of fiat money, the virtual currency has come crashing down because the invisible hand is paralyzed without government.