Consumer Sentiment Falls Amid Higher Gas Prices

By Kathleen Madigan

U.S. consumers were less optimistic in early March, according to data released Friday. Inflation worries seem to be lowering sentiment.

The Thomson Reuters/University of Michigan consumer sentiment index in early March fell to 74.3 from 75.3 posted at the end of February but up from an early February reading of 72.5, according to an economist who has seen the report.

The latest reading was well below the 76.0 expected by economists surveyed by Dow Jones Newswires.

The current conditions index increased to 84.2 in early March from 83.0 at the end of last month, while the expectations index fell to 68.0 from 70.3.

Household attitudes are being pulled in two opposite directions. Consumers are feeling better because of stronger labor markets, while at the same time they are grappling with the budget squeeze of higher gasoline prices.

In early March, gasoline worries seem to be winning.

Within the Michigan survey, the one-year inflation expectations reading jumped to 4.0% from 3.3% at the end of February, the highest reading since May 2011. The inflation expectations covering the next 5 to 10 years rose to 3.0% from 2.9%.

By Phil Izzo

A roundup of economic news from around the Web.

–Growth Puzzle: Greg Ip looks at a potential explanation for a puzzle over growth and job gains. “Labour force participation seems to have settled at 64%, two percentage points lower than its pre-recession level. If that drop is permanent, it would alone entail a significant decline in the level of potential output. What about productivity? My colleague notes there’s a healthy debate going on about whether trend productivity has slowed. I don’t know the answer, but it’s clear that actual productivity has been pretty unimpressive for this stage of recovery (see the nearby chart from Barclays), and certainly compared to a decade ago. For all the talk of social media IPOs, Apple’s market capitalisation and the money pouring into alternative energy, none of these represent transformative technologies with much impact on productivity. In the early 1990s Japan repeately disappointed forecasters who kept expecting it to return to its pre-1990 era of 4%+ growth. What we realized only much later is that its early 1990s financial crisis coincided with a slowdown in potential growth; Japan simply couldn’t grow as quickly as it used to.”

–Credit and Segregation: Amine Ouazad and Romain Rancière ask whether the mortgage credit boom impacted segregation. “Did the rise in subprime mortgages – predominantly to black and Hispanic borrowers – lead to a fall in racial segregation as people were able to move to more desirable neighbourhoods? This column looks at extensive data on mortgages and changes in the ethnic mix at local schools. It finds that the credit boom that precipitated the global financial crisis may actually have increased racial segregation.”

–St. Patrick’s Day: With St. Patrick’s Day coming tomorrow, it’s always a good time to check in with our old friend Dr. Goose and his economic limericks. Ahead of the holiday he doesn’t disappoint. “There’s a Blarney old stock market theory That prices are frothy and cheery On the eve of St. Pat, But decline after that, When Hibernian eyes are still bleary.”

By Howard Packowitz

A former economist at the Federal Reserve Bank of Kansas City is returning after a brief stint in the private sector to become the bank’s chief economic adviser.

Recently installed Kansas City Fed President Esther George said Friday that Troy Davig will be her senior vice president and director of research.

Davig had been a senior U.S. economist for Barclays Capital since 2010.

He will advise George who, along with other regional bank presidents, is responsible for setting the nation’s policy on interest rates.

Davig, 39, assumes a role that has in the past provided a path to the top of the regional Fed banks. For example, San Francisco Fed President John Williams and Chicago Fed President Charles Evans were promoted to their current posts after serving as research directors.

George was picked to lead the Kansas City Fed in September, having been the bank’s chief operating officer.

Davig’s recommendations will be in the spotlight because George’s previous role wasn’t directly tied to monetary policy.

For eight years, George was responsible for supervising commercial banks in the Kansas City Fed’s region, which covers western Missouri, northern New Mexico, and all of Colorado, Kansas, Nebraska, Oklahoma and Wyoming.

Davig declined to comment about his new position, but he expressed high regard for George during an interview with Dow Jones Newswires in January.

At the time, George was about to present her first monetary policy address. Davig said he wasn’t sure whether the new president would adopt the policies of her outspoken predecessor, Thomas Hoenig, who opposed the Fed’s economic stimulus programs.

Like Hoenig, George warned that the Fed’s low-rate stance can lead to excessive risk-taking.

George will be a voting member of the policy-setting Federal Open Market Committee next year.

By Jared A. Favole

President Barack Obama‘s budget would produce a deficit of $977 billion in fiscal year 2013, the Congressional Budget Office said Friday, higher than the White House projected.

The CBO, the nonpartisan budget cruncher for Congress, said that, if the president’s budget were enacted, the deficit would rise $3.5 trillion more over 10 years than originally expected.

In February, the president proposed a $3.8 trillion budget to fund the federal government. It includes new taxes on the wealthy, and boosted spending on infrastructure, education and manufacturing.

The budget, which needs congressional approval, has been denounced by Republicans and is unlikely to pass. The White House said it expected the fiscal year 2013 deficit to be $901 billion, compared with the CBO’s estimate of $977 billion.

The CBO’s analysis is based on its own estimates of economic growth, which differs from those of the White House. At the time it released its budget, the White House said many of its projections for the economy were outdated because economic conditions had shifted from when the numbers were crunched and the budget was provided to the public.

Republicans are expected to release their budget next week through House Budget Committee Chairman Paul Ryan (R., Wisc.), who will unveil the plan. Ryan has had a frosty relationship with the president, particularly over economic issues.